Company Outsider: Zomato's Eternal bet and the risks of a name change

Ordinarily, a name change isn't a big deal. Just recently, one gentleman announced, through a notice in the newspapers, that henceforth, he would answer to James Bond and not to his earlier name, Giridhar.

Companies, too, are well within their rights to do the same. Get approval from the board and sundry regulators and you can choose to rename yourself whatever you please. It’s a fairly common occurrence in India as well as abroad. In India, the BSE lists 2,500 companies that have changed their names over the years. In the US too, more than 30% of the firms listed on the various exchanges have changed their names at least once.

Zomato’s decision to change the name of its parent entity to Eternal is, therefore, neither unusual nor unprecedented. The company’s big boss Deepinder Goyal has linked the name to the changing paradigm of the company in terms of its future. It seems as a good enough reason, given that going forward it will be expanding into multiple businesses.

Read this: Zomato’s gamble with ‘Eternal’: A visionary leap or just a name game?

The move is part of a clear trend of startups changing their names en route to adulthood. What started as Backrub in 1996 became Google in 1997 and split into Alphabet in 2015. In July 2023, Elon Musk bought Twitter and proceeded to rechristen it X. The difference in the two renaming exercises is that Google continued as the name customers associate the company with, while users still struggle with saying “I Xed" instead of the more familiar “I tweeted".

Therein lies the danger for companies that go in for such a rechristening. Zomato has wisely chosen to retain the name of the brand that’s now synonymous with food delivery. But since Eternal will also be the company’s stock name, there is bound to be some confusion in the minds of investors.

Why do companies change their names, given the possibility of creating uncertainty?

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Some name changes are clearly a way to escape social opprobrium. Thus, BP was a way for British Petroleum to shed its troublesome association with fossil fuels while also acknowledging that it was no longer a British company. Similarly, British Steel in 1999 renamed itself as Corus after its merger with Koninklijke Hoogovens, a Dutch steel company, removed all trace of British in the company’s identity.

In India, Satyam Computer went through two name changes after it was outed for financial skullduggery. In the first instance it became Mahindra Satyam to reflect its new ownership. Subsequently, it became a part of Tech Mahindra that had also gone through a name change in 2006. Indeed, companies in trouble often seek a new identity in order to escape the stigma. In 2015, Jignesh Shah-promoted Financial Technologies India Ltd (FTIL) changed its name to 63 Moons Technologies Ltd after run-ins with various agencies, including the enforcement directorate and the ministry of corporate affairs.

After the 2008 financial crisis, any reference to finance in a company name was a real dampener for its stock. Not surprisingly, many companies changed their names to escape the wrath of irate investors.

Whether name changes impact stock prices is a debatable issue. Fifteen years ago, researcher Hung Wan Kot from the Hong Kong Baptist University studied listed companies in Hong Kong for stock price reactions following a corporate name change. His finding - investors react positively around the announcement date to changes which are made due to a merger or acquisition, a restructuring or a change in business type. Name changes to provide clarity or for reputational reasons generate no stock price reaction. The results suggested that name changes have short-term stock price effects, but don’t have any long-term relationship with stock price or operating performance.

However, another study questions that finding. A paper titled The impact of name changes on company value by Bryan Mase of the Brunel University of London concluded that “contrary to the existing research, there is evidence of consistent abnormal returns following name change announcements, particularly when a distinction is made between amendments and radical name changes, and whether the name change reflects a company that is diversifying or re-focusing."

In India, corporate name changes have a hoary past. During the dotcom boom of the late 1990s, many companies headed for a listing quietly added a Technologies or Tech to their names irrespective of their original businesses. Similarly, the infrastructure boom in the first decade of this millennium, triggered many name changes to include the word infrastructure. Both were cynical attempts at taking advantage of the high multiples those industries were getting.

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Do such changes work? Obviously, if the purpose is to wipe the slate clean, there is real value. Zomato’s change to Eternal, though, is clearly not an effort to escape a shadowy past but to reflect enhanced ambitions. The company’s share price, down 12% in the past 6 months, gained nearly 2% following the announcement.

But that rally will run out of steam soon.

Zomato’s core food delivery business has very few moats. Its success is built on marketing and brand recall. The key test will be how well the company is able to communicate the reasons for the name change to its investors while ensuring that its customers’ association with the brand continues uninterrupted.