July 23, 2014
The Anatomy of an Astros Breakdown
As the clock struck seven on the evening of June 5th, the Houston Astros stared with wide eyes at a deep draft board. The organization held a handful of early picks and $13,362,200 in available spending, the most of any team, putting it in an position to load up its minor-league system with high-level draft talent. But 42 days and 22 hours after the Astros announced the first selection of the 2014 draft, the front office somehow found itself with one of the lightest pulls of the draft, a bruised reputation, and public scorn from both the MLB Players’ Association and one of the game’s most high profile agents.
This was only the third time in the history of the draft, and the first time in 30 years, that the first overall pick had failed to come to terms with his drafting organization. The impasse was especially notable because the two sides had appeared to agree to terms quickly after the draft, a month before the signing deadline.
What follows is a summary of the players involved in this drama, an analysis of the sequence from draft day to the signing deadline, and some conjecture as to what lies ahead for each of the participants.
Brady Aiken (LHP, Cathedral Catholic (San Diego, CA)), a UCLA commit, was a consensus top three talent in the 2014 draft class, considered by many to be the top overall draft-eligible prospect. He entered June offering potential front-end stuff, good athleticism on the mound, physical projection, projection in his arsenal, and advanced feel for a prep product, all from the left side.
Jacob Nix (RHP, Los Alamitos (Los Alamitos, TX)), also a UCLA commit, was considered a developmental project, but one with solid upside, drawing mid-rotation projections from some. Due to the perceived strength of his commitment to UCLA, most figured it would take seven figures, and perhaps as much as $2 million, to buy him away from the Bruins, making him a likely target later in the draft for teams with a spending pool surplus.
Casey Close, agent and advisor with Excel Sports Management, is one of the most highly decorated, and respected, agents in the game, and served as advisor to the Aiken and Nix families in connection with the draft. NCAA rules stipulate that in order for students to maintain eligibility they must not (among other things) engage an agent to represent them in negotiations with professional sports teams. Accordingly, a player may hire an “advisor” to step them through the process and give advice in negotiations, but the only individuals who may interact directly with the team and its representatives are the player and his parents or rightful legal guardians.
The Houston Astros. Outside of the Miami Marlins, no team in baseball could even come close to Houston’s ability to add significant talent from the 2014 pool of draft-eligible players. The Astros were allowed more than $13 million in potential spending. Further, the combination of picks gave them more “opportunity leverage” than any other team, as they could expect to receive more value at some draft spots than they would pay in bonuses. Overall, the organization had the first overall selection, three selections in the top 42, and five selections in the top 106—all in a very deep draft class.
Setting the Stage
Breaking Down Houston’s Draft Class
One upshot of the strategy this year is that it provides a clear tell of where the organization expected to spend its pool allotments. Upon completion of the draft on June 7th, it was announced that Aiken and the Astros had agreed in principle to a deal for $6.5 million, strongly hinting that the two sides were on the same page prior to Aiken’s selection, common for a first overall selection.
With around $7.9 million allotted to the Astros for the first overall pick, Houston would thus save $1.4 million, which could be spent elsewhere in the draft to help sign a player who required more money than his draft slot allotment otherwise allowed. There were only two candidates in Houston’s first 22 picks that would reasonably require such a bonus: Nix (fifth round) and Marshall (21st).
Under the new Collective Bargaining Agreement, only draft picks in the first three rounds are “protected,” such that a team failing to sign the player receives a compensation pick in the following draft year. Because the Astros elected to use a non-protected, relatively early round pick on Nix, we can safely assume that selection was made with a high level of confidence that a deal could be reached.
The other evidence that the Astros believed they would sign Nix is that we don’t see any sort of “backup plan” for that $1.4 million, outside of Marshall. What’s interesting about this is that Marshall was selected a good five to 10 rounds later than you would generally see a team choose a “backup” for a potentially difficult early-round sign. That is, if a team truly expects there might be a chance that an early round pick will not sign, you generally see that team provide itself an out with a specific target just outside of the top 10 rounds (the top 10 rounds being the rounds that produce the organization’s pool allotment, and therefore generally reserved for players the team is confident it will ink). In order for the Astros to end up with Marshall, 29 teams had to pass on him roughly 20 times apiece—hardly an indication that Marshall, as a specific target, was a high priority.
