Frank Holmes on the damaging drag on the economy of so-called zombie companies.
You may have seen zombies in horror movies, bodies absent of souls, neither alive nor dead. But how about a zombie colony within the UK economy, growing in numbers and threatening to impede much needed recovery and growth?
A ‘Zombie Business’ is one which is generating just about enough income to cover its interest costs, (without being able to pay down its institutional debts) and whilst this situation persists, the monitoring bank is not obliged to call in loans. Consequently, the company is allowed to limp along; it survives, but does not have sufficient funds to grow its revenues in a difficult economic landscape.
The fact is that the UK is in a state of low productivity. Output per UK worker fell again in the fourth quarter of 2012 with the biggest negative measures in manufacturing, less so in services, and the only notable performer was in computer and electrical equipment.
Despite huge investment in management skills and systems, there has been a slowdown in the rate of innovation. A lack of innovation has occurred as companies have built up cash piles rather than invest in technology and equipment and increase competitiveness.
Without competition, management does little to raise productivity and bad performers are not driven out of their markets. So low innovation, poor macroeconomic conditions and weak competition are the perfect environment for zombie companies that have struggled on because of the forbearance of banks.
According to insolvency experts, there is estimated to be over 150,000 zombie businesses in the UK. This recession has not generated a sufficient wave of destruction of financially weak and low productivity yielding businesses which are retaining labour in the hope of an upturn in demand. Smaller and competitive businesses, which show potential for growth, have been stalled by zombie businesses hoarding skilled labour and customer contracts which might otherwise stimulate growth and increase productivity.
Banks have acted with increased reluctance to foreclose struggling companies in this recession, in comparison to the way they acted in previous prolonged downturns. This has allowed zombie companies to continually run on empty. They have survived because of low interest rates and resourceful management, but for many of these infected businesses, it is merely postponing a day of reckoning. The alternative to letting these firms survive advocates mass repossessions, corporate liquidation and surging unemployment. Like the aftermath and fallout of Japan’s zombie business outbreak, the UK may wake up in several years time, still, with weak growth, high debts and persisting economic problems.
So, can some of these moribund businesses be resuscitated? Is there a brave alternative initiative worth pursuing? Consider taking some of the inevitable medicine now; banks writing off irrecoverable debt, or settling for equity swaps, new investment and loans structured on an affordable basis. This would free up or enhance cash flow for growth and investment in equipment, people and the development of technology that is necessary to compete on a global scale.
Through this approach the zombies would gain a new lease of life, get out of intensive care, become energised, preserve employment, mitigate asset destruction and once again become competitive, and free to grow when the macroeconomic conditions improve.
