Why FSG?

The last 5 days have seen a bouquet of emotions, mostly negative. As if the Deadline Day (in)activity wasn’t sufficient, we didn’t do too well in the game against Arsenal and specifically laid bare our lack of options upfront. The question that’s asked and will be asked again and again in the next few months is simple – What if one of our strikers is injured or not at the peak of his form?

Let us take a look at the strikers/forwards/attackers who have been traded at this club since Jan 2011 –

Out – Fernando Torres, Ryan Babel, David N’gog, Dirk Kuyt, Maxi Rodriguez, Milan Jovanovic

In – Luis Suarez, Fabio Borini, Stewart Downing

(Craig Bellamy & Andy Carroll have been added and subtracted)

The numbers (headcount) doesn’t quite add up. However, when someone speaks about ‘prudence’ instead of calling it poetry what we will do well to understand how much money have we made by reducing the headcount from 6 to 3. The answer is none. Actually, we’ve spent £25m in the process! Agreed that Andy will have a sell-on value and it is not fair to not include his name in the list nor consider the money his sale would raise. So if Andy Carroll could be sold on for the reported £17m, the net spend on actually reducing our strike force has been £8m. This still does not take into account the monies paid for settling Jovanovic’s contract, agent fees for buying players etc. Similarly, wage savings aren’t included here for simplicity reasons. The point is simple – we’ve spent a lot of money for having fewer players!

Some might point out that we’ve added more midfielders but that isn’t the case either. Kenny added Henderson and Adam and sold Poulsen and Meireles while Rodgers added Allen and Sahin and sold Aquilani and Adam. Net change is zero but still have spent a lot of money in the process. A net of £19m spent without adding the numbers and the figure goes up to £30m if Sahin would have to be retained to keep the net headcount at zero. But £30m for having Sahin and Allen in the midfield instead of Meireles and Adam and Henderson on the bench instead of Poulsen? Agreed it is an upgrade but the value that should have been spent on the upgrade is an intangible for now. Let’s just say it neither fortifies nor dilutes the point made above.

JWH says: “We are still in the process of reversing the errors of previous regimes. It will not happen overnight. It has been compounded by our own mistakes in a difficult first two years of ownership. It has been a harsh education, but make no mistake, the club is healthier today than when we took over.” It is easy to dismiss it as passing the blame. But he does state clearly that their regime has made mistakes too. The above is a primary example of what kind of mistakes they’ve made.

Dwelling into FSG/LFC’s mistakes, first and foremost is the question of understanding the person(s) to blame for this farce, the one where we’ve spent to have fewer players. While that would be a futile exercise, it would explain some part of JWH’s letter. KD, while following football from the outside, was too far away from the business end of things for too long to have any sort of mastery in negotiations when he spent those megabucks. FSG were too new to ‘soccer’ by their own admission, DC was just a middle man, a go-through if you like, and IA was more of a Commercial Director than an MD. Moreover, no one person takes a multi-million pound buying decision by himself. So it is more of a collective failure from everyone involved than just person. As is said, the system failed. Digging deeper, of course the management, i.e. the owners, have to and do take more responsibility in putting that (non) system in place.

What’s frustrating here is the ‘what could have been aspect’ of the last 4 windows. In Jan 2011 we had a clean slate with only the deadwood to clear, about £50m-£70m in transfer budget for future windows and another £50m in incoming money from impending sale. In Aug 2012, we were still clearing deadwood, albeit both from the past as well as newly acquired.

I am going to reproduce the Aug’10-Jul’11 LFC accounts from a Swiss Ramble article to elaborate the ‘mistakes of previous regimes’ part:

The article (if you click on the image, it will take you to the original article) should help in understanding various aspects of the P/L but there’s a remarkable symmetry in the ‘2011’ column. If we take out the written off stadium expenses from it, it leaves us with £300k in net profits. That is also despite we sold Fernando Torres and his profit is accounted lump-sum while the purchases are amortized over the contract period. While there have been extraordinary reasons to the delicate balance of the table above like lack of Champions League football (and thus a straight miss of £30m+ in revenues) there are also the other subtle reasons like lack of commercial growth and increase in wages. Additions of players like Maxi Rodriguez, Joe Cole and Milan Jovanovic was down to the ‘previous regime’ as JWH pointed out. They bought players with low upfront costs and higher wages (mostly related to the player being available on free) so that while they would not have to increase their debt burden, the incoming regime would bear the salary burden. It was like having an upfront fee of a few million pounds amortized as incremental salary for the player. Letting Gylfi Sigurddsson go only because his acquisition would have been counter-productive to wage control was one such case. That said, Gylfi and Dempsey (non) deals also established something else in the market which I’ll cover later. The prominent number that came out from this summer’s transfer activity is the wage saving of £27 million or so.

