Heard on the Street
For Dot-Coms, New Names Are Good for a Pop --- Study of Stock Prices Confirms It's as Smart to Dump the Web As It Once Was to Embrace It
By Ken Brown
1395 words
18 December 2002
The Wall Street Journal
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English
(Copyright (c) 2002, Dow Jones & Company, Inc.)

EVERYONE KNEW THAT during the stock-market boom, one of the many ways to make easy money was to "Webify" a company's name, adding "dot-com" or some variation of "net" to the end. If you wanted a real jump, the switch could be more drastic -- going from, say, Nerox Energy Corp. to E*twoMEDIA.com.

Since the Internet-stock bubble burst, those names have become the butt of innumerable jokes, associated more with liquidation than stock performance. So what do you do if you're Skreem.com? Simple, get a more respectable name -- in this case, Waterford Sterling Corp.

A funny thing happened on the road to respectability. A study by a group of finance professors shows that companies that shedded their dot-com names saw their shares jump, as if investors were rewarding them for mending their greedy ways.

"I think we are very firmly stating investors are irrational, and here is one of their biases," says P. Raghavendra Rau, a professor of finance at Purdue University and one of the study's authors.

Irrational is a polite way to explain why investors bid up the prices of companies such as Judge Group Inc. and Voyager Group Inc. when they dropped the names Judge.com and Save On Meds.net. Overall, the study found, companies that dropped dot-com, or some other formerly hip designation, saw their share prices rise 15.8% the day the news hit the market and a total of 21.6% in the 30 days following the switch, though the gains were often ephemeral.

The stocks strongly outperformed other Internet stocks. Not too surprisingly, the switchers' shares had fallen nearly 20% on average in the three months leading up to the name change, in line with other Internet stocks.

Mr. Rau and his colleagues were uniquely qualified to carry out the current research. Their study, "A Rose.com by Any Other Name," appeared a year ago in the Journal of Finance and documented the pop that stocks got during the boom years when they added dot-com to their names. In doing the current study, Mr. Rau updated his previous work, adding more recent switchers to his first sample of name changers. And by doing the two studies, the researchers were also able to pinpoint the serial name-changers, those companies that added and then deleted dot-com from their names.

"We said if markets go down, what happens to those companies that added dot-com?" Mr. Rau says. "If they were smart enough to do it in the first place, they were surely smart enough to do it again." His hunch was right -- the 30 companies that swapped twice surged 9.6% ahead of their former dot-com brethren the day after the announcement and 38.5% a month after they shed their Internet anchor.

To find these names, the researchers looked at all publicly traded companies on the major exchanges, as well as the Over-the-Counter Bulletin Board, between June 1998 and August 2001. They discovered 183 companies that added dot-com or some other Internet code word to their names and 67 that dropped the moniker.

For the company formerly known as Attorneys.com Inc., the name change couldn't have come at a better time. In June 2001, with its shares down more than 75% from their 2000 peak, the Lake Helen, Fla., company dropped the dot-com from its name and took up the more-respectable 1-800-Attorney.

Within days, the company's stock soared more than 40%, to about $16 from about $11. It wasn't the first time 1-800-Attorney's stock had gotten a quick pop. A year earlier, when the company had changed its name from Publishing Co. of North America Inc. to Attorneys.com, its shares nearly doubled.

While the list of companies that have dropped the dot-com includes some well-known names such as Ticketmaster (was Ticketmaster Online-CitySearch), Neoforma Inc. (Neoforma.com) and J2 Global Communications (JFAX.COM), the list opens a window into the netherword of often-struggling penny stocks -- names such as EDT Learning (formerly e-dentist.com Inc. and before that Pentegra Dental Group Inc.) and Xdogs Inc. (formerly Xdogs.com Inc. and before that the Sled Dog Co.).

Consider the path taken by English Language Learning & Instruction System, a Provo, Utah, company that sells language-training materials and trades (though not very often) at 18 cents a share. The company, which was closely held and known as CALI Inc., merged, as a way to go public, with Politics.com in February 2001. Politics.com was a has-been political-news Web site that had started life as Lone Oak Inc.

"The idea of going public was to be acquired by a larger publisher, which we tried to do this summer, and we were not successful," says Chief Executive David Rees. "So we kind of retrenched and are running independently." The company, which calls itself ELLIS, dumped the Politics.com name shortly after the merger, though Mr. Rees still gets an occasional call from a confused investor holding Politics.com shares. "Their stock converts into ELLIS, so I tell them about ELLIS, direct them to the Web site," Mr. Rees says.

In many cases, the gains from the name change disappeared as the companies continued to struggle with corporate strategy. That was the case with A.D.A.M. Inc., an Atlanta health-care information provider whose name stands for Animated Dissection of Anatomy for Medicine. The 15-year-old company embraced the Internet as a way to sell its products to other Web sites, changing its name from A.D.A.M. Software Inc. to adam.com in October 1999. Nearly two years later, with the stock down 80%, the dot-com was gone. It got a pop of 23% the week it reverted to A.D.A.M. Inc. in July 2001. The company now trades at 40 cents a share.

"We've had to just kind of regroup," says Bob Cramer, A.D.A.M.'s chairman, CEO and co-founder. "The market has not looked kindly on us being a very small public company with a misunderstood mission, some of that being driven by name changes. They say, `What is this company anyway? They can't even get their name right.' "

The current study has five authors: Mr. Rau and fellow Purdue Prof. Michael Cooper; their graduate student, Igor Osobov; and Profs. Ajay Khorana from the University of Virginia and Ajay Patel from Wake Forest University. It is titled "The Game of the Name: Valuation Effects of Name Changes in a Market Downturn," and available at www.mgmt.purdue.edu/faculty/rau [http://www.mgmt.purdue.edu/faculty/rau].

Mr. Rau says some people have asked him for strategies to make money from his research, but his favorite reaction came from a colleague who recognized some of the names in the study. "One of them said, `I'm pretty sure I invested in some of these.' "

Although they have fallen from the radar, more than 130 companies with dot-com in their name still exist in the 9,154-company database maintained by Multex.com Inc., itself a surviving dot-com. Of those companies, just 26 trade for more than $1 a share.

Meanwhile, the ups and downs have continued at 1-800-Attorney, which maintains a lawyer-referral service, publishes legal directories and has a consulting unit. The company's shares are up more than 1,000% in the past two months from a low of 30 cents, following the arrival of new management, which has bought up 31% of the company's shares. One step they are considering: a name change.

"It's something that we are definitely contemplating," says Dan Rubin, the company's CEO and chairman for the past two months. He adds: "Now it sounds like we're just an 800 number, but it's just a third of our business lines and about 22% of our revenue."

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Journal Link: Read the full text of the study of dot-com stocks, in the Online Journal at WSJ.com/JournalLinks.

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