Zombie companies are, as people type zombies, in the hinterland between the alive and dead.   The media coined the phrase originated in Japan in the ’90s, and later the term resurfaced after the banking crisis of 2008.   It is no surprise in these times of economic recession and COVID, that zombie companies are very much an item once more.

What was seen in Japan at that point, were companies that had large amounts of debt but were propped up, the damage from their collapse being deemed too great because of their sheer size.   However, allowing those zombies to survive, was generally thought to be a significant cause of the 1990 crash.

Companies are considered to be in zombie state when they are so burdened by old debt, that they are barely bouncing along the bottom, managing to pay the interest, but with no spare cash to pay off the capital or invest develop for the future.  Any slight change to the interest rates can prove fatal.

Why do Economists believe Zombie Companies to be so bad?

There are several reasons that economists, governments, and insolvency practitioners give for their concluding that Zombie companies are bad for the economy as a whole.   The UK is particularly fond of blaming the zombies when, in reality, Southern Europe has a far greater number than we do.

 They make a great scapegoat for an economy’s overall low productivity.  The theory is that the zombies are too short of cash to increase wages, so too many people are demoralized and low functioning.  Talent is tied up in these companies that could be put to better use in thriving companies.

They are also a drain on money available for loans and investment.  With so much of lending being soaked up by the zombies, there is a huge chunk missing from available funding for what could be high growth companies.  This is the so-called congestion effect.

Equally, there is a slow down on cash flow right through the chain.  If the zombies only pay bills at the last possible minute, the otherwise healthy companies are held back by poor cash flow.

 Last but not least, there are the government’s revenues to consider.  Some economists argue that the more zombie companies, the lower the money coming in from taxation.  The less tax, then the more prolonged austerity continues, and longer growth is hampered.

Why is the number of Zombie Companies on the rise?

zombie companies limp from crisis to crisis

 We have the perfect storm for the growth of zombie companies, especially in the UK.

We have much-heralded low-interest rates, put in place to encourage growth, and allow for zombies to survive when higher rates would have left them with no choice but to shut up shop.

The banks are reluctant to call time on loans.   This reluctance is not from goodwill clearly, but they are happier showing revenue being generated than reporting the news of bad debt traveling up to the powers that be.  In the same way, large creditors hesitate to enforce insolvency, knowing that they will get nothing from it, and preferring to live on a mix of small payments and hope.

The same goes for the government.  We have seen economic policies change at speed throughout this pandemic.  Overall, governments and HMRC are also taking the line that a little leniency and more business survival might be better for both parties in the long run.

The furlough scheme has created a zombie job situation when large numbers of people having been kept on the books, will find themselves rapidly unemployed when the support ceases. 

They know that unemployment will rise this winter.  The fewer zombies killed off, the less immediate unemployment to deal with.  Like the principles of flattening the curve to enable the NHS to cope with pandemics and flu one at a time, companies can go under a slower rate, so unemployment can perhaps keep pace with expansion when times improve.

It is this rationale that governments used back in the ’90s and have continued to do so since, to allow a softening of attitude, additional support for select companies, and a grey area of legalities that enables zombies to continue.

Should we leave the Zombie Companies hanging on?

zombie company clinging for survival

 There are many problems with the arguments that pour scorn on zombie companies.  The first of the weak points is that they are based on “what if” scenarios.   

There are too many uncertainties in what makes companies successful.  We cannot be sure that other companies would become more profitable with greater investment and more talent, and there is no way of knowing that they too would not fail in some way.

When the next slump in the ’90s is laid at the zombie door, it overlooks one huge and vital fact, that many of the zombie companies that died were banks themselves, banks who had survived by income from debt without the necessary capital behind them.

We knew unemployment was going to rise before there was a sniff of COVID.  Automation, the death of the high streets, online shopping, and so many changes in society were all going to see the entire job market revolutionize. The volume going under, should we take a puritan line against zombie companies, could indeed be catastrophically overwhelming.

 Traditionally in times of unemployment, one of the life-lines for both government coffers and individuals has been self-employment.  A percentage of those people go on to employ others and to grow and contribute further to the economy. 

However, the government’s low-level support to the self-employed and non-existent support to sole-directors, means that the number of self-employed people has actually been falling.  Queue more unemployment, less revenue coming in, more going out for the government, more extended austerity for all.

 I hear some entrepreneurs join the witch hunt against zombie companies alongside the economists.  It is exactly the same attitude that the elderly or infirm are a burden and less worthy of a life that we have heard propounded.   People are still people.  One life, however short, is still as vital as the next.   

So are their livelihoods.  In many cases, these zombie companies are small businesses that provide vital local employment both to the owner and others in the community.  It may be tough; it may mean juggling.  Often with better help and advice on business turnaround, it might not have to be so tough. 

The impact of individual companies being put down can still be catastrophic, may also be needless, and right now, we cannot possibly afford it.   And where there is life, we should fight to keep it.

 

(NB – there are always important legal issues to consider in trading a zombie or potentially insolvent company and you must always take specialist advice. A starting point is the Gov UK website.

 

You might also be interested in reading about turnaround specialist Joe Meuse and his advice on keeping companies alive

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