Study: Middle Market Companies See Growth Ahead

New York, NY, July 30, 2007--Sixty-four percent of U.S. middle market companies, with revenues between $25 million and $1 billion, are predicting growth over the next 12 months, even though nearly 60% believe the U.S. economy will slow down, according to a new study from the Economist Intelligence Unit and CIT Group Inc.

The study, "Perspectives from America's Economic Engine: The CIT U.S. Middle Market Outlook 2007," surveyed more than 500 senior financial decision-makers at companies with revenues between $25 million and $1 billion. According to the most recent U.S. Census, the middle market accounts for more than $6 trillion in sales and employs almost 32 million Americans, which is more than twice the revenues and four times the number of employees of the blue-chip companies that comprise the Dow Jones Industrial Average.

Dan Armstrong, senior editor at the Economist Intelligence Unit, said, "Middle market companies continue to be a driving force behind the U.S. economy. The executives we surveyed believe that strong relationships are fundamental to their success and are optimistic about their revenue growth over the next 12 months. However, they are pessimistic about the overall U.S. economy, no matter which party wins the presidency next year."

Walter J. Owens, President of CIT's Corporate Finance Group, said, "The middle market is a vitally significant, yet historically overlooked segment of the U.S. economy. This study provides a comprehensive understanding of where the middle market is headed and highlights critical challenges and opportunities. At CIT, we know firsthand the important role these companies play and their vast collective impact on the health of the U.S. economy."

Key findings include:

-- Increasing revenues. More companies say their revenues will grow in the coming 12 months (64%) than revenues did in the previous 12 months (59%) - despite the fact that more than three-fifths of respondents think that U.S. economic growth is likely to fall off.

-- Growth starts at home. More than 40% of middle market companies plan to focus entirely on the domestic market. The Asia/Pacific region was the second-most targeted geography for growth (28%). And among all respondents surveyed, geographic expansion strategies came in a distant fifth behind acquiring new customers, selling more to existing customers, adding new products and finding ways to operate more efficiently to grow their business.

-- Shortage of talent. "Shortage of talented staff" was the top obstacle to growth cited by respondents. Approximately half of the companies are increasing their workforces to acquire the talent necessary to compete - despite the fact that "labor costs" was cited as the number two obstacle to growth. And, with 28% of middle market companies outsourcing IT and 14% outsourcing human resources, outsourcing may have become as much a way of tapping into new labor pools as it is a means of reducing expenses.

-- Vote of no confidence in 2008. Neither political party commanded respondents' confidence. While Democrats were viewed as "more likely to strengthen" the economy than Republicans if elected to the White House in 2008 (36% to 26%), they were also viewed as "more likely to weaken" it (34% to 30%). A Democrat is expected to have more of an affect on the economy than a Republican - for better or worse. Only 22% said a Democrat will not affect the economy, compared with 36% who said a Republican's election will not affect the economy.

-- M&A activity eyed to fuel growth. Twenty-nine percent of companies reported that acquisitions are one of their primary objectives to secure additional financing for. Potential hot sectors for middle market M&A activity include financial services (40%), real estate (59%), healthcare/pharmaceuticals/life sciences (28%) and energy/natural resources (25%).

-- Customers demand green initiatives. Fifty-four percent of senior executives said that environmentally friendly policies are important to their middle market companies. Second only to their own ethical considerations, 39% of senior executives said that customer pressure is directing their own environmental sustainability policies, demonstrating that customers are more influential than government regulation or energy cost savings.

-- Maintaining control, not Sarbanes-Oxley, rationale for staying private. Fifty-five percent of respondents said that their companies have no plans to go public (43% are already public, and the remaining 12% do hope to go public in the future). Surprisingly, only 25% cited the burden of regulatory requirements, such as Sarbanes-Oxley, as a primary obstacle to going public. Instead, over 70% want to stay private to retain control and flexibility in decision-making, and 30% wish to avoid disclosing financial information. Sarbanes-Oxley is clearly a burden, but it's not the primary reason that middle market companies avoid going public.

-- Industry knowledge, loyalty top pricing when choosing a financing partner. Of the three key criteria cited as important in choosing a financing provider - industry understanding (41%), loyalty through good times and bad (40%), and preferential pricing (39%) - pricing was last. Respondents indicated that all were important, but while large corporations may switch providers to save a few basis points, middle market companies are more likely to take into account industry understanding and loyalty.