Friday, December 12, 2008

Mark Teixeira Update

It looks like the Angels are the current high bidders in the Mark Teixeira sweepstakes. So how does the O's deal stack up in comparison? Reports put Baltimore's bid at seven years and between $140 and $150 million, Boston's at 7/$150 and Washington's at 8/$160. Let's assume that the Orioles are at the high end of their range and have thus matched the Red Sox offer, meaning the Angels have a $10 million advantage in the headline number. But how real is that advantage?

First, let's discount the future cash flows back to present value. Using an 8% rate, which would seem to be reasonable given salary inflation in MLB, and spreading out the entire value of the contract evenly over the seven years, the Orioles/Red Sox deal is worth about $111.6 million and the Angels contract about $119 million, a difference of $7.4 million or $1.05 million per season. But living in Maryland does not equal living in Southern California, at least when it comes to taxes. In Maryland, the top marginal tax rate for 2008 is 5.5%, and in California that rate is 10.3%; in Massachusetts the number is 5.3%, so we'll consider the Red Sox offer equivalent to the Orioles offer. Accounting for the difference, the Angels deal is worth just $1.2 million--total, over seven seasons--more than the Orioles deal. Teixeria may decide to play for the Angels or the Red Sox, but it is certainly not because those teams have offered significantly more money. Perhaps not surprisingly, each team has an offer that is virtually identical, and Teixeira will have to weigh the "other" factors when making his decision.

One confounding factor could be the apparent willingness of the Nationals to guarantee an eighth season. At $160 million and a tax rate equivalent to Maryland, the Nats deal is worth about $2.2 million more than the Orioles, which is the equivalent of a Year 8 salary of about $4.2 million. Teixeira, even in decline, would likely be worth more than that sum. The Nats will have to either up the dollar value or, ironically, shorten the length of their bid to present the most attractive financial package to Teixeira.

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