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When Dead Companies Don’t Die
The policies created to pull the world out of recession are still in place, but now they are strangling the global economy
By Ruchir Sharma
The Bank for International Settlements, the global bank that serves central banks, says low rates are fueling the rise of “zombie firms,” which don’t earn enough profit to cover their interest payments and survive by repeatedly refinancing their loans...
Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s. Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labor.
Yeah, I read this a couple of days ago. I don't really follow the logic except that the writer seems to think that struggling companies should die and get out of the way. Very darwinian.
It's possible that cheap money is keeping marginal companies afloat longer than they might have in a tough economy, but otherwise this is like saying old people draining Medicare are the problem with health coverage. I'm sure it's very frustrating to share a market segment with a company that's struggling with debt, but expecting them to commit hara-kiri for your benefit is perhaps a tad self-serving.
Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s.
16% would be 950-1,000 companies on the NYSE/NASDAQ and he can't name even one?
Yeah, I read this a couple of days ago. I don't really follow the logic except that the writer seems to think that struggling companies should die and get out of the way. Very darwinian.
Well, Darwin is how and why it works and should work.
His claims are suspect. If, as he claims, those companies are struggling, then they shouldn't exist. If those companies are struggling, then they have little to no cash on hand, which makes them easy targets for takeover, whether it's a hostile takeover, a leveraged buy-out or a forced merger/acquisition.
Why wouldn't you buy out a competitor?
South Korean LG Corp did.
Zenith couldn't turn a profit and was heavily in debt with no cash. LG Corp bought up Zenith stocks until they had controlling interest, which makes them both the major shareholder and the major creditor.
LG Corp has every right under US bankruptcy law to file a petition to force Zenith into Chapter 7 Bankruptcy, which is exactly what LG Corp did.
LG Corp then bought Zenith for pennies on the dollar, shut them down, closed the plants, laid off workers and absorbed Zenith's customers.
Now your TVs are made by LG instead of Zenith.
That's how it works.
If those companies are hogging resources, including market share, why wouldn't competitors shut them down?
Well, Darwin is how and why it works and should work
[...]
If those companies are hogging resources, including market share, why wouldn't competitors shut them down?
Even Chuckie doesn't say "hunt down and exterminate" lesser breeds. The implications of this idiot are that weak companies have no right to exist and strong companies should... have some right to erase them.
The fabled invisible hand should be plenty good for this, as it is claimed to be for all other market issues. Sounds like our boy owns some stock he thinks is being oppressed.
So, "holding companies" that really are just... holding a position? Assigned problematic but potentially lucrative assets like shale beds and oil sands, so that the parent company is isolated from claims etc. but would reap the windfall if it came? But in the meantime are a cash/debt sink?
Central banks around the world have created distortions all over the place. There is no escape and they will keep the distortions going until all confidence is lost in these institutions. At that point you have major economic turmoil and war will be very likely. I think the loss of confidence in central banks occurs before the 2020 election. The sovereign debt crisis is going to make 2008-2009 look like a blip on the radar.
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