One of the enduring mysteries of stock markets is why companies insist on changing their names more often than fugitives in a witness-protection plan.
Encana Corp.’s announcement on Thursday that it plans to relabel itself as Ovintiv Inc. is a particularly puzzling example. What is an Ovintiv anyway? According to Encana, “the new name stands for our commitment to deliver unmatched value through continuous innovation.” Of course.
Whatever the clunky new name means, it puts Encana on trend. Over the past couple of decades, a steady stream of other high profile companies have also undergone an identity shift.
In Canada, Research In Motion transformed itself into BlackBerry Ltd., Valeant Pharmaceuticals International became Bausch Health Companies Inc., TransCanada Corp. morphed into TC Energy Corp., and Penn West Petroleum Ltd. rather awkwardly became known as Obsidian Energy Ltd.
Outside of Canada, Google redubbed itself Alphabet Inc., Philip Morris rebranded as Altria Group Inc., and Andersen Consulting started life anew as Accenture PLC.
In some cases, the name changes were obvious attempts to distance management from memories of falling share prices. In other cases, they seemed aimed at papering over other unpleasant associations. In still other cases, such as Google’s, they were about indicating broader corporate ambitions.
The only common denominator? None of these new labels had any noticeable effect on the trajectory of their owners’ share prices.
Alphabet continues to thrive and BlackBerry goes on struggling, despite their new monikers. Investors in Altria still realize they are buying a tobacco company with all the challenges that entails, while shareholders in Bausch still recognize they are buying a drug company with a lot of debt on its balance sheet.
There is a message here. It seems the market is smart enough to look beyond a snazzy new label when assessing the value of a company.
Academics who have studied the matter generally conclude that any boost from a new name is transient. A 2013 study by Robert Mayo of George Mason University found that companies listed on the New York Stock Exchange enjoyed a small lift in their share prices during the first 30 days after they adopted a new name. Longer-term, though, the news wasn’t so happy. A 2007 study by a team of British researchers discovered that renamed U.K. companies significantly underperformed the market over the next three years.
It’s easy to see why renamed companies might fail to thrive. Businesses usually choose to relabel themselves when they are under pressure or struggling through a big shift. Encana, for instance, is moving its head office from Calgary to the United States and attempting to reposition itself as a player in the U.S. energy sector. All this refocusing involves risk and the possibility of disappointment.
What is unclear, though, is why a name change has to be part of this change. That seems an unnecessary extra twist to the geographical move. Encana says its shift to the United States is motivated in part by its desire to get bigger exposure to the large amount of money in U.S. index funds, but index builders don’t exclude companies on the basis of their names.
Big investors, too, are intelligent enough to see beyond historical associations. Shareholders in Wells Fargo don’t assume they are buying a stagecoach company; shareholders in Texas Instruments aren’t shocked to discover the company does business in other states too. Presumably, any serious investor looking at Encana’s investment merits would be able to get beyond the veiled allusion in its name to Canada.
So why change names? It seems to be an admission that management doesn’t have many other dials to turn. Since it is having trouble transforming the fundamental nature of its business, it is now turning to cosmetic changes instead.
If history is any guide, the relabeling will do nothing for Encana shareholders, who have already seen their shares lose three quarters of their value over the past five years. In fact, the question those long-suffering investors should now be asking is this: Do you really want to put your faith in a company that can decide Ovintiv is an attractive new name?