Stadium Naming Deals
December 16, 2008
Spring training may be a few months away, but bailout season is in full swing, as the Detroit automakers became the latest recipient of government largesse. One of the biggest recipients of bailout funds has been Citigroup who, in November of 2006, signed a deal to put its name on Citi Field, the future home of the New York Mets. Baseball fans may attend these games with a healthy dose of resentment. just as college football fans may have reluctantly attended bowl games sponsored by banks that were recipients of TARP funding.
Should investors be equally wary?
Based on our analysis of naming rights executed by publicly traded companies, the answer is an unequivocal “yes.”
Long before Citigroups’ record-setting 20-year, $400 million deal, banks were no stranger to naming major sporting arenas. Of the 105 major sports (professional basketball, baseball, football, and hockey) arenas in the United States and Canada, 72 have naming rights deals (69%), and of these, 58 belong to publicly traded companies. In addition, we identified 11 now-defunct deals among publicly traded companies, and these 69 deals form the basis of our analysis. There we were an additional 12 deals for which we could not obtain market price data. For the most part, these companies went through bankruptcy, so omitting their results strengthens our conclusions.
Our examination of these 69 naming deals shows that the performance of companies that purchase naming rights trails the S&P 500 index by 4.7% over the course of the deal. If you invested in a company the day it announced a naming agreement and sold when the agreement was done (or still held onto it for current name holders), your portfolio would be down 9.1%, as compared to -4.5% for the S&P 500. (To compute the average return across all 69 deals, we computed a weighted average, weighting each return by the duration of the naming deal.)
The most plausible explanation for the underperformance of companies with naming rights deals is poor corporate governance that lends itself to risky or poor capital allocation decisions. Among Forbes’ 25 industry-leading best managed companies, only three have stadium naming rights deals (Toyota Motors, Verizon Communications, and Hewlett Packard). By contrast, three of the top five largest bankruptcies in history– MCI Worldcom, Enron, and Conseco– were all prominent sponsors of major sporting venues in the United States. The current home of the Pacers, Indiana’s NBA franchise, is still named Conseco Fieldhouse.Display article as PDF for printing.
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