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What the Muschamp deal means

Posted by HenryJames on November 19th, 2008 under Uncategorized

Will Muschamp is the hottest commodity in college coaching circles right now. His stock has risen this past year to the point where he gets mentioned for pretty much every big time head coaching job that opens up. It will most likely continue to rise. Texas was rightfully concerned about keeping him. So what did they do about it?

A call option gives an investor the right to purchase a stock at a specified price within a specific period of time. The person who buys the call believes the stock will rise in the future and so he’s willing to pay a premium now in order to have the opportunity to purchase the stock at a discount later should it in fact rise in value. He’s not obligated to purchase it.

So let’s say a stock is currently trading at $20 a share, and you believe it will rise in value to $40 a share in the next 3 months. You buy a call option that will allow you to purchase the stock for $25 a share. If the stock goes up, you excercise the option. If the stock goes down, you don’t. You’re only out the premium you paid for the opportunity.

And that’s essentially what Texas has done with Muschamp. They’ve bought a call option that will give them the opportunity to make him their head coach at some point in the future believing that his value will continue to rise. The premium they paid is the $900,000 base salary for Muschamp beginning next year and any salary increases after that.

Pretty smart.

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40 Responses

  1. Bill Byrne said:

    November 19th, 2008 at 12:07 pm

    I can haz bailout?

  2. Jim Cramer said:

    November 19th, 2008 at 12:12 pm

    Booyah!

  3. Ben said:

    November 19th, 2008 at 12:17 pm

    How do we know it’s an obligation without a humongous default penalty?

  4. jc25 said:

    November 19th, 2008 at 12:18 pm

    Ah yes, the McCombs Finance way…back that asset!

  5. Parlin Hall said:

    November 19th, 2008 at 12:20 pm

    Thanks, HJ.

    While I understand the motivation for and wisdom of the move, I don’t see how it passes muster from an EEOC angle.

  6. Black Coaches Association said:

    November 19th, 2008 at 12:34 pm

    Racists

  7. Black Sholes pedantic cousin said:

    November 19th, 2008 at 12:41 pm

    Actually, the premium is $900,000 minus what his salary would have been as defensive coordinator plus any transaction costs, fees, etc.

  8. Hippie Killer said:

    November 19th, 2008 at 12:47 pm

    2 concerns:

    1- I’m not ready for Mack to go anywhere or stop being the head coach at UT.

    2- Muschamp hasn’t been here long enough for us to know what his weaknesses are and how that will effect our program.

  9. Labor Lawyer said:

    November 19th, 2008 at 1:04 pm

    Parlin,

    No EEOC concerns here. Muschamp must coach 3 games a year (and alternate when Texas is the “away” team in Dallas) in black face.

  10. beowulf said:

    November 19th, 2008 at 1:08 pm

    Once you are stunned and pissed, you don’t back off.

    Pussy.

  11. bevo XIX said:

    November 19th, 2008 at 1:09 pm

    remember, the actual price of the option here is the delta between his old salary and his current one. Its even cheaper than 900k, its the 450-500k we’re paying on top of that.

    this is why this move is so smart.

  12. CrazyJoeDavola said:

    November 19th, 2008 at 1:20 pm

    Hippie Killer

    1-Mack might be ready, or have a clear idea of when he’ll be ready.

    2-Muschamp has been in enough high-profile jobs that people should have a pretty good idea of his qualities and his weaknesses. If the rumors are true that Tennessee was about to throw the bank at him, then that’s at least 1 major program that was satisfied with him right now, much less 2-3 years from now.

    He wouldn’t be getting the gold seal of approval from Mack, DeLoss, the UT President AND the BOR without a pretty solid consensus. I think it’s safe to say he’s been vetted more than, say, Sarah Palin was.

  13. anonymous said:

    November 19th, 2008 at 1:24 pm

    You don’t think Muschamp gets some money if they backout on making him the head coach?

  14. Larrytex said:

    November 19th, 2008 at 1:35 pm

    I am pumped reading about this guy. To succeed Mack we can’t have a Mack clone.

  15. Bob in Houston said:

    November 19th, 2008 at 2:24 pm

    When I was in college, they always ignored transaction costs, fees and taxes.

  16. HenryJames said:

    November 19th, 2008 at 2:26 pm

    Well, you do want your defense to be professionally managed.

  17. lawdog13 said:

    November 19th, 2008 at 2:47 pm

    You don’t give Muschamp and his advisors near enough credit.

  18. RansomStoddard said:

    November 19th, 2008 at 4:55 pm

    Remember to obtain and read a prospectus. Past results are not a guarantee of future success.

  19. he hate me said:

    November 19th, 2008 at 4:56 pm

    I’m just fired that we’ll have continuity in our D for the next few years, a thing Bull Reese made a bad thing BTW, but Muschamp seemingly will not…for instance, our D looked stouter last weekend than anytime this year (regardless of the opponent), I’d hate to be aggy this T-day…

  20. RFourie said:

    November 19th, 2008 at 5:24 pm

    anonymous – the money Muschamp gets “if they back out on making him head coach” is essentially the bump to $900k

  21. CloseToJumping said:

    November 19th, 2008 at 6:09 pm

    I wish I could purchase put options for Duane Akina, Greg Davis, and Doperbo.

  22. zyzzyballubah said:

    November 19th, 2008 at 6:21 pm

    Now you are making some sense HenryJames. Nice article. You’ve made some progress since “I’m stunned. I’m pissed.”

    One other point that no one has mentioned yet is that with the HUGE TT/OU game this weekend, the timing of the press conference was brilliant. It gets pollsters thinking about UT when most would have been engrossed on this weekend’s game. The polls are extremely political and “what have you done for me lately” in nature. Without a game this weekend, Mack may have engineered more coverage than a win over a mediocre team. KUDOS!

