We all are quite familiar with the term Zombie – fictional undead flesh-eating creatures – quite a popular suit among some of the horror films and series produced so far.
Yet, have you ever thought of an idea of Corporate Zombies?
If no, don’t get tensed!
Relax and sit while we explore it here in detail.
Defining Zombie Firms
Zombie Firm simply means a company that is barely able to make ends meet by earning just enough money to be able to finance their debts and cost of operation.
They lack excess capital for investment and development with low profitability in their preceding years of operation and usually just a quarter away from becoming bankrupt. Being a class of highly risky investments, they generally have suppressed or low share prices.
In fact, these firms have been around since the 1980s and the numbers are increasing year on year. A survey by The Economist reveals the share of the Zombies in selected rich countries touching a whopping 15% of the total listed firms with the probability of existence in the next year at an all-time high at around 84%.
Certainly, eye rolling, no ?
But, how did they become Zombies in the first place?
Historically, loose banking rules and regulations with high credit flows have been the drivers of birth to these firms. Rather than looking to recoup some of their investments or bad loans via restructuring and liquidation, banks have allowed these unprofitable businesses to function and pay their old borrowings with more and more fresh loans.
Well, even banks have a sunk-cost fallacy. When they lend to a company that eventually looks like it is going to be in bad debt, it goes on and gives it more money - in the hope that the company will revive.
Moreover, the painful processes of the revival of bankrupt firms takes up a sizable amount of effort with very little to recover at times from the same. This, in turn, has led to an increase of many small firms becoming zombies in recent years.
Effect on Economy
Zombies tend to innovate and invest less. This ultimately puts a toll on the non-zombies. Increase in the number of such zombies also makes profitable firms harder to attract capital.
Profits at non-zombies are easily undercut by those content to make very less or no return on the investments which automatically leads to a slowing rate of spending in the industry.
According to The Economist, 1% rise in the zombie share results in a 1% decline in capital expenditure by non-zombies with a decline in productivity by 0.3% points.
Competition too is affected as a result. Due to the presence of lousy laggards, the overall productivity or growth is brought down with disparity in services being offered to customers leading to uncontested markets.
Covid-19 Impact
Certainly, looking at the pandemic situation, one could say that many zombies will eventually cease to exist. Yet, this might also go southwards with a rise in zombification. Two things that look strong to make it possible – Flow of Credit and Government backing.
In recent years, more credit loans have been made easily available to firms to operate without any restrictive clauses – controlling measures which when breached allow the creditors to dictate the terms and conditions of firms. In fact, the issuance and investments in junk bonds by companies having doubtful credit risks and compliances have also provided a cheap way for zombies to keep on operating for the times to come.
Government measures to protect economies from the pandemic might also contribute to the problem. Schemes covering wage bills and loans that provide liquidity enable unprofitable firms to keep going. Other backing including mortarium announcements that have allowed for loan holidays for companies affected by Covid-19 and putting off firms for filing for insolvencies are already piling up a pressure on the future scenario that might see a heavy burst in zombies.
Conclusion
Looking at the overall scenario presents a sight where zombification can be a tough measure to handle.
Cleaning up the economy could have been a useful tool to wipe off such laggards which seems highly unlikely due to the current pandemic and weak likelihood of profit recovery anytime soon.
Banks are scared of write-offs and highly improbable to keep a happy face with bad debts and losses that translates to little measure to kill zombies without any subsequent chaos.
Rather, the investor’s mindset to aim for consistent higher margins and not mediocre returns can be an effective threat to zombie existence.
In all, the whole landscape to finish off zombies is a painful affair to put up with.
