Wednesday, February 13, 2008

Selling the Chicago Cubs

The Wall Street Journal has a story today on page B1 about Sam Zell's attempt to sell the Chicago Cubs. Apparently, Zell would like to sell the Cubs and Wrigley Field separately to different buyers. The paper reports that Zell is exploring the sale of the ballpark to a state agency in Illinois, while seeking a private buyer for the team. The paper also reports that "most observers believe he will make more money" by selling the two entities separately.

I wonder about this conclusion. Strong arguments can be made that, in fact, it makes more sense for the Cubs to remain a vertically integrated organization - with both the team and the ballpark sitting under one corporate umbrella. When we think about vertical integration, scholars tend to think about transaction costs, i.e. the costs associated with contracting and coordination between two parties. Some would argue that the transaction costs associated with the team and the ballpark trying to cooperate as separate entities exceed the transaction costs associated with that same cooperation if the two entities were part of the same corporation, with the same owner.

What drives transaction costs? Well, scholars like to think about what they call "transaction-specific assets." An example of a transaction-specific asset would be if a supplier had to invest in specialized technology in order to manufacture components for one of its customers. In that scenario, the two parties can become beholden to one another. The opportunity exists for what economists call "holdup" i.e. one party can try to renege on obligations and perhaps try to extract additional value from the other party. In that type of situation, we tend to see vertical integration arise, i.e. the customer merges with the supplier.

In this case, I think that there may be a high degree of asset specificity... to put it simply, the Cubs are closely linked to Wrigley; it's highly unlikely that the Cubs will have the option to play anywhere else in the foreseeable future. Thus, I think the potential for holdup and opportunitistic behavior exists if the two entities are owned separately and trying to negotiate contracts to cooperate with one another. I think that transaction costs associated with coordination and cooperation might be lower if the team and ballpark are owned by the same corporate parent.

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