Middle market companies across the Western U.S. are bullish on their growth prospects well into 2020, even as they confront near-term economic uncertainty and ongoing market disruptions, according to the 2019 Umpqua Bank Middle Market Monitor.
The survey covered 250 middle market companies in California, Washington, Oregon, Idaho and Nevada. Economic optimism stayed high among CEOs and CFOs, however, strategic shifts are underway as companies look to remain competitive and position themselves for future growth.
Of executives surveyed, 73% are actively seeking M&A opportunities, nearly 60% are either looking for new foreign trading partners or altering plans for international expansion, and 56% 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% of executives expressing they are very confident in the U.S. economy. Furthermore, 99% of those surveyed were confident in their own growth prospects.
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%) stated they plan to acquire a company in the next 12 months, and 18% 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%) respondents looking at alternative sources.
In an unpredictable economy, middle market businesses have traditionally sought to leverage international opportunities to improve margins and scale. However, 90% of middle market leaders claim trade disputes with China have already impacted their approach to international business. Nearly 49% are now actively looking for new markets (outside of China) to help drive expansion, and nearly 10% have delayed expansion internationally. That said, only 25% believe the ongoing trade and tariff dispute will impact their growth plans long-term.
Leveraging new technology remains at the forefront of corporate strategies for middle market companies, with more than 90% of executives planning to invest in technology to streamline operations and 62% noting they are currently automating human work.
At the same time, 24% 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%) of executives expect their workforce to experience the most disruption in the next 5-10 years.
The Umpqua Bank Middle Market Monitor is designed to provide insight into middle market businesses whose contribution to the economy is significant but less visible than other sectors. The online survey was conducted by Engine, a global research company, among a sample of CEOs and CFOs who work for a company with $10 million to $500 million in annual revenue. The survey was fielded from May 29 – June 19, 2019.
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