A Casualty of the Financial Crisis: Sports Sponsorships

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Action Images / Zuma

Manchester United's Wes Brown and Albert Riera of Liverpool in action.

Forget that portfolio of dodgy debt. Don't fret the lack of liquidity. If you really want to know who's in for a dusting amid the global downturn, check out the jerseys on show in English football's Premier League.

Consider the line up: local bank and Newcastle United sponsor Northern Rock had to be nationalized in February after it was caught short of cash when the money markets seized; on Sep. 12, Britain's third largest tour operator XL went bust leaving London club West Ham United without a shirt sponsor; and now insurance giant AIG, shirt sponsor at English and European club champions Manchester United, is teetering on the brink of collapse.

We've seen a version of this game before. Enron, PSINet, Trans World Airlines and WorldCom all paid out for naming rights at U.S. sporting arenas before going under earlier this decade. In fact, sponsors of major U.S. sports stadiums lost an average of 33% of their market value in 2002, roughly double the Dow's fall that year.

So what's the harm in a little sponsorship? The ambitions behind a firm's marketing may offer a clue. "A lot of companies interested in sponsorship would be companies targeting very high rates of growth," says Stefan Szymanski, a sports business economist at Cass Business School in London. "To target a very high rate of growth is often a high risk strategy. High-risk businesses, in recession, tend to go bust." (The reverse can also be true: the stock price of sponsors of U.S. sports stadiums actually outperformed the market in the more benign conditions of 2006.)

Then there's the fact that an executive's normally sound judgment can quickly cloud over when it comes to sports. "A lot of [sponsors] have been involved in football on the basis of someone's hobby," says Simon Chadwick, a professor of Sport Business Strategy and Marketing at Coventry Business School. When the boss of one leading British firm opted to back a poorly performing English cricket team in recent years, "people were asking 'Why?'" Chadwick says. "The fact was [the boss] was a big cricket fan. That was the only reason." At the least, such vanity can leave shareholders pondering how else a firm's profits are being deployed.

Still, sponsoring a sports team is unlikely to bring a company down on its own. Even in the case of AIG — whose $112 million, four-year tie-up with United is the most expensive ever in English football — "if you look at the overall marketing spend of the companies involved, the shirt sponsorship was tiny," points out Rob Mason, managing director of SBI, a British sponsorship consultancy. Any link between the deal and AIG's current woes, Mason says, is "coincidental."

Companies are actually a lot smarter about sponsoring things than they used to be, says Chadwick. Rather than treat a deal like a one-time transaction and stepping back as soon as a logo is sewn into a jersey, big firms — not to mention big clubs — are more likely to "carefully select a partner to build a strategic relationship with," he says. With more than half of Manchester United's estimated 75 million fans worldwide now based in Asia, the investment by AIG — keen to build their business in the region — made good business sense. When quizzed by a shareholder why he was pouring so much into the U.K., a modest part of AIG's empire, the insurer's then-CEO Martin Sullivan explained: "I am not buying the U.K. I am buying Asia."

And despite this week's market meltdown, companies will still be keen to buy the special brand of magic that sports teams offer. Citigroup stumped up some $400 million to tag its name to a new stadium that baseball team the New York Mets will play in from next year. And British lender Barclays — who backed out of talks over a possible takeover of troubled Lehman Brothers last weekend — lavished a similar sum for the naming rights to the New Jersey Nets' planned Brooklyn basketball arena. If that sounds risky, consider its exposure in its home market: the U.K. bank is the proud sponsor of the English Premier League.

(Check out more soccer photos here.)
(See photos of the troubled economy here.)