The Extra 2% (14 page)

SLK started the 1970s with just fifty employees, then went on a buying spree. By 1978, when Sternberg was still at St. John’s, SLK partner Jimmy Kellogg had overseen a series of acquisitions that added several longtime Wall Street specialist firms to SLK’s arsenal. Kellogg retired that year, then died two years later, leaving behind trusts that allowed the company to continue its buying binge. By the early 1980s, SLK employed more than seven hundred people, including Sternberg. But the deregulation of commission rates,
along with institutional trading in blocks of stocks far too big for specialists like SLK to handle, cast the company’s future into doubt. A successful company alum named John Mulheren offered $350 million to acquire SLK in 1985. Had the buyout gone through, Sternberg’s career might have turned out very differently.

Success on Wall Street, as in baseball, depends on a combination of skill and luck. Sternberg had both. After spurning the initial buyout offer, SLK then pondered a number of different liquidation events—methods the managing partners could use to cash out. The company first considered an initial public offering, following just-completed, successful IPOs by brokerage firms like Bear, Stearns and Morgan Stanley. SLK also pursued the options of either a leveraged buyout or a straight sale to a bigger company. Any of those moves would have been of little benefit to Sternberg, who was years away from becoming a senior partner who could get rich from a liquidation event. Instead, the company began a new era of growth, acquiring stock trade–clearing companies that helped SLK expand its reach. SLK then dodged several controversies, avoiding the pitfalls that beset numerous other Wall Street firms in the “anything goes” 1980s.

The company made several key moves in the 1990s, growing its electronic communication networks capabilities and program trading operations. Having dramatically grown the business and stayed independent all those years, SLK made itself into a prime buyout candidate. When Goldman Sachs finally offered $6.3 billion for the company in September 2000, SLK accepted. Sternberg was by then one of six senior partners who collectively owned a minority stake in SLK. Like Dallas Mavericks owner (and author of this book’s foreword) Mark Cuban and his partner Todd Wagner selling
Broadcast.com
for $5.7 billion in Yahoo! stock at the top of the tech bubble, Sternberg and his partners landed the perfect price at the perfect time.

Scandals would soon rip through Wall Street, with SLK right in the middle of things. Business fell off sharply at Goldman’s new SLK division as Wall Street entered a massive bear market that
lasted two and a half years. None of this was Sternberg’s problem: he’d sold right before things turned for the worse, getting paid in Goldman Sachs stock that would prove to be a gigantic winner in later years. The suddenly very wealthy Sternberg worked in Goldman’s merchant banking division for two years before seizing on his next opportunity—a chance for him and his old SLK partners to buy into the Tampa Bay Devil Rays. Sternberg was a huge baseball fan who grew up in Brooklyn, cheered for the Mets, and named his first son after Sandy Koufax. Now he had an opportunity to own a major league franchise. It did take him a little while to warm up to the idea of the Devil Rays, though. His 2002 reaction to first learning that he could buy into baseball’s perennial doormat was, he said, “Ewwww.” But Sternberg would soon embrace the idea of buying a Devil Rays organization with precarious finances—and thus plenty of upside.

“Whatever needs to be done, we’re going to do it,” he vowed after completing the deal.

Sternberg’s opportunistic approach would inform his decisions as the owner of a major league baseball club. The two lieutenants he would hire to run the club would employ the same “buy low, sell high” mentality. He didn’t have to look far to find his first hire.

Matt Silverman graduated cum laude with an economics degree from Harvard in 1998, then caught on with Goldman Sachs. New talent working for the investment banking giant had to show ambition and ability if they hoped to advance. Silverman would show both. On top of his regular work coming up through Goldman’s training program, Silverman started his own venture, cofounding a real estate software company that used the Web to aid large real estate transactions. The economy was growing fast in the late ’90s, and software companies were on fire. Working as the company’s CFO, Silverman saw huge potential for the start-up. But the bursting of the Internet bubble after the stock market’s 2000 peak ended all hopes, and the company faded away.

