Business, Legal & Accounting Glossary
Companies that continue operation while they await Merger or closure, even though they are Insolvent and bankrupt.
A company that is insolvent but continues to operate. This may be the case before a bailout or restructuring occurs.
Also:
Zombies are businesses that make just enough money to stay afloat and service debt but are unable to repay it. Given that they barely scrape by to meet overheads (wages, rent, and debt interest payments, for example), such businesses have no surplus cash to invest in growth. Zombie companies face higher borrowing rates and could face insolvency or a rescue if a single unforeseen event occurs, such as a market interruption or a poor quarter performance. Zombies are particularly reliant on banks for funding, which is essential to their survival. The “living dead” or “zombie stocks” are terms used to describe zombie firms.
Zombies frequently collapse due to huge debt expenses or the exorbitant costs of key operations, such as research & development. They may not have the financial means to invest in capital, which would lead to growth. It may be regarded as “too big to fail” if a zombie company employs so many people that its failure becomes a political problem, as many financial institutions were during the 2008 financial crisis. Given that many analysts believe zombies will eventually be unable to satisfy their financial obligations, such businesses are viewed as riskier investments, and their stock prices will be lowered as a result.
During Japan’s “Lost Decade” of the 1990s, following the bursting of its asset price bubble, zombies were first mentioned in relation to companies. Companies were reliant on bank funding to stay afloat at this time, even if they were bloated, inefficient, or bankrupt. Economists believe that letting such underperforming businesses fail would have been beneficial for the economy. In 2008, the term “zombies” was revived in response to US government bailouts under the Troubled Asset Relief Program (TARP).
While the number of zombie companies is still limited, years of lax monetary policy, including quantitative easing, heavy leverage, and record low-interest rates, have aided their expansion. According to economists, such measures maintain inefficiencies while strangling productivity, growth, and innovation. When the market moves, zombies will be the first to suffer, unable to satisfy their fundamental responsibilities when interest rates rise, making debt service more expensive. Meanwhile, successful businesses that are unable to expand due to financial constraints may feel any downturn more than they should.
While keeping zombies alive on life support may save jobs, economists argue that doing so is foolish since it stifles growth in successful businesses, which in turn stifles job creation.
Zombie stocks are exceedingly risky and are not suitable for all investors because a zombie’s life expectancy is highly unpredictable. A small biotech company, for example, might strain its funds to the limit by focusing all of its resources on research and development in the hopes of developing a blockbuster medicine. The corporation might go bankrupt within days of the announcement if the medication fails. If the medicine is successful, though, the corporation might profit and decrease its liabilities. In most situations, however, zombie stocks are unable to overcome the financial difficulties of their high burn rates and most eventually dissolve.
Because this group receives so little attention, there are typically interesting prospects for investors with a high-risk tolerance who are looking for speculative opportunities.
Private Equity
Private Equity Funds
Limited Partner
General Partner
Waterfall Structure
Preferred Return
GP Commitment
Clawback Provision
Overall Fund Period
Private Equity Investment Period
The term “zombie” refers to a company that is insolvent or facing bankruptcy, but is still operating as it awaits the subsequent merger or foreclosure.
A zombie, in the traditionally haunting sense, is a living corpse; a zombie is associated with “the living dead.” A zombie company is considered to be in a figurative state of “living but dead” because it is not expected to continue operating, despite its ability to do so now. A zombie company may be in or close to filing for bankruptcy – Chapter 11 – which allows a company to continue operating while it restructures its debt. A zombie company is typically considered a risky investment, so investors may choose to avoid a corporate zombie just as they would avoid a supernatural zombie. Of course, as with many investments, the higher the risk, the higher the potential payoff.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Zombie are sourced/syndicated and enhanced from:
This glossary post was last updated: 21st January, 2022 | 0 Views.