"It's like deja vu, all over again"
Redundancy aside, we can all share in Yogi Berra's sentiment. You have no doubt heard the news. In a repetition of last week, Real Madrid has signed one of the world's best players for a staggering fee.
Cristiano Ronaldo and Kaká will be wearing white next season, and that privilege has cost a combined €160,000,000. The world record transfer fee has been shattered once more, and the top four transfer fees on the list have all been paid by Real Madrid.
Astonishing, but they are not finished yet. Flonentino Pérez, Real Madrid's returning president announced they "will be signing five or six players" this summer. All told, they are rumored to possess a war chest of 300 million euros.
All this at a time when the world economy is in recession. While most industries are tightening their belts, and many individuals and businesses are being denied credit, Madrid keeps on spending.
Many will rightly be scratching their heads wondering how Real Madrid can afford it. Do they really have 300 million euros sitting in a bank account somewhere?
Mr. Pérez is regarded as a wizard of finance, but his strategy is not overly complex. A look back at his first term as president is revealing.
Florentino Pérez: Part 1
Fresh from winning a record eighth European Cup, the second in three seasons, Lorenzo Sanz looked certain to win re-election to the presidency of Real Madrid. Pérez won a surprise victory, promising to erase the club's debt and sign Luis Figo.
He did both.
And he paid for it by arranging the re-zoning and sale of the club's training ground for 500 million euros.
This cleared the debt and provided the funds for the assembling of the "Galacticos", a squad of the most famous and talented footballers on the planet. This team of superstars was phenomenally successful at earning money for the club. Pérez aggressively marketed the team globally, and courted some of the world's biggest multinationals for sponsorship.
Today Madrid takes in a reported 350 million euros annually, with approximately 39% of that proceeding from marketing and commercial activities, and 38% from television rights.
Pérez has often bragged that Zinedine Zidane's 75 million Euro capture was "the cheapest signing I made as president", because of the extra income he generated. The lesson, presumably, is that signing players like this pays for itself.
The Galacticos' sporting success was short-lived by comparison. Over the course of three trophy-less seasons, the rest of the training ground money was spent in desperate attempts to patch together the lineup of aging stars.
The Calderón Years
The presidency of Ramón Calderón saw a continuation of the successful economic policies of his predecessor. Income grew steadily during his three years in charge.
His spending was every bit as excessive as Pérez's, but he continually failed to sign his two main transfer targets: Kaká and Cristiano Ronaldo. The club's debt grew significantly.
Financial problems were alleviated when, in 2006, the club signed a seven year TV deal with Mediapro worth 1.1 billion euros. Unlike the Premier League, Spanish clubs sell their television rights individually, so Real Madrid and Barcelona end up with a disproportionate amount of the total.
Calderón has been accused of manipulating the budget reports by spreading transfer fees over various years, and counting future income in the yearly balance sheet. He was eventually forced to resign over a vote-rigging scandal in the annual assembly to approve the club budget.
The best independent assessment available estimates Madrid's debt to be somewhere in the neighborhood of 500 million euros. The debt in 2000 was 270 million euros, by comparison.
Florentino Pérez: Part 2
If we assume for a moment that Kaká and Ronaldo will pay for themselves in the long run, there is still the question of paying for their arrival. This time there is no property to be sold to pay for the large initial investment.
The answer is debt.
This summer's signings will be made with borrowed money.
It is curious that Real Madrid is so flush with credit when so much of the world is cut off from it, but this too has an explanation.
The first part of that explanation is the TV deal signed by Calderón. It is assumed by most outside analysts that many of Calderón's signings were made with loans that used the TV money as collateral. In effect, they are spending tomorrow's money today.
The other part of the explanation is Florentino Pérez himself. He is the CEO of ACS, the largest construction company in Spain, with an annual turnover of 16 billion euros last year.
The company also possesses a debt of 9 billion euros (down from 16 billion in 2007). Maintaining a good working relationship with Mr. Perez and ACS is clearly worth a lot of money to certain banks. Enough to fast-track a loan of 300 million euros? Perhaps.
Should it all go to plan, revenues will rise and the increases debt will be reduced to a manageable proportion.
It remains a high risk game however. There is no guarantee that the club will be able to find more money in the middle of the recession.
Neither is there any guarantee of sporting success. "Football is not finance", "A team is not the sum of its parts", "Passing forty yards is not always better than passing four", and "Having four golden balls is not better than having a pair".
There are plenty of lessons to take from the collapse of the first round of Galacticos. Time will tell if Florentino Pérez has learned them.