Lack of commercial activity for whatever reasons has hurt too bad. What is apparent and well documented is how FSG have been working on those two aspects. But also noteworthy is that the commercial tie-ups are only just happening. The additional annual revenue from the Standard Chartered deal would be in 2011 accounts above. 2012 accounts would only show a marginal increase. In 2013 we would see some difference in those numbers with extra £13m from Warrior and a few more millions from the likes of Garuda, Chevrolet, Ramsey, Paddy Power, Stanley etc. However, even an optimistic estimation of those numbers would let us assume that the increase in commercial revenues would be around £25m.

In cash flow terms, spending £28m net at the beginning of the year and committing £7m in wages out of the £52m to be accumulated over the period of the year is not too bad a business considering some sum also have to be set aside for the January activity – £18m including the 6 months’ salaries for new signings. What can we expect within that kind of money? Say a £15m player with £100k/week wages. Any extra commercial activity and sales from squad would/should add to that budget. Also noteworthy is that, for the Dempsey deal, FSG were also prepared to spend £7-£9m in fees and wages.

What we did badly in 2011 was overpay for players. At times, we compensated for lack of Champions League not by offering less money but by more and thus weighing the seller’s decision in our favor despite the player not being entirely inclined. We lost Ashley Young and Phil Jones to the lack of CL football. We didn’t want to lose our second choice winger and matched whatever Villa quoted just so we could push the sale. While establishing a malfunctioning system was FSG’s fault, DC could have hedged those spendings by scouting for talented players who would have been cheaper as well as younger and more importantly, hungrier. That in turn established our image in the market as ‘big spenders’. Clubs quoted whatever they fancied and surprisingly Liverpool matched everyone’s asking price. From Newcastle to Sunderland to Villa to Blackpool, everyone benefited from FSG’s naivete as well as their eagerness to ‘buy wins’. A lesson was learnt. But while being rich is not a bad thing, what it does is make us unnecessarily pay over the top amounts for players who would otherwise be sold to others for much lesser. I presume it was a calculated gamble when FSG refused to pay Gylfi his desired wages only to send out the message: We don’t have as much money as you thing we do. In the same breath, Clint Dempsey was viewed as a value buy. As someone who was 29  and thus no sell-on value and into the last year of his contract, we thought he made sense specially in our transition year. If your car breaks down and you need to call a cab to go home, it may not make sense to call a limo. What would make even less sense would be to call a cab but pay limo’s price. What FSG did was establish boundaries with the valuations they perceived and remained true to those. It might have hurt us in the short term of 16 weeks but definitely would help us in the longer. Can’t have enough of those £22m Suarezes and Torreses or free agent Bellamies. The acceptable mistake of the Dempsey fiasco was not having a plan-B. The thing about deadline day dealings is that either you end up getting someone like VdV at great value, or end up paying way over the top like AC or end up getting no one at all. The last 4 windows have taught FSG all 3 of those.

Unless a Football Club is a billionaire’s boytoy, it can only be run as a business – a profitable business not built on debt and leverage but on strong top lines and tight expenses. For people with lesser means but higher aspirations, the reality comes to bite sooner or later. Be it Rangers or Everton or Portsmouth or LFC, a club simply cannot spend more than it earns. Debt, insolvency, administration are terms we weren’t very far off a few months ago. Let us not get into that again. UEFA FFP is an ideal case system that, if implemented, would probably see us rising to the top of financial stability and thus competitiveness on the field. I’ve said before and I’ll say it again – instead of a Sheikh or an Oligarch or a Venky’s or a Glazer or an Ashely, I’ll take an FSG to be the owners of the club I support.

YNWA!

@kaushal__