Silverman’s next big opportunity would come with Sternberg: the pair spent nine months working on mergers and acquisitions
together in Goldman’s merchant banking division, acquiring a total of ten companies, most of them relatively minor deals. In many ways, both men fit the Goldman profile. When Silverman talked about his work, he didn’t reveal a single word that would give away any secrets. He wanted to learn from his new mentor and get better at his job. The best way to do that, he felt, was to measure his words and be a perpetual listener.

Working with mergers and acquisitions also forced Silverman to take an analytical approach to company valuation. He noted all the spending mistakes that struggling companies made and all the revenue-boosting methods that pumped up surging companies’ balance sheets. Silverman had already gotten a firsthand look at how a good business idea could fail to pan out owing to circumstances beyond his control. Still in his mid-twenties, Silverman gained as much valuable experience and insight in a few short years as many others might in decades.

“He loves to learn,” said Colorado Rockies president Keli McGregor, a few weeks before his untimely death in April 2010. “He’s not going to interrupt a conversation—he’ll take it in and listen first. Even as we sat here at Starbucks and reflected on their great [2008] season and where they were at, he was still very observant. He’s got a great quality about him: if he doesn’t know, he’s not afraid to tell you he doesn’t know.”

After nine months working with Sternberg, Silverman was reassigned. Sternberg retired six months later. Silverman soon began looking for new endeavors. He’d become closer friends with Sternberg since his mentor’s departure and went asking for advice: should he leave Goldman to pursue writing a book, loosely based on his relationship with his father and their love of baseball? Sternberg told him to follow his heart. Who knows, maybe one day they’d work together again. Maybe even on something big.

Such an opportunity would come sooner than he’d expect. While at Goldman, Silverman bonded with Sternberg over baseball, Silverman’s own childhood having minted him as a big Cubs and Ryne Sandberg fan. A year after Sternberg left Goldman, Silverman
got the call: Sternberg had a chance to buy controlling interest in the Tampa Bay Devil Rays. Would Silverman like to help put the deal together?

For Silverman, just twenty-six, it was the opportunity of a lifetime—a chance to blend the lessons he’d learned at Goldman with his childhood love, baseball. Still, he had to consider that most important of Wall Street concerns: opportunity cost. If he went down this road with Sternberg, he’d be shelving his new book project, not to mention the riches that could come with a successful return to investment banking if he went down that road. Still, working on a deal to buy a major league baseball team—and maybe stay on and build a career in baseball—was too much fun to pass up. He was in.

All three of the Rays’ top decision-makers form a case study in the value of meshing passion with business acumen. Silverman had more than his share of alternate career opportunities. But so too would his running mate Andrew Friedman, a rising private equity star who also punted his Wall Street career and eventually rose to become the Rays’ de facto GM. And a man of Sternberg’s net worth could have chosen any number of business opportunities with greater profit potential. Not everyone gets a chance to do what they love. But “the Tampa Bay Three” would prove that pursuing that goal, even with risk and sacrifice involved, was usually well worth it.

The deal was done by May 2004. As Silverman had surmised, Sternberg asked that he stay on as an executive. Silverman started with the title of director of strategic planning but quickly graduated to vice president of planning and development. The tacit expectation, once he’d studied the industry and Sternberg had assumed control of the team from Naimoli, was that Silverman would eventually run the team’s day-to-day business operations.

“Meeting Matt, the first thing you notice is that he’s a pretty young guy,” said Jeff Cogen, president of the Dallas Stars and former president of the Texas Rangers, who first met Silverman at the MLB owners’ meetings in 2006, when Silverman was twenty-nine but looked younger. “That quickly dissipates after you spend ten minutes with the guy. Stu was impressed with Matt’s prowess—he
knew [Matt] could certainly do the New York banker thing. Then you talk to Matt and you see that Stu hit it on the button. Here’s an incredibly cerebral, personable individual who really embraced his role in baseball.”

With Silverman installed as the man to eventually head up the business, Sternberg needed someone else to run the baseball side. Overseeing sponsorships, driving new revenue streams, negotiating future stadium deals—these were tasks that could conceivably be handled by an outsider. But with the day approaching for Sternberg to wrest control of the Devil Rays from Naimoli, he would need someone with baseball acumen to make the big trades and player signings.

