Beware of companies changing their name for spurious reasons.
There are so many pitfalls to beware when investing that it took me a while to realise that, quite aside from the basic financials, it's important to pay attention to the name of a company and whether it has been changed in the recent past. I've found this out to my cost.
A recent name change should set alarm bells ringing. Frequently, it's a sign of a company that has lost its way or is trying to distance itself from a history of disappointing shareholders. Thank heaven for discussion boards such as the Fool's where private investors reveal a company's dirty secrets.
Sometimes there are good reasons...
There are many legitimate reasons to change your company's name, perhaps it no longer accurately reflects the business you're in. It also frequently occurs after a merger. For example, Intelligent Environments (LSE: IEN) has merged with Documetric and now will be called Parseq.
I admit I don't like the new name, it strikes me as somewhat pretentious. Still, I'm willing to put up with that given the fact it seems to make strategic sense to change the name. Moreover, the enlarged business offers much more potential. Time will tell if I am correct in my assumptions in this case.
And sometimes there are not
Watch out for any name change that might fall into one of the following categories:
1) Riding a bandwagon
Does the name change genuinely reflect a change in business focus or is it purely a device to take advantage of a fad? In the late 90s the number of 'dot-coms' that suddenly materialised was disturbing. Of course, many went bust.
Other names that have been associated with fads include some of the following: 'China', 'Nano', 'Green' and 'Rare'. Of course, you'll need to delve into the background of the company concerned to see if this is criticism is applicable or not.
2) Marketing mayhem
Are the marketing men running riot? Of course, the company name is part of the 'brand' image but there is an awful lot of nonsense done in the name of branding.
Made-up words and consultancy bills running into hundreds of thousands of pounds are warning signs here.
3) Reputation management
Is the name change prompted by an attempt by the management of a company to distance it from a past record of patchy performance? I made the mistake of investing in Motionposter a few years back, failing to heed the warning of shareholders who'd held it since it was called Westminster Scaffolding.
Westminster Scaffolding had bought Motionposter for £15m as part of a reverse takeover in 2000. It sounded like a great name to me at the time, and it did describe what the company was involved in. But I still lost my money.
Don't be surprised if, in the next year or so, you hear that BP (LSE: BP) is changing its name -- it would be one way of trying to distance itself from the Deepwater Horizon disaster.
It may appear to be a cynical move but it does work in practice. Who now would automatically associate Altria with Marlboro? Yet it is the holding company for cigarette manufacturer Philip Morris.
Success stories
Of course sometimes a name change can bring benefits. I somehow can't imagine that the following companies would have done so well had they stuck with their original names:
- Google -- once known as Backrub.
- Pepsi Cola -- formerly Brad's Drink.
- IBM -- formerly Computing Tabulating Recording Corporation.
Or maybe a rose by any other name would smell as sweet?
More from Chris Menon:
Chris owns shares in Intelligent Environments.
