Behind the year's biggest basketball deal, which brought Michael Jordan to Washington, lies an Internet business deal that may eventually be worth billions of dollars.
Think of an Internet Web portal that takes the world's most powerful brand name and makes it a gateway to sports, entertainment and commerce. Think of an audience of billions of Michael Jordan fans around the world, an audience that dwarfs the current Internet customer base that uses such portals as Yahoo or AltaVista or Microsoft Network. There's no way those geeky brands would beat Michael.com in a global game of one-on-one.
This is the business vision Ted Leonsis sold to Jordan, starting at their first meeting last September. And it's the secret glue holding together one of the year's most intriguing business ventures. Jordan in effect has concluded that Leonsis -- a top executive at America Online as well as the Wizard's largest minority shareholder -- is the man to take him into cyberspace.
"Michael is one of the greatest brands in the world, and Ted is one of the greatest brand managers," explains Jon Ledecky, a partner of Leonsis's in the company that owns the Caps and a minority share of the Wizards. "That's the business marriage that took place last week. Ted is the Michael Jordan of the Internet, in Michael's mind."
A close look at the structure of the deal makes clear that there was some heavy muscling under the boards on the way to an eventual slam dunk.
The basketball part is simple: Jordan will become president of basketball operations for the Wizards. He'll practice with the team, "look into [a player's] eyes and see how scared he may be," as Jordan put it on Wednesday, and in the process sell a whole lot of season tickets. The complicated part was the business deal that gave him an ownership share in the team.
The heart of that deal is that Leonsis, Ledecky and two other partners agreed to give Jordan up to 20 percent of Lincoln Holdings. That venture, in addition to owning the Caps outright, has a 44 percent share of Abe Pollin's company -- Washington Sports and Entertainment Limited Partnership -- which owns the Wizards, Mystics, MCI Center, US Airways Arena and the local Ticketmaster franchise. And most important, Lincoln has first right to buy Pollin's controlling share when he dies or decides to sell.
Jordan won't have to invest any cash to acquire his initial stake in Lincoln. The other partners agreed to accept dilution of their shares -- give away part of their equity, in other words.
But Jordan will have to put down real money when it comes time to buy out Pollin's majority interest in Washington Sports and Entertainment. He'll have to fork over tens of millions of dollars to become a full 20 percent partner in Lincoln and the Wizards. By that time, if Jordan has been successful in rebuilding the team, its value (and cost to Jordan) will have increased. But so will the value of Jordan's initial share of Lincoln (which amounts to about 8 percent of the Wizards), which he's effectively getting for free.
Deal mavens may be curious how the value of the limited partnership will be set when it's time to sell Pollin's share. Unless they can agree beforehand on a negotiated price, the parties will use what's known as the "three appraiser method" to reach a valuation. Each side will choose one appraiser, and those two will agree on a third.
So if Jordan isn't initially putting cash into Lincoln Holdings, what is his contribution? That's where the deal gets interesting. In addition to his charisma and basketball expertise, Jordan has agreed to give Lincoln a first option on any new sports-related Internet deals that use his name. In other words, Jordan has chosen Leonsis and his partners as the main vehicle for developing his "brand" in cyberspace. (It didn't hurt Leonsis's case that as the deal was closing, AOL acquired Time Warner, the company that made Jordan's movie, "Space Jam." That sent a powerful signal to Jordan.)
What might the Michael Jordan brand be worth? Well, Fortune magazine last year added up the value of all the business activities that have drawn on Jordan's name -- from Nike shoes to MCI phone calls -- and assigned a value of $10 billion. But that may be a conservative estimate, if Leonsis can make the Jordan name a premier gateway to the Internet.
Business (not just basketball) was center court at the first meeting last September. Ledecky bluntly cautioned Jordan: "Michael, I think it's great that you are a sports icon, but I'm making an investment decision here. How do I know this isn't just another trophy for you?"
Answered Jordan: "I want to be as good a businessman as I was a basketball player. Once I commit to something, I don't fail. I don't compete to lose."
There are some powerful redemption stories at work here. For Pollin and his struggling Wizards, Jordan's arrival offers a chance to turn around a franchise that seemed on the verge of collapse. For Jordan's agent, David Falk -- the man who arguably ruined the Wizards with his $100 million shakedown of Pollin on behalf of the ever-disappointing Juwan Howard -- this is a chance to give something back to Washington. (Careful observers noted, however, that Falk wasn't invited to sit in Pollin's box Wednesday night -- there are limits to forgiveness!)
But the real action in this deal may not be down on the court but out in cyberspace. Coming soon to a computer screen near you: Michael Jordan, the Web site.