Is there good news in HMV's collapse?

 
HMV's Nipper dog Will HMV's iconic Nipper dog brand now be put to sleep?

Here are two big questions about the collapse into administration of HMV.

Will it go the way of Jessops and Comet? Will all 239 stores be closed, with the loss of all 4,000 jobs?

And is there a rising incidence of corporate insolvencies which could actually be a good thing, in the widest possible sense (please bear with me; I haven't taken leave of my senses or transmogrified into some kind of insane company necrophiliac)?

On the first question, what future holds for HMV and its people, the outlook looks considerably better than for other recently kaput store groups.

And the reason, according to influential sources close to HMV, is that the music industry and the film industry want its survival, albeit they recognise that will have to be with fewer stores and with fewer locations.

Record labels (are they still called that or am I showing my age?) and DVD distributors don't want to be wholly dependent for sales on Amazon and Apple's iTunes.

So Deloitte, appointed as administrators to HMV last night, is working on the assumption that these important suppliers will help the creation of a slimmed-down and viable HMV.

This is unlikely to involve these suppliers actually buying HMV out of administration. Much more likely is that they would provide easy credit terms to a buyer - which will very likely be a private equity group (right now, again, there is too much money in private equity chasing too few deals).

Start Quote

We do need to have a situation where bad businesses fail, otherwise the economy will stack up with progressively weaker business models and growth will go into reverse”

End Quote Jon Moulton Investor and entrepreneur

Now on to my hideously heartless question whether the collapse of HMV is good for the rest of us.

First of all, I had better explain what I mean.

The evidence of past recessions is that economic growth doesn't resume at any great velocity until unviable and inefficient businesses are put of their misery and excess capacity in various industries is eliminated.

Now, although there has been a fair old number of retailing collapses in the past year or so (according to FRP Advisory, HMV is the 32nd significant retail chain to go into administration in just over a year), there have been many fewer corporate collapses since the financial crisis of 2008 than was predictable on the basis of past economic experience.

As you will know (don't yawn) if you read this column, this economic malaise has been characterised by many weak businesses being put on life support and turned into the living dead, or (to use what is now a cliche, so sorry) zombies.

This is good for the employees of these companies, for a while at least.

But, many would argue, it is not good for the economy in the long run. Because it preserves excess capacity, in a way that makes it more difficult for new business to grow and thrive, and it also holds back the progress of bigger more successful businesses.

So if HMV's demise signals a rising incidence of banks and other creditors being more ruthless in putting lame companies out of their misery, that might in a fundamental sense be quite a good thing.

And if those rising corporate mortality rates were real, it would also show that banks were feeling increasingly confident that they have sufficient capital to absorb the consequential losses - which would also be a very positive sign, in that banks would also have sufficient capital to extend necessary credit to viable businesses.

Here's the bad news (please forgive).

According to leading administrators, so far the underlying trend of corporate deaths does not seem to have risen much. The number of companies going into administration is still bumping along at a relatively low level.

If it doesn't feel that way, that's simply because recently companies that have gone down - Comet, Jessops and HMV - were so visible and famous.

But there are still plenty - far too many - corporate zombies that are clinging on and holding back job creation by companies with much better prospects.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 749.

    Banks should not be except from any failure. If manufacturers and retailers are too big to fall then the likes of RBS, HBOS and Northern Rock should have met the maker. It is for this reason why we are facing austerity.

    As for which companies will fall. Hedge your money on the likes of WH Smith, Thomas Cook, Thorntons or maybe a clothing retailer.

  • rate this
    0

    Comment number 748.

    @747 'This is also why the bust banks need to go bankrupt - so that the debt can be deflated - prior to a recovery!'

    That's right then the debt of the failed Banks with bad loans,
    can be picked by the Government! or rather picked up by Joe public directly or indirectly.

  • rate this
    0

    Comment number 747.

    740.Justin150

    change the 'why shouldn't ...' to PFI contract hospitals and see what I mean!

    Fundamentally uneconomic and uncompetitive contracts signed or not will without doubt create a longer than necessary depression - that is the purpose of bankruptcy to get out of these contracts!

    This is also why the bust banks need to go bankrupt - so that the debt can be deflated - prior to a recovery!

  • rate this
    0

    Comment number 746.

    745. Why not get off the bandwagon of those who have abdicated all responsibility for their own actions - incompetent businessmen, irresponsible borrowers, governments - and see that banks (who do share part but not all of the blame) either lend responsibly or they don't. Problem is - when they do those that can't shout 'foul' whilst ignoring their own lack of creditworthiness!

  • rate this
    0

    Comment number 745.

    Almost there Robert, you just need to take one more step after your comments about corporate zombies and point out that the biggest zombies causing the largest drag on the economy are the major banks.

 

Comments 5 of 749

 

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