is Carillion the ultimate zombie company?

Date: 22/01/2018
Author: Beever and Struthers
Company: Beever and Struthers

Charles MacMillan, partner and head of corporate recovery at accountants and business advisors Beever and Struthers, asks: is Carillion the ultimate zombie company?

There has been much talk since the banking crisis of 2008 of zombie companies and their ability in a benign economy to survive. Unlike previous recessions huge numbers of these companies survived and continue to thwart the kind of economic recovery coveted by all.

I was not a great fan of history in my school days; I stuttered to an O-level pass. Since leaving school and plying my trade in the grown up world I have learned that history contains many shining examples of how challenges are to be met. This applies not only to many military and political issues but the economy as well.

Having lived through more recessions than most I became accustomed to the traditional recovery from recession where assets and intellectual property were recycled, largely via insolvency procedures to businesses which could realistically exploit these opportunities and kick-start the recovery.

This all happened through natural economic forces abetted by insolvency legislation drafted for that very purpose.

This did not happen in the years following 2008. There are many reasons cited for this. The upcoming election, the reticence of banks to incur more bad publicity or the reluctance to suffer the pain of surgery have all been quoted as contributing factors.

There certainly appears to have been a tendency to prefer short-term alleviation than to deal with an elongated problem.  Whatever the reason, the nation’s fear of old fashioned remedies allowed the zombies to survive.

Thousands of these companies have been surviving for many years by taking on business at any price to generate cash to survive another day. The effect on competitors in their sector is far reaching and ultimately affects their ability to grow and pull the economy onwards and upwards.

Equally the extended credit demanded and taken by these businesses is highly detrimental to the cash flow of their suppliers and that of the economy in general. It could be argued that as the effect of each such company is small scale it is not material. But maybe the demise of Carillion will challenge that view.

Surely Carillion will be an example to all that the UK economy cannot thrive while zombies continue to buy work at unsustainable margins and prevent their stronger and sustainable competitors from thriving.

Carillion has been accused of contracting at unrealistic prices using new contract receipts to fund old contract liabilities. Matthew Vincent of the FT likens their practice to a Ponzi scheme and he could not be more correct; there has to be an Armageddon.

The immediate effect of the Carillion downfall will be far reaching but in time, its work will be recycled just like it was in the old days.

The government will fund other organisations to carry out its contracts on a properly costed and funded basis and it will be all but forgotten, except for those suppliers which become consequential casualties. It will be a costly affair but hopefully, a lesson learned; a lesson that was hiding in those dusty old history books.

The 2008 recession was unique. It can be argued that the soft touch approach preserved employment and allowed businesses to survive.

It will most likely be concluded that natural economic forces would have determined a swifter and better recovery and the term ‘zombie company’ would never have been invented.

Will we learn this time around?