We saw the Astros take this “fallback” approach in 2012 when they popped Hunter Virant in the 11th round as insurance for Rio Ruiz, a fourth round selection believed to require an over-slot investment in order to sign. (The Astros ultimately secured his services at a cost of around $1.8 million). Conversely, in 2013 Houston had relative cost certainty in their top 10 picks, with 10th rounder Austin Nicely the only selection likely to require significant over-slot investment. (He signed for around $600,000, with around $475,000 of that bonus available thanks to first overall selection Mark Appel’s below-slot deal.)
Without belaboring the point, the composition of Houston’s 2014 draft class, and the lack of a traditional “backup plan” selection in the first few rounds outside of the top 10, point to three facts: 1) The Astros had relative cost certainty with their picks in the top ten rounds, 2) the Astros were not looking to significantly leverage back-up options in closing the deal with Nix, and 3) Houston really wanted Nix and Aiken. And it expected to sign them.
A deal in principle between the Astros and Aiken was announced just days after his selection. Shortly thereafter, news leaked that Nix was believed to also have a deal in place for $1.5 million, which left a few hundred thousand dollars of wiggle room for the Astros to complete the remainder of their negotiations.
Aiken and his family flew to Houston to complete his physical and sign his paperwork, with the Astros undoubtedly excited to announce his formal signing and introduce him to the Houston fan base. But an MRI revealed “issues” with Aiken’s elbow and the Aikens left Houston without a deal. Sources have indicated the issue with Aiken’s elbow is structural, intrinsic to Aiken’s elbow—not a matter of existing injury or damage. The Astros have not claimed Aiken is injured, and the SoCal prep product closed his year throwing comfortably in the mid-90s, both in high school game action and in pre-draft workouts.
After the physical, the formal offer of $6.5 million was pulled. Houston instead submitted the minimum formal offer required to ensure a 2015 compensation pick if Aiken didn’t sign (40 percent of the slot allotment, around $3.2 million in this case), as well as an informal offer of $5 million, a further $1.5 million discount from the initially agreed upon bonus.
That specific discounted amount would free up just enough money to make an earnest run at signing Mac Marshall. Per John Manuel of Baseball America, Houston did just that, reaching out to Marshall around the time that Aiken’s $6.5 million offer was pulled off the table. The inference is that the Astros were still very much interested in signing Aiken, but only for an amount that would allow them to sign Marshall, as well.
At this point the breakdown in negotiations took a hard turn, as Casey Close escalated the dispute to a public matter, stating that “we are extremely disappointed that Major League Baseball is allowing the Astros to conduct business in this manner with a complete disregard for the rules governing the draft and the 29 other clubs who have followed those same rules.” Houston countered by noting they believed they were acting in accordance with MLB rules and had been careful to ensure compliance throughout the negotiating process.
The signing deadline passed on Friday, July 18th. Per Major League Baseball’s draft rules, the failure to sign Aiken meant the Astros lost their access to the entire $7.9 million allotment for the first overall selection. With that allowance gone, Houston no longer had the savings needed to sign Nix and, accordingly, pulled his offer as the deadline passed.
While this is not the first time a high draft pick has failed to sign, this is by far the ugliest such incident under the new Collective Bargaining Agreement, with the top overall selection and his drafting team disagreeing about an MRI, and a third party (Nix) caught in the fallout. From the failed physical onward, the negotiations were dysfunctional enough to cause the player’s advisor to go public, and to cause the MLBPA to issue a scathing statement after the signing deadline passed:
“Today, two young men should be one step closer to realizing their dreams of becoming Major League ballplayers. Because of the actions of the Houston Astros, they are not. The MLBPA, the players and their advisers are exploring all legal options.” —Tony Clark, Union Head
The ultimate resolution left no party happy, and it left the Astros’ front office with yet another piece of bad PR to add to the growing pile. So who is to blame, and how could this have been prevented?
