Among CEOs of Russell 2000(R) companies, 52% expect no real economic upswing until 2010, according to respondents to a new survey by Ernst & Young LLP. However, 62% had not yet experienced a slowdown in growth or revenues by October 19 (well after the first attempt to pass the bailout bill).
Despite the economic uncertainty, 12-month plans are relatively positive for the responding high-growth companies. Among them, 75% expect to increase employees and 86% expect revenues to increase.
"Right now, these CEOs are an optimistic group," said Maria Pinelli, Americas Director, Strategic Growth Markets, Ernst & Young LLP. "They have faith in their own companies and the US market. Their confidence will serve as the growth engine to revitalize the economy."
Through September and mid-October, respondents cited the credit crunch (61%) and market volatility (54%) as having the largest effect on corporate growth. Infrastructure challenges -- people, processes and technology -- took a backseat (43%) to these external market drivers. Recent market turmoil has decreased respondents' access to capital, whether it be credit or from private equity (33%). Respondents are also tightening expenses (54%), while another 29% declared that the market's volatility delayed a merger or acquisition.
"Right now, CEOs are looking for US economic stability to drive growth," said Pinelli. "However, over the next year, leaders of high-growth companies are looking to mergers and acquisitions for opportunities."
According to the survey, 64% of respondents expect to acquire a company in the next 12 months, 17% are planning a merger and 51% anticipate a strategic alliance. Only seven percent expect to sell the company. Also, 49% of respondents feel that mergers and acquisitions will be their most likely source of growth in the next 12 months, followed by new product launches (42%). That doesn't mean new products will wait for corporate deals, however. In fact, 71% of those surveyed anticipate rolling out a new product or service in the next 12 months.
In the next six months, however, US economic stability reigns as the key determinant of growth (cited by 54% of respondents), followed by access to capital and new product launches at 40% each. In fact, M&A ranks lower than innovation for short-term growth factors.
The Global Frontier
Over half of the Russell 2000 companies surveyed (52%) see the most opportunity for growth within the US market, followed by Europe (13%), South America (11%) and China (9%). Three-quarters of respondents generate at least some revenue outside of the US.
Most competitive pressure (79%) comes from domestic businesses. If they have seen increased competition from foreign companies, it has come primarily from Europe (71%) and China (34%). Over the past year, almost half (46%) of respondents have seen increased interest in their business from foreign investors. With that in mind, the majority (72%) are taking steps toward increasing their current understanding of International Financial Reporting Standards (IFRS), though only 23% see the adoption as helping their company compete globally.
Respondents ranked the top five barriers to the US competing globally as: the regulatory environment (48%), the global credit crunch (47%), the US tax code (39%), rising energy costs (31%) and the weak US dollar (29%). Forty-three percent were unsure whether the incoming President will have a significant positive effect on the US economy.
Russell 2000 companies make significant contributions to the economy and society. According to the survey, 48% had annual budgets from $100K or more dedicated to charity. In addition, 38% consider climate change important or somewhat important to their company, and 67% say executives and boards understand climate change risk and legislation, though most find it hard to quantify.
About the survey
This survey was completed by CEOs or other high level executives of Russell 2000(R) companies from September 9 to October 16, 2008. Seventy-one companies completed the survey, representing various industries. The survey responses were weighted by industry to mirror the industry distribution in the current Russell 2000 index.
About Ernst & Young's Strategic Growth Markets Group
Ernst & Young's Strategic Growth Markets (SGM) practice guides leading high-growth companies. Our multi-disciplinary team of elite professionals provides perspective and advice to help our clients accelerate market leadership. SGM delivers assurance, tax, transactions and advisory services to thousands of companies spanning all industries. Ernst & Young is the undisputed leader in taking companies public, advising key government agencies on the issues impacting high-growth companies and convening the experts who shape the business climate. For more information, please visit us at www.ey.com/us/strategicgrowthmarkets.
About Ernst & Young
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