Middle market companies within the San Francisco Bay Area and Silicon Valley as well as across the U.S. are optimistic on their growth prospects well into 2020, even as they confront economic uncertainty. According to the recent 2019 Middle Market Monitor, a survey of 250 middle market companies in the United States, economic optimism is high among chief executive officers (CEOs) and chief financial officers (CFOs), but strategic shifts are underway as companies look to remain competitive and position themselves for future growth. Of executives surveyed, 73 percent are actively seeking merger and acquisition (M&A) opportunities, and 56 percent are accelerating investment in new technology as a top priority.
"The health of middle market companies is of central importance to the overall U.S. economy as they're responsible for producing roughly one-third of U.S. private-sector GDP—which totals about $5-6 trillion," said Tory Nixon, chief banking officer at Umpqua Bank. "The prospect of continued growth is instilling confidence in business leaders, but they aren't resting on their laurels. Our research indicates that CEOs and CFOs in the middle market are confident they're on a good growth trajectory but understand that adaptation is critical to being competitive in an ever-changing market environment."
According to the survey, a majority of middle market executives expect continued growth during the second half of 2019 and into 2020, with 57 percent of executives expressing they are very confident in the U.S. economy.
Furthermore, 99 percent of those surveyed were confident in their own growth prospects, with 35 percent stating predicted revenue growth to be between 11-15 percent and 90 percent anticipating their revenue to grow by more than 5 percent, which is significantly higher than the World Bank's Global Growth predictions of 2.6 percent growth.
U.S.-targeted M&A broke historical Q1 records by reaching a total volume of $537.6 billion across 2,158 deals, and the Middle Market Monitor indicates that will continue in Q3 and Q4 with nearly 3-in-4 executives expecting their companies to be involved in an M&A transaction in the next year. Further, roughly half (48 percent) stated they plan to acquire a company in the next 12 months, and 18 percent of companies plan to be acquired in the same timeframe.
Supporting this volume of potential deal activity, the expectation for growth coupled with an unprecedented amount of liquidity sees continued competition for funding. Middle market firms continue to choose bank financing as the top source of growth strategy funding, with private equity financing being used by one in four (24 percent) respondents looking at alternative sources.
Leveraging new technology remains at the forefront of corporate strategies for middle market companies, with 61 percent of executives saying technology has already provided more opportunities to build and shape strong relationships with customers and vendors. Looking ahead, investments in new technology will be critical for 56 percent of companies in the next 12 months. More than 90 percent also plan to invest in technology to streamline operations, with 62 percent noting they are currently automating human work, showing they already expected this disruption, which mirrors actions seen in larger corporations.
At the same time, 24 percent of middle market leaders are looking to make investments in talent training/education that may help them execute against a digital transformation. Investments in talent training/education are expected to increase in the coming years as the survey found that nearly half (47 percent) of executives expect their workforce to experience the most change in the next 5-10 years.
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