Understanding BATNA; Where the Astros Lost Their Leverage
At the top of the draft, leverage is fairly balanced, as a general matter. Teams are seldom, if ever, interested in risking the loss of their largest slot allotment and highest valued talent acquisition, while players are highly incentivized to grab the big payday that comes at the top of a draft, rather than risk injury or poor performance in subsequent years. Because both parties are highly incentivized to reach an accord, a great deal of resources are put into vetting potential draftees to make sure their bonus expectations and the drafting team’s spending expectations align.
As variables are introduced to a negotiation, that leverage can skew to one side or the other. One example of a variable resulting in the drafting team having extra leverage would be a late season injury, like we saw this year with Jeff Hoffman (drafted 9th overall) and Erick Fedde (drafted 18th overall). Because of the timing of those injuries, neither pitcher had a good alternative to signing. They are unlikely to be back at full strength in time to demonstrate their health before next year’s draft. Accordingly, we saw both Fedde and Hoffman fall deeper in the draft than a healthy version of each would have lasted, and both drew bonuses well below what was expected prior to their injuries. The drafting teams get the big upside at a discounted price in order to account for the shift in leverage.
Conversely, a high school player or underclass collegiate draftee might have natural leverage due to his ability to head to a four-year school and attempt to grow his draft value (though the closer the top of the draft, the less that leverage matters, as the player will have a harder and harder time improving his stock the next time around).
One recent example of a player creating leverage for himself is Kevin Gausman.
Gausman was drafted fourth overall by the Baltimore Orioles in 2012. He and his advisors were able to drag out negotiations until late in the process, eventually identifying a point when Baltimore looked unlikely to reach agreement with some late round over-slot draftees. That left an excess of pool allotment, which Gausman demanded and ultimately received. The argument, in flat language, goes something like this: “We both know you are a rebuilding club that can’t afford to lose your top draft pick, and we both know you don’t have anything else to spend that pool allotment on. Give it to me.”
This can be a tricky argument to make, but Gausman had some built-in leverage as a draft-eligible sophomore, and the excess he demanded was not so much that it would sour Baltimore on its investment. This year we saw the White Sox short-circuit any ability of the player and his advisor to create leverage by signing all of their picks before turning to their first selection, Carlos Rodon (who went third overall). The Sox knew Rodon was looking for an over-slot deal, even at third overall, and by signing their other picks they were able to create a cap on what Rodon could ask for. He ultimately ended up with a bonus that was roughly 10 percent over slot, giving him and his advisor a deal they could happy with while avoiding a hard-nosed negotiation as they moved toward the signing deadline.
The Astros seem to have done a solid job of identifying their targets, and the aggregate expense of those targets. The selection of Aiken and Nix, as well as the relatively quick announcement that agreements were reached in principle, indicate that all parties were on the same page. However, Houston’s comfort with its plan was also its undoing.
Because the Astros were so comfortable with the demands of their draftees and the amount of money the organization had to spend, the front office failed to build in an adequate failsafe for a complication that should be foreseeable, especially when selecting a pitcher: What if something unexpected comes back in the medicals?
There is currently no formal mechanism for teams to get access to pre-draft medicals (something that will likely be remedied in future CBAs), so organizations are left to review whatever the player decides to make available. Anything a player elects to be made available to one team must be made available to all teams. Because of this huge unknown hanging over these draft picks—particularly pitchers—it is incumbent on a front office to cover its bases and account for the possibility that the goods they plan to buy might have some unseen defects. To say this game planning is of paramount import when dealing with the no. 1 selection in an entire draft class would be a massive understatement.
As noted above, the Astros had essentially one fallback option in their draft class, and that was Mac Marshall. His demands seemed to match up with those of Nix, making him a fine fit to check the box on that front, but the team had no plan whatsoever to account for the scenario they were actually presented with. What if there was something non-catastrophic in Aiken’s medicals that added to the risk profile?
All medical concerns are not created equal, and while the industry has found some level of consensus that, say, a frayed tendon is a significant concern, there is a large gray area. Multiple medical experts could disagree on the level of risk that should be assigned. That is where Aiken’s “structural issue” falls. The result is additional leverage on the team’s side, but that leverage is limited because the player's side might not agree on the level of risk—and, therefore, might not agree on how much leverage was lost. So long as there is relative uncertainty there, parties have to be reasonable as to the extent to which leverage in the negotiations has shifted.
