What Are Zombie Companies?
Zombie companies are businesses that earn just enough revenue to continue their daily operations and service their debt, but lack the capability to pay off the principal. Despite barely meeting their overheads (like wages, rent, and interest payments), they have no excess capital for growth or innovation. This precarious financial situation leaves them susceptible to higher borrowing costs and heightened risk of insolvency from any market disruption or poor financial quarter. In perpetuity, these companies rely on constant financial support from banks, essentially making bank loans their lifeline. As a result, they are often referred to as the ‘living dead’ or ‘zombie stocks’.
Key Takeaways:
- Zombie companies scrape by, just managing to operate and service their debt.
- These companies lack capital for growth initiatives, bordering on insolvency.
- On rare occasions, a zombie company might overcome its financial constraints through the development of a successful product, thereby reducing liabilities.
- Investing in zombie companies is high-risk and not for the faint-hearted.
Understanding Zombie Companies
Zombies often plummet due to high debt costs or inadequate resources to invest in growth-generating areas such as research and development. They may employ substantial numbers of people, thus sometimes becoming ‘too big to fail,’ seen prominently during the 2008 financial crisis where government bailouts were given to major institutions. Most market analysts predict these companies will eventually be unable to meet their financial responsibilities, classifying them as risky investments with suppressed stock prices.
First associated with companies in Japan during the 1990s ‘Lost Decade’ following the bursting of asset price bubbles, zombie companies depended heavily on bank support to stay operational despite being inefficient or falling. Economists note that allowing such companies to fail might have benefited the economy more. The term regained attention in 2008 alongside U.S. government bailouts (for instance, the Troubled Asset Relief Program).
Despite their limited number, years of eased monetary policy—through tools like quantitative easing and low-interest rates—have seen their ranks grow. Critics argue that catering to zombies wastefully retains inefficiencies, thus stunting productivity, growth, and innovation. A market shift, such as a rise in interest rates making debt more expensive to service, signals increased risk for zombies, who often can’t cope with these changes.
Balancing keeping zombie companies afloat with preserving jobs and resources is a contentious subject. While jobs are maintained short-term, impeding thriving companies’ development restricts longer-term job creation and overall economic growth.
Special Considerations
Zombie Investors
Since a zombie’s life expectancy can be unpredictable, investing in their stocks is especially risky and not advisable for the risk-averse. Consider a small biotech firm sinking all its resources into developing a groundbreaking drug: failure could mean swift bankruptcy post-announcement. Conversely, success could turn fortunes around by decreasing liabilities and boosting profitability. However, most zombie stocks succumb to their financial burdens, dissolving after extended struggle.
For frequent high-risk takers seeking speculative investments, zombies—often overlooked—can present intriguing opportunities, albeit with high volatility.”
Related Terms: debt, insolvency, market disruption, monetary policy, Too Big To Fail, quantitative easing.
