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What’s in a name?

When companies change their names, it is often to cover up a poor investment story or chequered history

Dan Coatsworth

When it all goes wrong, companies often believe a simple change of corporate name will cover up the sins of the past. This may work on investors who do not carry out the proper research but the market does not easily forget which management teams have let investors down and which stocks have been dogs. Judging by the high number of name-change announcements this year, it seems clear firms’ nominated advisers (NOMADs) are still recommending the oldest trick in book. Yet the subsequent share price performance of many firms which have changed their moniker would suggest problem companies cannot hide behind a mask. Unless influenced by a major acquisition, name changes in general are a sign to sell the shares. After all, any sailor will tell you that it is bad luck to change the name of a ship.

A company’s market valuation may have already slumped before a name change is made but this does not mean the share price finished falling. Investors still have an opportunity to short the stock and make money. Existing shareholders should take rebranding as the cue to get out before their investment falls further in value. Do not treat it as a signal the shares will recover.

Not so fresh air

Once lauded as Aim Company of the Year, management and operational failures at air conditioning specialist Worthington Nicholls got so bad it rebranded as Managed Support Services (MSS:AIM) in April 2008. Despite the appointment of a new board in November 2007 to repair the damage caused by accounting irregularities, this supposed fresh start has not exactly yielded a spectacular return.

The company said in June trading had become profitable again, whereas six months previously it was losing £1 million a month in cash. Yet the market has not bought into the recovery story and, at 6.8p, the shares are now trading dangerously close to an all-time low. In fact, the stock is 28 times cheaper than its 194p high in April 2007 and down 25% since the name change. Apart from a disclosure about selling property, Managed Support Services has been noticeably quiet on the news front since the summer. Sometimes no news is good news, but investors need reassurance that the company’s troubles are not returning.

It was not a surprise to see in-flight caterer Watermark change its name in July, having struggled for several years with profit warnings, financial difficulties and management changes. The newly-christened Journey (JNY:AIM) used the opportunity to leave the main market and join Aim. It began a restructuring programme in June 2007 but 13 months later the company said it was only beginning to show positive results. If shareholders had not approved a £9 million placing three months ago, Journey said it would have breached its bank borrowing limits and would not have enough money to stay in business. It asked the market for another chance, but the shares are down 52% to 3p since the name change.

The last few months have seen a spate of rebranding proposals, including miner Murchison United (MUU:AIM) wanting to become Forte Energy and payments group NETeller (NLR:AIM) eyeing the new identity of NEOVIA Financial. The paint is still drying on media group VTR’s switch to Prime Focus London (PFO:AIM) and home entertainment products distributor Air Music & Media transition to MBL (MUBL:AIM), to name but a few.

A bad call

Some had good reason to adopt a new corporate identity, such as cash shell Global Gaming Technologies which became Sirius Petroleum (SRSP:AIM) after changing its focus towards the natural resources sector. Others, such as County Contact Centres, gave less plausible reasons. It justified a switch to IPPlus (IPP:AIM) on the grounds its business was more than just call centres, even though that is still essentially what it does. It explains the new name is linked to parts of its industry, such as Internet Protocol and Intellectual Property, not to mention IP being the post code of its home town, Ipswich.

Carnegie Minerals (CME:AIM) wants to become Beacon Hill Resources in an attempt to restart the business. In February, the mineral sands company had its operating licence withdrawn in Gambia because of alleged illegal mining. It has now sold the remaining West Africa mining assets for next to nothing and wants a fresh start to pursue natural resources in the US. Carnegie has had a tough time but it is hard to see it surviving on the stock market as it becomes an asset-less business.

Historically, the best time to buy a cash shell is before it makes a transaction, as the share price can rise to the point where the business is valued more than the funds it holds – on high expectation over what it may acquire (Shares 02 February 2006 and 23 May 2007). Unfortunately, Carnegie looks to be a lost cause, name change or not. A £140,000 placing has been proposed but this money will be tied up in working capital. Carnegie will become a cash shell effectively without any cash. Acquisitions will require further fund raising.

