Zombie companies continue to surge, report warns
The number of companies failing to produce enough profits to meet their debt obligations is rising steadily in Australia, according to a new report.
A research report by consulting firm Kearney has found that the number of zombie companies increased again last year by 7.4 per cent globally.
Zombie companies, regarded as companies that don't produce enough profits from operations to meet their debt obligations, now account for 5.8 per cent of all publicly traded businesses worldwide.
The Kearney report, Zombie buyers beware, found that the increase in zombie companies was more pronounced in regions such as Australia and Germany hit by economic slowdowns, higher interest rates and global supply chain challenges.
The research analysed a dataset dating back to 2000 with more than 5.5 million data points on close to 76,000 publicly traded companies across 154 industries and 152 countries, including 45,000 companies active in 2023.
The report revealed that Australia saw a 13.6 per cent increase in zombie companies operating last year.
"The zombie increase in Australia is in line with the country’s wavering economic performance, as indicated by a dip in GDP growth from 4.27 percent in 2022 to 3.02 percent in 2023, according to the World Bank," the report said.
"That could help explain why the Asia Pacific region’s zombie population multiplied despite an overall improvement in GDP from 4.5 percent in 2022 to 4.8 percent in 2023."
The report also noted that if companies had to refinance their current debt obligations at today's higher interest rates, the effect would be drastic.
"According to our stress tests on the 45,000 active companies in our database, a two-fold rate increase would turn close to eight of every 100 enterprises into a zombie," the report said.
The research found that the real estate sector was one of the industries seeing the greatest rise in zombie companies.
"Inflation, rising interest rates, and economic instability affected the financial well-being of companies in the real estate industry more than companies in any other sector.
"By contrast, the post-pandemic return to normalcy for travel and tourism contributed to a net decline of zombies in the sector, from 14.7 percent to 9.7 percent."
In terms of company size, the biggest increase in zombie companies last year was among midsized companies at 12 per cent. However, small companies still account for the larger number of zombies.
The report also found that investors continue to pay substantial premiums for zombie companies because they typically generate double-digit shareholder returns in the first year following the deal.
"However, the surplus value they create soon decreases to be more in line with that of other, non-zombie companies," the report said.
There were 294 zombie companies involved in 388 deals, meaning some zombies were fully or partially acquired more than once.
"The finding that some zombies trade hands multiple times indicates that investors can’t always absorb or turn them around, and when that happens, undead companies wind up back on the market," the report said.
"It highlights the extreme challenge of integrating a company facing significant financial headwinds."
About the author
