Risk Latte - Do Companies and firms live and die like human beings?

Do Companies and firms live and die like human beings?

Rahul Bhattacharya
August 27, 2007

I was recently having latte with an old college mate of mine and talking, amongst other things, about the possible changes in international accounting standards when the discussion finally turned towards the recent turmoil in the credit and equity markets. The discussion was about how some well known hedge funds have closed shop recently and how others have suffered huge losses.

And then the discussion became even more esoteric. My friend asked me: " Don't you think that companies and firms, which are perhaps as organic as we are, should also live and die like us ?" He went on to add: " Quite a few hedge funds have gone bankrupt in this present turmoil; many funds have gone bust before; companies, some even big and reputed ones, have gone belly up. Enron and Worldcom, which were giants, went bust......you see, .companies and firms are always dying. The thing is that we choose to focus only on the birth of the companies, this immense fascination of ours with the start-ups ".

Ever since I bade him farewell in that airport lounge, I have been thinking about this concept: do companies and firms, after all, live and die like we humans do ? I have been browsing the net and the bookstore shelves to see if I can find any material - books, articles, blogs, sites, research papers - on this topic. I have come up with very little material. It seems people are simply not interested in this area. No one wants to know whether a company dies or not.

But I cannot deny the fact towards which my friend pointed. Corporations and firms are always dying. And an interesting fact is that some of the companies which die have either lived long enough with a profitable business model or have had a brilliant and illustrious past. And corporate death can take many forms, bankruptcy, liquidation, merger or takeover, nationalization (the opposite of privatization). And just like human beings, some companies live long and some die young.

Here are a few anecdotal references:

  • Netscape was perhaps one of the most innovative companies of this century. It totally changed our world by ushering in the internet revolution. And then it died. As Tom Peters have said, " I've long said that Netscape is one of my favorite companies ever: Born, changed the world, and died ... all in the space of 60 months. I'll stand by that remark ."

  • Alex Brown & Sons, a two hundred year old American investment bank (founded in 1800) was acquired by Bankers Trust in 1997.

  • Bankers Trust, perhaps the most innovative of all investment banks in the eighties and nineties, and almost a hundred year old company itself, was acquired by Deutsche Bank in 1998 when its losses became unsustainable.

  • The dot com era of the late nineties is full of start ups - some with interesting and new ideas as well - that folded up within a span of a few years. But two companies, from the new Economy age, stand out: Enron and Worldcom. They were around for quite some time, caused disturbance in the markets they operated (not necessarily positive), became big and famous, and then died with a bang.

  • I recently came across an article in a business newspaper that only 2.1% of the companies listed on the New York Stock Exchange a hundred years ago are still around. Rest of them have all perished.

A couple of questions which come to mind are:

  • Do companies have a certain life span, like the human beings? Is it a hundred years or two hundred years. In fact, this is a very difficult question to answer, as the history of companies, unlike the history of human beings, is very short, only around three to four hundred years.

  • Like humans, is the death of a company an organic process? That is given a certain age, will a company necessarily die? An organic death could mean a death due to inertia and attrition, whereby the "innovative" process in a company comes to an end and either through obsolescence or due to a lack of competitive strength its very survival gets threatened). Or is the process of death of a company inorganic and can only be triggered by an extraneous event (such a credit shock in the economy, bankruptcy due to external factors, takeover by another company or complete and total disruption of the markets for its products)?

  • Are companies born only as start ups? The answer is "no". Just like its death, the birth of a company can also be due to several reasons. Start up by an entrepreneur is one of them. New companies are born when existing companies form subsidiaries, joint ventures; when existing public companies are taken private or nationalized (this is a situation when death of a company automatically gives rise to the birth of a new company). An even more difficult question to answer would be: is the birth of a company an organic process? In other words, will new companies always be formed out of a given mass of existing companies?

  • Do we need a physics-like science to study the birth and death of companies (like we study the birth and death of stars and planets)? Or do we need a biology-like science to study the corporate birth and death processes?

Some may say that above questions are only meant for the economic historian or the bored finance Ph.D. waiting to get into the industry. Perhaps so! It's the same as the average guy on the street doesn't care about the fact that earth will eventually be gobbled up by the Sun in four billion years!

But these are interesting questions nevertheless, questions that make the Management theory an incomplete science.

References: http://innovationzen.com/blog/2007/06/20/on-life-and-death-of-companies/

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