The final piece here is the idea that simply saving money on the pick has limited utility. We will flesh this out below, but the best case scenario when additional risk surfaces with respect to a drafted player is that player is willing to take a discount such that you can now sign other players you have drafted, giving you a shot at bringing in and developing another asset that could save your organization millions down the line.
While we can’t be certain that Aiken and the Astros would have reached an agreement at $6 million or $5.5 million, having one or two other backup options willing to sign for various bonus amounts would have given the Astros something else worth pursuing—options that split the difference between the full agreed-upon $6.5 million and a 20 percent slash.
The Astros painted themselves into a corner by not taking the simple step of spending even one additional pick in the top 20 or so rounds on a college bound player whose profile they found interesting and who could potentially be signed for somewhere between maybe $500,000 and $1 million. Instead, they put themselves in a position where only an indisputably significant condition uncovered in Aiken’s medicals would free up enough money for the team to hedge its bets with additional acquisitions. When the Astros neglected to adequately plan for unknown medical complications they ceded any opportunity to leverage the results of those medicals.
Let’s take a step back and look at Aiken’s BATNA. He could go to UCLA with the hopes of following in the footsteps of Gerrit Cole, who was likewise drafted in the first round and turned down seven figures to honor his college commitment, emerging three years later as the top overall selection in the draft. That route carries with it three years of risk: potential injury, developmental blips, or even something as simple as dissatisfaction or discomfort with life in college or the coaching staff. (Note, in no way am I suggesting Coach Savage or his staff have any reputation for being difficult or not providing a fertile ground for development in the Bruins program.)
Aiken could also go the JuCo or independent-league route were he interested in retaining eligibility for next year’s draft. This shortens the window wherein injury or developmental blips might sprout up, but also limits his exposure. That could impact his draft stock when organizations get limited views against inconsistent competition, while other draft-eligible players are in more traditional situations against top collegiate contemporaries.
In a vacuum, none of those options is particularly appealing when compared to a $6.5 million bonus, or even the $5 million “final offer” put on the table by Houston. So again we ask, should Aiken have simply sucked it up and grabbed the money?
Were the Astros able to create more leverage as a result of the medical findings, I have to think Aiken almost certainly would have been forced to sign a deal. That leverage could have come in the form of a more clearly discernable risk associated with the medical findings or a better BATNA for the organization. In each case, assuming that Aiken is indeed currently healthy and that there is indeed legitimate uncertainty about the level of risk that should be assigned to the “structural quirks“ in Aiken’s elbow, there just is not enough here for the Astros to shift gears from an agreed upon deal to a significant slash in bonus. There’s not enough leverage to justify a hard line approach to negotiations.
The other side of that coin is that a healthy Aiken might be supremely confident in his ability to stay healthy for one more season, be it at a JuCo or with an independent team (likely working out for big-league clubs leading up to the independent-league seasons, which tend to start later than the early February start for JuCos). Add to that the fact that Aiken is one of the younger members of his draft class and you get a situation where Aiken would enter the 2015 draft younger than some of the top high school seniors.
Is that alone enough to make him pass on the $5 million final offer? Maybe not, but it certainly pushes the needle in that direction. The final variable to take into account: Is there anything specific to the drafting organization that would discourage Aiken from deciding to commit the next six to nine years, minimum, of his baseball life to the folks in charge in Houston. This is where the specifics of the negotiations, and the mounting bad press surrounding the organization, likely ultimately undid the Astros, and eviscerated any perceived leverage the organization thought it held.
Were I advising Aiken, the purported squishy nature of the Astros’ concerns with his medicals would give me pause before swallowing a 45 percent discount on the slot allotment for the best player in the class. Adding to my wariness would be the coincidence that the team is adding an increased risk value that coincides exactly with the amount that another draftee is rumored to be asking for, and the team is rumored to have reopened talks with that player.
It would be impossible for me to move forward with advising negotiations thinking anything but that the organization is placing a higher importance on landing this other player than it is on reaching a good faith agreement with my client (Aiken). Assuming we were all in agreement that the agreed upon $6.5 million bonus should be reopened for further discussion, the idea that those negotiations should center around a figure that gives a 21st rounder his desired bonus would be highly frustrating at best, and devastatingly insulting at worst. The focus should be on reaching an amicable resolution with Aiken, then working to see if you can convince Marshall to sign for whatever is left over.
