What’s in a name? Of Umlauts, The Alphabet and World Peace!
David Einhorn Buys Three New Stocks: These Are The Names And Theses (Q3 Letter)
David Einhorn's Greenlight Capital funds returned 5.9% in the third quarter of 2020, compared to a gain of 8.9% for the S&P 500 in the same period. This year has been particularly challenging for value investors. Growth stocks have surged as value has struggled. For Greenlight, one of Wall Street's most established value-focused investment funds, Read More
Reasons for Name Changes
- To decontaminate or escape: In some cases, a name may get contaminated to the point that changing it is the only way to escape the taint. When Philip Morris changed its name to Altria in 2001, it was partly an attempt to remove the taint of tobacco (and its associated lawsuits) from its then food and beverage subsidiaries (Kraft and Miller Brewing). While there may have been other reasons for Tyco Electronics to rename itself TE Connectivity in 2010, one reason may have been to disassociate itself from the accounting scandals at its parent company.
- To change: Changing your name can sometime make it easier for you to change yourself, as a person or how you operate, as a business. In this context, corporate name changes can cover the spectrum. Some name changes reflect changes that have already happened, as was the case when Apple Computer became Apple in 2007, a concession to the reality that it was deriving more of its revenues and profits from its smartphones, tablets and retail than from its computer business. It can sometimes be a precursor of changes to come, as was the hope at International Harvester, when it sold off its agricultural division to Tenneco, renamed itself Navistar in 1986, and worked to make a name for itself in the diesel engine and truck chassis markets. Finally, there is an escapist component to the some name change, where the firm is trying to get away from troubles and hopes that changing its name will help it in the endeavor. When Research in Motion changed its name to Blackberry in 2013, it was in an attempt to divert attention from declining sales and a business in trouble.
- To market: To make money, you have to sell your products and services, and not surprisingly, companies are drawn to names that they perceive will make it easier for them to market. In some cases, this may require simplifying your name to make it easier for customers to relate to; Tokyo Tsushin Kogyo did the right thing in 1958, when it renamed itself Sony. In still others, it may be designed to have a name that better fits your product or service; we should all be thankful that Larry Page and Sergey Brin changed their search engine's name from Backrub to Google a year into development. Finally, the name change may be to something more exotic, in the hope that this will give you pricing power; the only surprising thing about L’Oréal renaming of its US subsidiary, Cosmair, to L’Oréal USA was that it took so long to happen. After all, it must be a marketing maxim that having an accent in your name (the é in L’Oréal), in an Anglo-Saxon setting and that adding a apostrophe can only add to your cachet.
- To fool: In one of the more publicized frauds of the last century, a German named Christian Gerhartsreiter managed to fool East Court elite (both society and business) into thinking that he was Clark Rockefeller, using the last name to open doors to country clubs and financial opportunities. Corporations have played their own version of this game, incorporating the hot businesses of the moment to their names, whether it be dot.com in the 1990s, oil in the last decade or social media today.
It is much easier to see a price effect from a name change, and especially so, if your end game is fooling investors. The highest profile studies of this phenomenon have centered around the dot com era, when the renaming was visible for all to see (adding a .com to an existing name or removing it), and the evidence was striking. The first study looked at companies that added dot.com to their names in the late 1990s and found that stock prices surged by astonishingly large amounts on the news, often with no accompanying change in operating focus or business practices. The second study looked at companies that removed dot.com from their names after the dot.com bust in 2000 and 2001 and uncovered an equally unsetting market reaction, i.e., that stock prices surged on the removal, again with no really accompanying shift in fundamentals. The results from both studies are graphed below:
If change is the rationale, the timing seems odd, given that Google just reported exceptional results in its last earnings report, triggering a 16% increase in market capitalization on the news. It is true, though, that Google is still a single-business company, deriving almost all of their revenues from advertising, and that all of its attempts to diversify its business mix have generated more publicity than profits. It is possible that the renaming and reorganization are designed to fix this problem, but will it work? I am skeptical, partly because there is talk that Page and Brin were using Berkshire Hathaway as a model, which makes no sense to me, since the two organizations have very little in common (other than large market capitalization). As I see it, Berkshire Hathway is a closed-end mutual fund, funded with insurance capital, and run by the best stock picker(s) in history, and its holding structure is consistent with that description, where Buffet and Munger have historically picked up under valued, well managed companies as investments, and left the managers in these companies alone. Google, in contrast, is composed of one monstrously successful online advertising business (composed of Google search, YouTube and add ons) and several start-ups that so far have been more adept at spending money than generating earnings.
If this name change is designed to alter that reality, it has to attack what I see as Google's two big problems. The first is what I term the Sugar Daddy Syndrome, where the earnings power and cash flow generating capacity of Google's advertising business has made its start ups too sloppy in their investments, secure in the knowledge that they have access to an endless source of additional capital. The second is that Google, for better or worse, has been run as a Benevolent Dictatorship, with Larry Page and Sergey Brin calling the shots at every turn. The fact that Sundar Pichai, the new CEO of the Google portion of the Alphabet, is little known can be viewed as a sign of his modesty and self-effacing nature, but it is also a reflection of the outsized profiles that Page and Brin have had at Google. So, for this name change to work, it has to solve both problems, and here are the signs that will indicate that it is working. First, I would like to see Google refuse to invest in one or more of its start-ups, on the grounds that of non-performance and invest in or acquire a competing start-up in the same business. Second, I would also like to see Mr. Pichai deny capital to a project that is prized by Page and Brin, and have them not over rule that decision. Given the history of Google's founders, the likelihood of these events happening is low, but I give Google better odds than I did Ron Artest, an NBA player with anger management issues, when he changed his name to Metta World Peace in 2011.
What's in a name?
If value is driven by substance (cash flows, growth and risk), it seems absurd that name changes can affect your value, but I have learned not to dismiss them as non-events. Name changes can lead to shifts in investment, financing and dividend policy that can affect value, but more important, they can have substantial price effects. That may seem irrational, but it is ironic that academics in finance would be so quick to make the judgment that what you name something cannot alter its value or significance. After all, these same academics have learned that attaching letters from the Greek alphabet to their measures of risk (beta) or performance (alpha) provide these measures with a power that they would never possess otherwise. So, who knows? These name changes may all work: Bröd Kitchen might deliver delicious and cheap food, Page and Brin may actually be willing to give up control at Google and Ron Artest could become a Buddhist monk!