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Are Olympic sponsors getting gold?

For corporate sponsors of the 2012 London Olympics, going for the gold is about more than winning medals. As the opening ceremonies kick off and athletes hit the track, the field, and each other, let’s take a look at whether this year’s sponsors are likely to come out ahead.

The lineup
The International Olympic Committee pulls in around US$1 billion every four years through its sponsorship offerings to both domestic and international corporations. This year, 11 corporations have signed on for the highest-level partnership:

  • Acer
  • Atos
  • Coca-Cola (NYSE: KO)
  • Dow Chemical
  • General Electric
  • McDonald’s (NYSE: MCD)
  • Omega
  • Panasonic
  • Procter & Gamble
  • Samsung
  • Visa

Coca-Cola is the Mark Spitz of Olympic sponsorships. For the past 82 years, “Always Coca-Cola” has been a slogan for both the corporation and for the Olympics. Coca-Cola is expected to serve 23 million drinks on Olympic grounds, buts its real returns will come from global viewership. An estimated 4 billion people (or 60% of the world population) watched the 2008 Beijing Olympics opening ceremony. Coca-Cola has signed on through the 2020 games and, if the past fourscore years have been any indication, we shouldn’t expect to see this company pull the plug anytime soon.

In 1968, McDonald’s began its relationship with the Olympics when it airlifted hamburgers to hungry U.S. Olympians who weren’t lovin’ the food being served up in France. It became an official sponsor in 1976 and has big plans for this year, including a 2,000-person staff in the Olympic Village and live chef demonstrations. Although happy meals are making their Olympic debut, there’s plenty for the public to frown about when it comes to McDonald’s carte blanche exemption from the Olympic Committee’s local food policy. The Olympics epitomise international cooperation, so corporate partners should be wary of potential bad press that can sour their public image.

Mo’ money, mo’ problems
While big-name corporations signing on as Olympic partners might seem like evidence enough that sponsorship brings in bucks, there’s plenty of research that speaks to the contrary. Economist Alexander Molchanov found that expensive sponsorship bids erase almost all the benefit for Olympic partners. In other words, corporations are spending so much money winning sponsorships that they can’t benefit financially from the extra exposure. Perhaps companies like Lenovo (OTC: LNVGY.PK) and Eastman Kodak, which both bowed out in 2010, realised something that Coca-Cola and McDonald’s have not.

What’s even more surprising, however, is a shocking study that highlights lucrative free-rider effects from corporate sponsorships. After the 1994 Winter Olympics, a team of researchers conducted a survey to find out if the average Joe knew who sponsored the Olympics that year. A mere 37% of respondents correctly identified McDonald’s and only 18% ID’d Coca-Cola. More astonishing, though, is that 57% incorrectly believed that Wendy’s (Nasdaq: WEN) was a sponsor and 7.5% thought that PepsiCo (NYSE: PEP) was doling out the drinks. That means Wendy’s and PepsiCo benefited from a return on invested capital of, well, approximately infinity.

Ticker turmoil
As a shareholder, the direct effect of Olympic sponsorship becomes even more muddled. A study by the Federal Reserve Bank of Atlanta found statistically significant evidence that sponsoring corporations experienced negative stock returns on the day of their Olympic partnership announcement, but positive returns on the day of opening ceremonies. But wait, isn’t the stock market perfect? Doesn’t it instantly incorporate all future expected benefits from an investment as soon as that information becomes known?

As it turns out, the crux of this study brings the flawed economics of Olympic sponsorship back to the age-old problem of excitable corporate management making value-subtracting decisions. Chief executives love the pomp and circumstance, but it’s unclear whether shareholders really benefit from their investment.

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The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Justin Loiseau, originally appeared on fool.com

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