A new identity

A shift in sentiment towards a certain business area can prompt companies to seek a new identity, as in the case of several IVA (Individual Voluntary Arrangement) providers. Consumers struggling to pay back bank borrowings would avoid bankruptcy by going through IVA providers, who in turn would negotiate with the creditors for a new repayment schedule. Banks then said IVA providers’ fees were too high and stopped working with them, leaving the IVA industry in tatters. The credit crunch and economic problems meant banks were unwilling to write off loans, instead moving troubled customers onto debt management programmes. This radical change to the IVA industry forced companies with ‘debt’ in their name to seek a new identity as the ‘D word’ suddenly took on negative connotations.

Debts.co.uk bought Relax Finance in May for £3 million, taking its IVA-dominant business model into the new area of loan and mortgage broking, subsequently changing its name to Relax Group (RLX:AIM). Debtmatters sold its IVA and debt resolution business in February for £7.2 million – also in favour of becoming a loan broker. Trading has been terrible since switching to the new moniker of Loanmakers (LMH:AIM). Its main provider of secured loans, First Plus, shut its doors to new business in August because of the credit crunch, leaving Loanmakers in a pickle. Shareholders who failed to sell at the name change in March have since seen their investment fall 98% in value. Relax has fared much better, with the shares currently trading around the same level as on the day of the name change, although it is still hard to ignore the fact its £7 million market cap is nearly ten times less than it was two

years ago.

DebtFreeDirect, another IVA provider, became Fairpoint Group (FRP) in January. Despite a move into broader areas of helping ‘financially-stressed’ consumers, the company issued a profit warning in June, became loss-making at the half-year stage and its share price is down 79% since adopting its new identity.

There have been some peculiar name changes this year including EagleEye Telematics becoming Eagle-i Holdings (EIT:AIM), a new identity that now makes it sound like a dotcom business with a spelling problem. Telecoms technology group Citel sold its assets and became DietBrown (DTB:AIM). Aspiring fuel cells group Cue Energy became Alecto Energy (ALO:AIM) in August. To the average punter, neither the former nor latter name really meant anything, so why did it rebrand? It is another company eager to put a line through a torrid past.

But is this process really necessary? Regal Petroleum (RPT:AIM) would have been a natural candidate for a name change after an over-promoted oil project turned out to be a dry well. It stuck to its guns and kept the Regal name. It took a long time to recover, not helped by legal problems in the Ukraine, but Royal Dutch Shell (RDSB) does not seem to mind the junior’s history if rumours of bid interest over the past year are any guide.

Rivers of gold

Perhaps the only situation that justifies a name change is when a company makes a significant acquisition, typically a reverse takeover. For example, River Diamonds turned its attention from gemstones to gold when it bought the Vatukoula Fiji precious metals project in March, so it made perfect sense to change the corporate name to Vatukoula Gold Mines (VGM:AIM) three months ago. Cash shell Ninety bought food preservatives group Honour Field in September and is now called Sorbic International (SORB:AIM), in reflection of its key product sorbic acid.

Without any logical reason to change a corporate identity, only the stationery companies and brand consultancies stand to benefit. In the future, shareholders invited to vote on a name change should ask their company to thoroughly explain their intentions or whether they are merely try to hide their past.

The increased rate of corporate rebranding would suggest there are quite a few skeletons still in the cupboard and it will be interesting to see whether any firm can break Tadpole Technology’s record. It took the former main market stock a mere six weeks from changing its name to Endeavors to go bust.

Resources In Insurance

(RIIG:AIM) 0.5p

Claims People undertook a £24,000 initiative in April to rebrand as Resources In Insurance as it said the original name did not reflect where the business was heading in terms of insurance support services. Resources In Insurance has moved into recruitment and forensic services where it investigates motor accidents.

Diversification is a logical move to protect revenue streams if one area suffers weaker conditions. However, June saw managing director Barry Whyte step down to become a non-executive director. A month later, chief executive Geoff Somervail quit after just over a year in the job. At the half-year results in September, the company became loss making and warned it would stay in the red for the full year. It is a messy situation and the new-look business is already fading at the edges.