Zombies are companies that make enough money to continue operation and pay interest on debt, but are unable to pay off their debt. While these companies stay afloat paying overhead costs, they do not have enough many left over for investment in new growth. These companies are often very dependent on banks and may be subject to higher borrowing costs. Zombie companies may be one bad quarter or market event from insolvency or bailout.
President George W. Bush discusses bailouts with members of Congress in 2008.
Historically, the term “zombie” came into popular use in the financial sector during Japan’s Lost Decade of the 1990s. Many Japanese companies during this period were dependent on bank backing due to bloated or inefficient practices. Many economists argued that such businesses should be allowed to fail rather than limp along. The topic of zombies again became relevant during the 2008 financial crisis, applying to some companies that were deemed “too big to fail” and bailed out by the US government under TARP.
Investing in zombies is usually unwise as their survival is unpredictable. It can, however, occasionally produce positive results. For instance, a pharmaceutical company could be stretched then due to research and development costs, but then happen upon a breakthrough drug that boost expansion.
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