  23. anonymous said:

    November 19th, 2008 at 6:23 pm

    RFourie,

    So you are suggesting that Muschamp, the hottest coaching commodity out there, gave up on pursuing any of his other numerous opportunities (for head coaching jobs that will be available immediately after this year, and which pay far more than 900K) in return for nothing more than a raise to 900K plus a promise that he will become HC here which you suggest is completely unenforceable?

    I doubt it. I would guess there will be something in the contract that guarantees him some additional sum in the event that he is “preemptively fired.”

    Anyways, I’m not knocking the move. I’m thrilled to keep him on board. I’m just speculating that the cost of this “option” will be more than the raise to 900k if it is not exercised. Not that money is an issue around here in any event.

  24. marc said:

    November 19th, 2008 at 6:27 pm

    will is our own obama in texas, the future looks bright

  25. TKO said:

    November 19th, 2008 at 6:41 pm

    “I think it’s safe to say (Muschamp’s) been vetted more than, say, Sarah Palin was.”

    True, but she was just in line to run the country, not the UT football program. Let’s be mindful of our priorities here.

  26. Doperbo said:

    November 19th, 2008 at 6:48 pm

    ‘Nice article. You’ve made some progress since “I’m stunned. I’m pissed.”’

    Since we’re all family here I want to explain this reference to everyone- a long time ago on a board far far away this was the title by an esteemed colleague proclaiming Mack’s hire- the irony of the source and the initial reaction in hindsight have become legend. Hell it’s almost reached meme status among the longhorn cognoscenti. HenryJames’ use of it was the definition of wit.

    I can’t believe I just defended HenryJames. I need a shower.

  27. marc said:

    November 19th, 2008 at 6:49 pm

    I owe Will an apology. That was harsh. Although he is unqualified, on further consideration, he’s not THAT unqualified!

  28. marc said:

    November 19th, 2008 at 6:51 pm

    I meant to say:

    …our own Carl Marx, Che Guevara, or Hugo Chavez. AND- he prefers to be referred to as “Comrade.”

  29. TKO said:

    November 19th, 2008 at 6:56 pm

    “…a long time ago on a board far far away this was the title by an esteemed colleague proclaiming Mack’s hire- the irony of the source and the initial reaction in hindsight have become legend.”

    Well, now I’m curious: Who was that source and what is the irony?

  30. zyzzyballubah said:

    November 19th, 2008 at 6:57 pm

    Thanks for the history Doperbo. That WAS a nice twist of wit. However, I was referring to the article as a whole.

    Despite all of that, the option analogy in this article is spot-on.

  31. Atomic Teeth » Blog Archive » Muschamp and Defensive Stats that Matter (and Mizzou, of course) said:

    November 19th, 2008 at 7:02 pm

    [...] of writing, HenryJames at Barking Carnival does a swell job of explaining the Muschamp play by comparing it to buying a call option.   Interesting way to put [...]

  32. TKO said:

    November 19th, 2008 at 7:03 pm

    On second thought, should have phrased my question above more carefully: Who was that source and why was it ironic that he/she said it?

  33. Steve Nebraska said:

    November 19th, 2008 at 7:27 pm

    Wouldn’t the actual price of the option be the delta between the 900k and the salary we’d be paying the guy who we would have to hire to replace Muschamp after this season?

  34. Vasherized said:

    November 19th, 2008 at 8:21 pm

    Buy 100 Puts January Mike Sherman

  35. Spawn of Cthulhu said:

    November 19th, 2008 at 8:49 pm

    A little google brings up the legendary texlarry from the original austin360 board (it was ironic because he had heard from connections that Gary Barnett was going to be the next coach of UT, and was unhappy that MB got the job instead).
    The other classic quote from the board: “he committed to the Oklahoma freakshow, but i’m the idoit?” This one’s harder to explain, but a sooner fan apparently posted it in all seriousness. No one really understands what it’s supposed to mean.

  36. Orbea said:

    November 19th, 2008 at 11:29 pm

    HJ I think that there is a better way to look at this besides a call option, which by the way is a very good explanation. Had we not taken this route then we would been hiring a head coach. That head coach would have had a buy out clause. More likely than not the buy out clause would have been over $2 million. Over the next 5 years we are going to pay a little over $2 million “extra” to WM. So, basically what we have done is pre pay an expense that we were going to pay anyway. If WM does not become the next HC, then we are spending $425K a year for the next few years not to have the defense disrupted. So, the cost is either a pre paid expense (most likely) or the cost of business interruption insurance.

  37. Newbie said:

    November 20th, 2008 at 5:41 am

    I read on the AAS that this was a family move for Muschamp. Plus, I see the extra 400k paid to coach boom as the cost for keeping this badass DC for a couple of years + no distractions of HC offers.

    If it translates in to shitstomping aTm, then its money well spent.

  38. uthookem said:

    November 20th, 2008 at 5:55 am

    “If it translates in to shitstomping aTm, then its money well spent.”

    Not quite. If it translates to an MNC in 2009 and at least two Big XII titles between 2009-2013, then it was money well spent.

    Hook ‘em!

  39. Horncasting said:

    November 20th, 2008 at 8:12 am

    To put the extra $450-$500k into perspective – this is basically the equivalent of the ticket proceeds from less than half of the North End Zone expansion for 1 game.

    Since I’ve sat in those seats every home game this year, all I have to say is You’re Welcome.

  40. JDLooneyII said:

    November 20th, 2008 at 8:33 am

    Otherwise good analogy, but you left out the volatility smile and the theta. That said, I agree – it does seem like an appropriate hedge.

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