An ancillary issue to consider would be the struggles the Astros developmental staff has encountered in bringing along last year’s no. 1 draft pick, Mark Appel, and the deliberate nature in which the Astros have been developing and promoting their prospects. Add to that the piggy-back approach to developing arms in the lower levels and you have a situation that has the potential to be less than welcoming. That is not to say the Astros are doing anything wrong on the developmental side. Only that there is at least enough here for Aiken and Close to have seriously considered whether waiting to be drafted by another club was ultimately a tolerable outcome.
Where Aiken and Close outmaneuvered the Astros, creating enough leverage to make walking away a worthwhile option, was in getting the MLB Players Association involved, putting added pressure on the Astros and the commissioner’s office. While it’s highly unlikely Aiken will be granted free agency, that is an option that the commissioner’s office has utilized in certain circumstances in the past. By getting the Players Association on board for the fight, Aiken and Close strengthened the odds of Aiken being given the opportunity to avail himself to the market, even if it was only from, say, a two percent chance to a seven percent chance (both figures hypothetical examples).
The sum of the factors in Aiken’s favor in a potential grievance hearing include (1) the Astros requesting a larger discount in bonus than we have otherwise seen in cases involving indeterminate medical conditions, (2) the Players Association commenting during negotiations that it was troubled by the way the Astros were conducting business, then releasing a statement after Aiken failed to sign indicating it would be looking into taking on Aiken’s cause, (3) the Players Association having previously expressed concern with the Astros’ treatment of service time issues and general payroll concerns, (4) Aiken by all accounts being fully healthy at this point in time, and (5) a general feeling of frustration in the industry with certain modes of operations employed by the Astros, including most recently the security slip-up that resulted in a database filled with private discussions with other organizations being made public. All of this is underscored by the virtual lotto ticket that is the commissioner’s office’s ability to grant Aiken free agency, which would likely land him a contract in excess of $30 million.
Taking all of this into account, was Aiken right to pass on $5 million? Time will tell. What we do know is the Astros seem to have completely botched the draft from beginning to end. First, by not building in adequate fallback options to give themselves a satisfactory outcome should something less than $1.5 million in additional risk pop up on the Aiken front. Then, by taking a hard-lined approach to negotiations while simultaneously slashing Aiken’s bonus an additional 20 percent post-medicals—an approach that completely undersold the viable option Aiken had to walk away, healthy, and re-enter the draft next year as one of the youngest non-high school talents in the class.
Finally, Houston seems to have not even taken into account the fact that there is a non-zero chance that Major League Baseball could force them to honor their agreement with Nix. Were that to happen, the Astros would be well above their permitted draft spending per MLB rules, thanks to Aiken’s slot allotment evaporating. This would cost them seven figures in penalties and the loss of their next two first-round picks. While this outcome, like Aiken being declared a free agent, seems unlikely, the fallout from such an occurrence would be such a disaster that its mere possibility actually tips the leverage further toward Aiken and Close. In other words, by the time last Friday rolled around Houston was somehow operating as if it had a clear upper hand in negotiations, while reality shows us no one needed a deal more than the Astros.
The totality of facts, as we know them, seem to indicate that Aiken might not be in such a bad position re-entering the draft in 2015. He also has an outside shot at free agency and a huge payday, and will not be shackled to an organization which he and his advisor have clearly come to feel operates in a craven and disingenuous manner. I hesitate to say I’d ever advise any amateur to turn down a significant seven-figure bonus, but in this instance I can’t say I disagree with anything that Aiken and Close have done. In any negotiation, once you have reached a point where you feel the other side is not negotiating in good faith (whether that is perception, reality, or both) it is very difficult to get comfortable with any deal.
Should the Nix Agreement be Upheld?
Tackling the latter first: while a verbal agreement may be enforceable as a matter of contract law, Nix would first have to show evidence that the Astros’ offer was unconditional and that he reasonably relied on the agreement to the extent that he suffered damages (e.g., that he told other teams not to draft him).
