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May 18, 2009

The Latin Talent Market

The Art of the July 2nd Deal

by Kiley McDaniel

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When I talk to people about the July 2nd market, after understanding the basics (conveniently covered last week), they want to know how a deal is made. Part of this is due to the human fascination with the unknown, particularly when there's been a long buildup and some handicapping involved, as in a trade deadline or draft in any sport. The other part is some combination of fascination with celebrities (executives, agents, and players), negotiations with millions of dollars at stake, and curiosity about how your favorite team does business.

I break it down this way because, at its core, a trade deadline, draft, or opening of a free-agent market doesn't seem intrinsically interesting. If you really look at it, these events garner more interest than the majority of games, despite wins and losses from these games being the currency by which those three events are judged. If one frames July 2nd this way, we're debating about high school sophomore-aged kids from foreign countries who are long shots of ever being a big-leaguer of consequence. At this point, I start wondering why I'm even writing about it; then I realize that these events just are that interesting, people want to read about them, and we may never completely understand why, but then some of the best things in life are inexplicably appealing. So, without further psychoanalysis, let's jump into the art of the deal.

Beating the Bushes

There are a handful of clubs (say six to eight) that have spent the most money in Latin America for years now, and thus have experienced scouts, key relationships, impressive facilities, recognizable Latin big-league stars, and the biggest international budgets. These teams had the infrastructure in place long before every other organization deemed it a necessity to set up shop in the Dominican. While teams can buy their way into "big spender" status as a strategic move, these original clubs still possess some advantages that can't be bought. This group of long-time big-spending clubs dominated the market in terms of quality signees for years, though some clubs with smaller budgets claim that the dominance is only in spending.

This dynamic probably doesn't seem foreign to you, as it is similar to big-league clubs attacking the free-agent market with the benefits of bigger budgets, established stars, experienced talent evaluators, and new stadiums. The obvious difference is in terms of scale: the amount of the initial investment and each new bonus is small enough to write it off as more of a failed investment if things go wrong, rather than tracking it obsessively and readying the guillotine if one investment goes belly-up.

The lower end of the July 2nd market is made up of two types of players: lesser talents belonging to aggressive agents, and relative unknowns that not every team knows about. The lesser players with agents go to different countries, complexes, and workouts to get in front of scouts and are part of a fluid market in which they normally get a bonus commensurate with their talent. On the other hand, complete unknowns come from out-of-the-way locales with small-time representation. By definition, only a few clubs are aware of what they might have (a big talent for a potentially small price) and try to keep the player from being exposed to the market at large by verbally agreeing to a deal early.

You may ask why these players still exist, what with every team and agent beating the bushes to find talent. I have two answers for you. The first is that there are still some wild stallion tendencies in this market, despite many that are trying to tame it. The country isn't working with the benefit of computerization, and in many cases it's impossible to find out how old certain players actually are. Understandably, these types of struggles come from a less-connected culture, and this will manifest itself in inefficiencies in finding talent.

The other reason is something I'll touch on in detail later, a fundamental flaw of the buscone system. These buscones train players for years at their own expense in hopes of a big payday to validate their decision. For example, to keep their player from being outed as a batting-practice warrior who can't hit in a game, prospects have nearly no game experience before signing. For the sheer fact that these players are signed for their tools and projection, there's no reason to cloud an executive's head with questions of the application of physical tools when they could just dream on pure talent. One scout summed it up by observing, "Say what you want about these buscones, but they really know how to coach a kid for a showcase."

While every team finds their acorn and inks a talented player for a next-to-nothing bonus, the big-market clubs tend to get more of these players, because they effectively have more blind squirrels running around as a benefit of their more expansive infrastructural resources. Make no mistake, though: everyone in this market is blind, and they all know it.

The Club Side

On the club side, teams have set budgets and simply try to get as much talent as they can for that price. That means locking up bargains as early as possible, seeing which of the top players you will be in the running for, with a secondary list of mid- and low-range talent to fill out the class. In a normal class, most teams sign about 15-20 players.

