Nascar Mergers - who and why
Last week, Ginn racing – a well-financed start-up in the Nextel Cup Series which almost won the Daytona 500 with Mark Martin at the wheel earlier this year– merged with DEI, Dale Earnhardt, Incorporated. Having lost Dale Earnhardt, Jr. to Hendrick Racing, DEI moved quickly to find additional capital. In so doing, it emulated Richard Childress Racing, which quietly brought outside investors into team several years ago, and Jack Roush, whose team became Roush-Fenway Racing after he brought the owner of the Boston Red Sox in as a part owner.
Shortly after, came news that Yates Racing had merged with Newman/Haas, an exceptionally well-financed open-wheel racing operation headed by salad dressing entrepreneur Paul Newman and Carl Haas, of cigar chewing fame.
Meanwhile there have been mergers in the Busch Series teams, as well. Two of the biggest NASCAR stars merging the Busch teams each owns into the teams for whom each drives in the Cup series.
Dale Earnhardt, Jr. has merged JR Racing, his Busch team, into Hendrick Racing, his new Cup employer. Kevin Harvick is merging his Busch team into Richard Childress Racing, his Cup team.
So, what’s it all mean?
Despite purported cost containment measures, the reality is that it costs a lot more money to run a successful NASCAR Cup operation than it did a few years ago. Only the richest teams – Hendrick because of its success and Penske because of Roger’s bank balance – have been able to meet the increasing research, testing, and development expenses required to stay on the top. When Jack Roush has to bring in money to stay in the game, you know it’s expensive. Dale Earnhardt, Jr. has persistently complained about DEI’s lack of testing. Yates has fallen further and further behind, despite the merger of his engine program into the Roush program.
The merger of DEI and Ginn was a simple financial transaction. Ginn has money, which DEI needs. DEI has expertise which Ginn needs. The merger is mutually beneficial, but it the money that drives it.
With Yates, the need for an infusion of cash is evident. However, there may be more to that story than just adding capital. Newman Haas has been in open wheel racing for a very long time. But that form of racing does not have the visibility of NASCAR. Buying into Yates is probably a short cut for Newman Haas to become a significant player in NASCAR, perhaps with more than a little encouragement from Ford.
The Busch team mergers are a different story.
These transactions weren’t so much a matter of money, as a matter of personnel.
In each instance, the driver’s Busch team had given the driver a fall-back position, should the team that runs his Nextel Cup car either become intolerably uncompetitive or the driver should want to run his own Cup operation for other reasons. Though financial terms haven’t been disclosed, it seems fair to say that the primary reason for the Busch mergers is driver satisfaction with their employer’s Cup program, coupled with the employer’s desire to have the driver concentrate on winning a Championship.
Overall, though, each of these moves is one move in a chess game that will change the basic character of NASCAR teams within the next five years.
Historically, NASCAR resisted a so-called “franchise” rule, one that guaranteed that a team would start a race almost regardless of its qualifying position. Team owners, however, wanted a franchise rule for a very basic reason: it made the team worth money. In the past, when a NASCAR Cup team went out of business, it had almost no value. The tools and equipment were auctioned off and what was left, if anything, was the value of the team. Anyone could start a team, lots did, and the value of the team came in its operation, not in its assets.
The guarantee of a starting position if a team is in the top 35 in owner’s points was a rule that received attention in the press, but little analysis.
That rule is a modified franchise rule. It means that there is a certain level of stability that a team has in dealing with sponsors. It means that there is an actual asset value to a team beyond the auction value of its assets because a guaranteed starting slot means there is an advantage to buying an existing team over starting a new team.
And therein lies the second reason behind these mergers.
It becomes critical to a teams value to maintain itself in that top 35.
And that means that no team can justify shorting the costs of developing exactly the right car for exactly the right race, which means lots and lots of money on development.
And on that front, there is nothing more frightening than the fear of Toyota.
Even though it has been spectacularly unsuccessful in Nextel Cup competition this year, every NASCAR team expects Toyota to do what it needs to do to win the Championship.
Make that spend what it must spend.
Jack Roush has been, perhaps, the most publicly vocal in complaining about the effect which he expected Toyota would have on Cup competition, but it’s a safe bet that his sentiments were shared by all of the other established team owners. It doesn’t take a genius to look at the profit and loss statements of Toyota, GM, Ford, and Chrysler and figure out who has the money to bankroll a no compromises effort to win.
Toyota is the NASCAR fear factor.
A spectacularly overrated racing entity – when, exactly, did Toyota win the Championship in Formula One? OK, when did they win a Formula One race? They’ve been in Formula One since 2002 – Toyota still frightens Cup competitors because they are concerned about the amount of money the company can funnel into their teams. The established Cup competitors are also worried that the Detroit Three automakers will conclude their advertising budgets can better be spent elsewhere. Exactly how many Saturn Aura’s will GM sell by putting a Monte Carlo on the front row at Daytona?
NASCAR teams are consolidating to ensure their futures in the sport.