The Browns, Colin Kaepernick, and Positive Arbitrage

A clear cut Top 32 quarterback in the NFL is unable land a job because of the controversy that surrounds a simple gesture; an act of principled defiance. The Cleveland Browns are in the midst of a multi-year rebuild, which is centered on bottoming out to acquire top-tier talent and collecting a high volume of assets in order to acquire the talent necessary to be a long-term contender. Colin Kaepernick and the Browns occupy an interesting space in the NFL wherein they could both benefit from each other.

Setting aside the social and political aspects of Kaepernick’s plight, the controversy regarding Kaepernick has created an uncertainty that adversely impacts the valuation of Kaepernick the football player. When a football player is incorrectly undervalued, it creates an opportunity for a value gain.

Jonah Keri in The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First notes how the Tampa Bay Rays focused on the value of small marginal gains in the process of rebuilding. In the book, these gains were often made through positive arbitrage which is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.1

These gains are a product of market inefficiencies. Inefficiencies can be created by a number of different things, a market using flawed evaluation tools, an unstable marketplace, or perhaps, a player’s value being suppressed because of his socio-political practices. While the Ravens have publicly denied the claims, ownership in multiple places have supposedly shown trepidation regarding Kaepernick due to public image costs for Kaepernick’s off the field value.

In a situation where multiple organizations have progressed towards the acquisition of a player but cooled on the asset because of off the field considerations, the player can become an undervalued asset. Quarterback specifically is a position where organizations take on enormous risk or cost with a chance to stabilize or mitigate risk. Be it the Texans getting out of contract albatross in Brock Osweiler for the cost of a second-round pick, the Bears signing Mike Glennon to a three year $35 million contract, or Josh McCown getting $6 million to help the New York Jets tank. Brian Hoyer is getting $6 million per year for two years from the San Francisco 49ers.

Indeed, Kaepernick is likely to at least return to a player valued as a high-end backup, which can merit a third or fourth-round pick for a contending team attempting to protect against risk.  While a new automobile depreciates value when it leaves the lot, Kaepernick’s value should appreciate when he moves on to a new organization. Further, for owners and organizations afraid of a player protesting, Kaepernick has decided to quit his in-game protests for the 2017 season.

A year in a new organization, a few designed plays, and an adaptable Kaepernick becomes a valuable backup quarterback especially if the worries of protests and sponsorship losses prove to be an act of folly. Long-time NFL journalist Andrew Brandt believes this will be the case as he compares it to when he covered the Michael Vick signing with the Philadelphia Eagles.2

If signed for a below average rate because of the market efficiency, Kaepernick becomes an appreciating trade asset. The type of asset that nets a fourth round pick.  Earlier this year WFNY discussed the value of pick acquisition:

This process, much like Daryl Morey’s approach in Houston, requires patience and is strewn with complexity. This process acknowledges that to truly contend, and do so for a significant period of time, you have to land elite talent. The easiest road to do so in the NFL is through the draft, and on rare occasions a trade. In this vein, the Browns have collected a bevy of picks, bottomed out for a superstar-caliber defender, while continually searching for new ways to build assets to bring in impact talent.

For the Browns, acquiring and consolidating assets is central to building the foundation of a contender in terms of “the process.” Kaepernick represents an opportunity to acquire and rebuild the value of an asset.

While this piece develops the Kaepernick example, it is not limited to him. The Browns during this rebuild will be aided by taking inappropriately valued assets and either wielding value gains for their on field improvement or using value gains to cash out for greater assets. The Browns signing of J.C. Tretter is an example of such a signing. Coming off a serious injury, Tretter is a relatively young, previously productive center signed to a three-year contract. For the Browns, there is a huge potential value gain in Tretter, a player who is of less value in the current space to a contender because of an injury history but with a season of production could significantly raise his value.

Players like Kaepernick and Tretter are opportunities for the Browns to improve the value of players found in an inefficient marketplace.

  1. Note: It is a touchy subject. Discussing human beings, athletes, as assets is an impersonal and perhaps denigrating practice. However, this is the process which all front offices partake in, evaluating individuals as assets. []
  2. Note: These situations are being compared here from a public relations perspective only as the circumstances run parallel. I have deep moral reprehension of aligning the actual actions of these men together. []