Clubs typically have rules they try to observe while signing international players, like never spending six figures on a pitcher, or never spending over $1,000,000 for a corner player. Even these rules can change when an executive sees a few exceptions succeed and wants to ride that momentum. There is so little data and so much noise that many times you wouldn't even know what the mean is that will be regressed back to. There are still diverging opinions from scouts and executives on major league players, so you can only imagine how, in evaluating international amateurs, opinions and philosophies can vary widely in this market.

Each team has a unique grade card that they use to keep all of their scouts on the same page, unifying the 20-80 scouting scale and OFPs with actual value. OFP stands for 'Overall Future Potential,' and a scout takes each individual tool grade on his report and summarizes it into one number (the OFP, also on the 20-80 scale) that is used to rank one player against another. These overall OFP grades correspond to roles on an MLB team and also projected rounds in the draft, but vary from team to team.

For international purposes, the slot money for the projected round from the grade card gives a general value for July 2nd purposes. That number is usually the highest a team wants to pay for that player, given that there's even more projection than with a domestic draftee that the grade card is written about. Very frequently in the media, a team signing a seven-figure international free agent will comment about how the player stacks up favorably with the previous month's draft and would've been a top 10 pick, thus justifying his $2 million bonus, for example. This isn't just said for the writer or fans to be able to wrap their head around the bonus and talent, it's a back-of-the-envelope calculation that everyone in the industry uses. There are obviously other factors and alternate methods of valuation, but more so than any other amateur market, July 2nd is about scouting instincts and projection, not advanced mathematical modeling.

Teams typically have set, separate budgets coming into the year for the draft and July 2nd, only going over budget in a rare case. Executives know if they can get creative with millions to spend, or if they have $500,000 for 25 players, and it's assumed that 15 or more will be released before making it to America. If the Latin market is weak and the budget isn't spent, a surplus will normally be rolled over to the next season, but rarely do amateur draft budgets and Latin budgets affect each other after they are set. There are counter-examples like the Rays, where their draft budget is certainly lower when going from picking first overall to 30th, thus giving them more capital to use internationally, but these types of shifts are known far in advance. There are instances where a high-profile player may do something unexpected and budget money will shift late in the process, but this is a very rare occurrence.

The Agent Side

Before I get into what an agent does, you may still be unclear whether the agent is a necessary part of the typical high-level July 2nd transaction. Some feel that experienced buscones can negotiate the same bonus an American agent could, and the top buscones probably can, and those of that stature are increasingly becoming more like agents and academy owners, rather than remaining true buscones. Most agree that a more professional and experienced negotiator can get the player at least a three to five percent increase in their bonus, thus covering the agent's fee, and setting the player up with a trusted agent when he goes stateside.

Agents appear to be beneficial to all sides for a top-level player. An agent can get in on the ground floor for a quality client, while the player and the buscone get more money when the agent negotiates a higher bonus. Clubs also get the benefit of the comfort that comes with dealing with a familiar negotiator. Much of the difference in bonuses for top players is more than just straight evaluations, given the variance between teams in their evaluations and budgets. The key that drives a bonus higher is more in the number of teams bidding, and building a market is something that agents do routinely. Agents drive a harder bargain than most buscones, and teams know this. There are many instances of teams acting in their own interests to sign a player by going behind the agent's back and cutting a deal for a lower bonus directly with the buscone, who either doesn't know better and/or is having his ego stroked by the club.

Another issue with this system is that many times the agent/buscone is looking for his big payday even more than the player. Many buscones, particularly the new ones, look only at the short-term. The trusted buscones and agents represent most of the top players every year, as the market has its way of filtering out the problems. As mentioned before, the Dominican isn't yet an efficient market in many ways, so some buscones widely considered to be crooks are nevertheless still in business, and teams are forced to deal with them.