Were that the case, evidence of that arrangement would require the Astros and Nix to have reached a formal pre-draft agreement, which runs counter to MLB rules. Further, I would be shocked if the exchanges between the Astros and Nix showed no indication, explicitly or implicitly, that the bonus was contingent on that amount being available within the pool allotment.
Further complicating Nix’s case is the fact that he was receiving advice from an experienced agent/advisor, whose expertise should have been such that he explained to Nix that being drafted does not ensure that a deal will get done, and that variables (including Nix’s own physical) could lead to an agreed-upon deal falling through. Because of the nature of draft negotiations, it seems unlikely that a court would find an enforceable agreement in place until such time as the team and player have in place a signed deal approved by the commissioner’s office.
As to whether Major League Baseball should, or could, force the Astros to honor their agreement with Nix, the case is a little stronger, but only because the commissioner’s office can essentially do whatever it wants within reason. The big issue I see is with establishing precedent. The commissioner’s office certainly doesn’t want to give players and agent advisors incentive to try and subvert the pool allotment process. Further, as frustrated as Nix and Close must be with the fallout from the Aiken negotiations, absent a signed and submitted agreement it seems clear on its face that the Astros did not consider the Nix deal formal and had no intention of formalizing the Nix deal until Aiken was signed and the organization was certain to have adequate pool space to pay Nix the agreed-upon amount.
What’s next for Aiken and Nix
Ideally Aiken and Nix will be able to attend UCLA or a junior college of their choosing, though the public nature of these disputes may push the NCAA to investigate the situation to make sure there was no violation of the “no agent rule.” One would hope that the NCAA does not elect to go that route, but there is certainly a real threat that either or both of these UCLA commits could be suspended from participation with the Bruins baseball team for a period time, or even prevented from playing ball at UCLA. Junior colleges have looser eligibility rules, but it’s conceivable they could be barred from pitching there, too.
If the college door is closed, Aiken and Nix will be forced to work out privately (or publicly) for pro teams next year and perhaps find an independent club with whom they can spend some on-field time in April and May leading up to the draft. This is less than ideal, but would still afford each player the opportunity to showcase his stuff and carve out an early round spot in next year’s class.
We should also note that while there have been no public comments dealing directly with any negotiations between the Astros and Marshall, the public nature of these disputes could also lead the NCAA to take a cursory look into the matter.
What’s the fallout for the Astros?
Houston takes a very college-centric approach to its draft, and as a matter of process time will tell whether they are investing their resources in the best manner. But if that is to be their focus, the organization is doing itself a disservice by not allowing for some flexibility in its negotiations with the high schoolers it does elect to draft. Of course, this becomes a non-issue if the team is comfortable with leaving some money on the table.
The impasse arose when the Astros decided (my assumption based on the facts before us) that it needed to be able to make a run at signing Marshall in order to make the Aiken and Nix signings worthwhile. They misunderstood Aiken’s BATNA, soured Aiken on the organization, and have once again given fodder to critics who feel the organization is run in too analytical a fashion at the expense of relationship building and recognition of the human element.
That critique is one reserved for a different time and place. What should be evident to everyone, regardless of where you come down on the various issues at play in this odd draft drama, is that Houston’s process failed this time around, turning best situation in all of baseball into one of the lightest talent pulls in the league, on paper. The organization has further estranged its relationship with the MLBPA and has put the commissioner’s office in a situation where it will likely have to make some uncomfortable decisions as to the fate of Aiken and Nix, with the MLBPA watching closely and publicly invested in the outcome.
Failure to sign the top talent in the draft class over $1.5 million? Check. Lose the ability to sign your second or third most valuable draft asset (measured by bonus amount)? Check. Draw the ire of one of the most successful agents in the game as well as the further scorn of the MLBPA? Check. Leave open the possibility that the commissioner’s office will force you to honor an agreement with your fifth rounder that will effectively cost you seven figures in draft tax and the loss of your next two first rounders? Check.
You would be hard pressed to script a believable failure larger in scope, and more sweeping in potential fallout, than what we’ve seen with the 2014 draft efforts of the Houston Astros.
Nick J. Faleris is a practicing structured finance attorney and Sports Industry team member in the Milwaukee office of Foley & Lardner LLP. The views he expresses at Baseball Prospectus are his own, and not necessarily