42 Years Ago, Magic Johnson Left an Estimated $5.2 Billion of Nike Money on the Table

If you’re watching the HBO series Winning Timeyou know Magic Johnson turned down a shoe deal with Nike — one that would eventually have been worth $5.2 billion — to take a $100,000 deal with Converse.

(We’ll talk about that $5.2 billion in a moment.)

When I first came out of college, all the shoe companies came after me — and this guy, Phil Knight, who had just started Nike.

All the other companies offered me money, but (Nike) couldn’t offer me money because they just started.

So he said, “Stock. I’m going to give you a lot of stock.”

I didn’t know anything about stock. I’m from the inner city. We don’t know about stocks. (Laughs.)

Let’s Talk Math

$5.2 billion is an eye-catching number.

Yet not particularly accurate.

While Nike offered Johnson stock in the summer of 1979 (something I’ve written about before), the company didn’t actually go public at 18 cents per share until December 1980. So the per share value of the stock offered is clearly too high .

Then there’s the amount; Winning Time assumes (if only because it makes the comparison easier) that Nike offered $100,000 worth of stock. The actual amount? Who knows.

And then there’s this: Winning Time says Nike offers Magic a $1 royalty per shoe sold, but that’s probably twice what the actual amount would have been. As Darren Rovell writes, the standard royalty at the time was 5 percent of gross; in this case, about .50 per shoe.

So yeah: The Winning Time math doesn’t work.

But the Nike offer was still a potentially huge deal.

Since we don’t know how many shares Magic was offered, let’s pick a round number to use as an example. Say Magic was offered $1,000 worth of stock. At Nike’s IPO, $1,000 would have purchased 5,555 shares. Adjusting for splits turns the original 5,555 shares into 711,040 shares, and the initial price of .18 per share into .000004 per share.

Since Nike stock recently closed at $135.87 per share, that means a $1,000 IPO stock purchase would now be worth over $96 million dollars — and that doesn’t count the value and compounding power of reinvested dividends.

So you can certainly understand when Johnson says:

Boy, did I make a mistake. I’m still kicking myself. Every time I’m in a Nike Store, I get mad. I could have been making money off of everybody buying Nikes right now.

Even if Johnson “only” got $10,000 in Nike stock, those shares would now be worth nearly $1 billion.

But That Assumes He Never Sold

Imagine you buy, say, $10,000 worth of Tesla stock. And then the stock doubles. And doubles again. Your original $10,000 is now worth $40,000. Do you continue to hold?

If you’re like me, probably not.

Science agrees. Research by Daniel Kahneman, author of the great book Thinking, Fast and Slow, indicates that losses are twice as psychologically powerful as gains. (To most of us, a bird in the hand truly does seem worth two in the bush.)

That bias is understandable. A loss means giving up something we actually have; not acquiring a gain means giving up something theoretical rather than actual. If we have a chance to make another $10,000 but don’t, that sucks… but if we have $40,000 and lose some or all of it, that really sucks.

So I’m only guessing, but it’s safe to assume Johnson would have sold his Nike stock somewhere along the way. Maybe to avoid a potential loss, but more likely to finance one of many business ventures.

Because make no mistake: Johnson is one kick-ass entrepreneur.

And That Assumes Nike Would Have Become Nike

Magic’s Nike deal would have started in 1979. Was Nike in a position — in terms of finances, infrastructure, marketing savvy, etc — to take full advantage of that deal?

Compared to 1984, when Nike signed Michael Jordan. By then, Nike wasn’t just thinking about signing an endorser athlete — it was thinking about building a brand.

Is Nike the company it is today without Jordan? Absolutely not. Nike’s three-year sales goal was $3 million; in fact, first-year sales generated over $126 in revenue. Today the Jordan brand generates approximately $4 billion per year.

And that’s just the money side; Jordan’s popularity — and the cool factor of Nike’s Jordan-centric advertising campaigns — attracted other professional athletes to the brand.

Without Jordan, Nike arguably wouldn’t be Nike.

Which means Johnson’s stock would probably not be worth as much.

All of Which Leads Us to Hindsight Bias (and Unjustified Regret)

In 1979, Nike was an under-capitalized running shoe manufacturer trying to enter a broader market dominated by legacy brands. And Converse was the basketball shoe brand leader.

Would you have turned down a sure $100,000 from the dominant player to bet on Nike? I wouldn’t have.

That’s the problem with hindsight: It’s easy to think you knew the right thing to do. Take me: In the 1980s, my next-door neighbour, a computer science professor, started a language learning company from his living room.

That fledgling company was Rosetta Stone.

Sure, I could look back now and think, “Wow, I should have invested.” But that’s now. At the time I thought he was very nice but kind of odd; I would never have invested in his startup.

Only in hindsight does it seem smart.

As forgotten Apple co-founder Ronald Wayne — who famously relinquished his stake in the company after two weeks, an ownership share that would today be worth $75 billion — says:

I have never had the slightest pangs of regret because I made the best decision with the information available to me at the time.

Magic made the best decision he could with the information — and knowledge and experience — he had at the time.

In fact, you could argue that the Nike experience sparked his desire to become a better businessperson. Realizing what he didn’t know fueled his desire to learn, grow, develop, and build a staggeringly successful portfolio of companies and investments.

So maybe he does regret turning down the Nike offer.

But he surely can’t regret what he did in response to that “mistake.”

And that’s the real lesson of Magic Johnson and Nike: Past mistakes don’t define you.

What you do after you make a mistake? That’s what defines you.

And determines your future.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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