One of the main things an agent does is gauge the interest of each club and build a market by setting up workouts, placing his client at showcases, and in general taking him to where the scouts are. Teams aren't seeing very many game situations, and the players are basically coming to find them in a continuous string of workouts. At times, failure in a game situation is dismissed because the player clearly isn't used to it. This may sound ridiculous, but at this age for a young player, teams are projecting on tools, and not so much on skills like plate discipline, particularly when 90 percent of a prospect's swings are in batting practice.

As for the agents, their goal is to get whatever their best offer is going to be as quickly as they can. Since every team is seeing the tools in workouts from the beginning of this process, each successive day that their player could get hurt or be forced to continue to work out and possibly hit a cold streak is a risk that they would like to avoid. Thus, it is common practice to hear of players and even elite talents who verbally agree to deals before they are eligible to sign. These players typically will stop working out, indicating to everyone that a deal is in place, and show up at workouts out of courtesy for the agent's future negotiations, or go to the extreme and wind up sequestered, typically by the signing club. I referenced this third option in reporting a rumor making the rounds last week about outfielder Guillermo Pimentel and the Rangers. If this happens, it is normally found out pretty quickly by the other teams, as top prospects are constantly in contact with teams, and teams want transparency (at least when it's not their prospect who's being hidden). It indicates a fear on the part of the signing club that this agent isn't to be trusted, that the player could conceivably get a higher offer if he's in the open, or possibly some wrongdoing.

While bonus skimming is on the decline with the FBI and MLB investigating the situation, sequestering players was very common in instances where bonus skimming happened. That isn't to say that all sequestering situations indicate wrongdoing, because they don't, but it at least raises the suspicion. One agent told me that he had a verbal deal done before July 2nd and still took his player to workouts as requested by rival clubs, just so that the possible appearance of wrongdoing wouldn't be tied to him, his player, or the signing club. Whether a higher offer was extended at these workouts or not, though, the deal was in place. A less experienced agent or buscone looking for a payday would likely handle that situation differently.

In the postmortems of some signings, frequently a player will talk about why he chose to sign with a certain team and mention that he knew a scout since he was a kid, or that he likes a certain team's development system or track record with previous players at his position. This leads to the belief by some that there is a recruiting aspect, somewhat like in American colleges. As numerous scouts, executives, and agents have told me, there really isn't a recruiting aspect, though. A high offer is typically only turned down when a handshake was already in place (such as the above example) and the late-offering team basically dragged their feet. Insiders estimate that 95 percent or more of top offers are accepted.

A few international scouting directors also admitted that it's accepted in the industry that reports of "higher offers turned down late in the process" were typically either offers extended knowing a deal was already in place or simply a club using the media, both to the end of simply letting future prospects know that they aren't opposed to spending big money. Another avenue to express that same message is in a team new to the Latin market bidding on top players to indicate that they mean business, but not expecting to land any of those players. We've seen in recent years that teams will jump from non-factors into big spenders when a new academy is built, but more often than not a new academy and seven-figure offers are essentially serving the same purpose: to let everyone know that you exist.

One angle that would influence players of yesteryear to sign for less than the highest offer was the promise of playing with a prestigious team that they grew up watching. This tendency has actually gone in the opposite direction. These days, those clubs with a certain cachet in the Caribbean normally spend a lot of money and sign more and more talented players than most clubs. This means that it is even harder to make it to the big leagues, with more players to leapfrog for promotion. As agents got more involved in the process and alerted their clients, it's now not unusual for a big budget team to be forced to pay a premium to land a top talent. One big-spending club's executive bemoaned this very truth to me, that his club went from carrying a negotiating trump card to now having to beat a best offer by a wide margin to land that same player.

By the time my next article appears in this space, I will either be in the Dominican or have just gotten back, with full scouting reports on top prospects and likely some travel horror stories. You can hit me in the comments or on e-mail with questions, and monitor my upcoming trip via Twitter.

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