In the past, that person would probably have been an ex-player, maybe a former manager, longtime scout, or player development guru. Recently, that had started to change. The Boston Red Sox made Theo Epstein the youngest general manager in major league history when they hired him in November 2002. Epstein didn’t remotely fit the role of a baseball lifer. For one thing, he hadn’t lived much life, taking the GM job at age twenty-eight. He’d never played major league baseball, any other form of professional baseball, or even any college or high school ball. But he had accumulated some impressive baseball experience in a relatively short amount of time.

After earning his degree in American studies from Yale, Epstein started cramming for the job he’d long dreamed about. Starting as an intern with the San Diego Padres’ public relations department, Epstein spent the next few years working insane hours, soaking up as much information as possible on subjects ranging from scouting to player arbitration, and earning a move to the Padres’ baseball operations department and eventually a promotion to head of baseball ops. He did all that while also earning his law degree. When Padres president and CEO Larry Lucchino made the move to Boston, he remembered the only person in San Diego who would stay in the office as late as he did every night, hours after everyone else had gone home. Epstein’s hire as Red Sox GM inspired an army of bright college
graduates to try to follow the same path: take any job you can get in baseball, kill yourself for a few years, and maybe one day you too can be the man in charge—maybe even before your thirtieth birthday like Theo.

Just a few months after Epstein joined the Red Sox, veteran financial journalist Michael Lewis published
Moneyball
, the story of Oakland A’s GM Billy Beane and the methods he used to win multiple division titles, slaying teams with much higher payrolls in the process. Beane was a top high school prospect who’d made it to the majors as a player. But as he later climbed the ranks of Oakland’s front office and learned from incumbent GM Sandy Alderson, Beane realized that he would need to unlearn all the old saws that permeated decision-making in baseball. When Beane finally ascended to the role of A’s GM, he embraced objective analysis over appeals to authority, hard evidence over tradition. He was a baseball insider who approached his job with an outsider’s sensibilities.

Andrew Friedman had the same evidence-based background working in his favor when he first met Sternberg in 2003. But the introduction happened for simpler reasons. Working as an analyst for Bear Stearns, Friedman had become friendly with Silverman, a fellow Wall Street upstart who loved baseball. When Silverman signed on to assist in Sternberg’s purchase of the Devil Rays, he recommended a meeting with Friedman. The three men met at a diner near Sternberg’s home in Rye, New York. Sternberg and Friedman talked about Wall Street, baseball, and life, discovering they had much in common.

“He had the same thought process I did,” Sternberg told the
St. Petersburg Times
. “He knows his stuff and he’s a quick study. The bottom line is, ultimately, this is a results-driven business.”

Friedman would prove his ability to deliver results, though he took a circuitous path to get there. Like Silverman, Friedman had dreamed of making a career in baseball. Unlike his buddy, he had enough playing ability to imagine a quicker path. Friedman played college ball at Tulane, manning the outfield for the Green Wave. He idolized Lenny Dykstra, writing the hard-nosed Mets and
Phillies star’s number on the back of his cleats and adopting the same nickname, “Nails.” Friedman didn’t quite have Dykstra’s ability, though, nor his longevity; a shoulder injury ended his collegiate career. Setting off for what he presumed would be a career on Wall Street, Friedman joined Bear Stearns in 1999, spending two years there as an entry-level analyst. It was at his next job, though, that Friedman would hone his deal-making skills (in stark contrast to Dykstra, whose own foray into investing would end in disaster).

Private equity is the lifeblood of many up-and-coming companies. Before a company’s owners can monetize their business through an initial public offering or other means, they often need seed money—for research and development, to launch a new product, to hire key personnel, to build a death ray to dissuade would-be competitors, and so on. Private equity can take many forms, including venture capital, growth capital, and leveraged buyouts. In each case, the goal is to invest money in a company you believe has growth potential. Finding the right source for your investment is paramount, but so too is timing the investment correctly. The most successful private equity investors typically have a firm grasp of the quantitative factors needed to turn a profit. They also have excellent intuition, being able to spot broad market-, industry-, and company-specific trends well before they come into play. To become a successful private equity investor, you need to know how to make a deal.