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CEO Profile: Tom McGee, National Managing Partner for Deloitte Growth Enterprise Services

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PRESIDENT&CEO found, Paul Stukel, interviews Tom McGee to discuss growth in the middle market. From our February Issue.

PCEO:  Tom, maybe we can start by you telling us a little about Deloitte Growth Enterprise Services.

McGee:  Deloitte Growth Enterprise Services is Deloitte’s private company mid-market practice. We generally define the mid-market as companies between $50 million and $1 billion in revenue. These companies are a huge part of the American economy. They’re about 50% of our client base, and we’ve come to understand from our clients that they really expect the same types of things that all clients expect from Deloitte - the technical experience, industry expertise etc. - but that they also value a more personal service delivery approach. So, we have resources throughout the United States, in every one of our offices, that are focused on serving companies in this space and really have a deep experience and understanding of the unique needs of the rest of the companies that operate in the mid-market.

PCEO:  Can you give some insight as to why you picked the
revenue range you did in defining the middle market? There are obviously lots of definitions. It’s almost a philosophical concept at this point. Why are those cut-offs important, if in fact they are?

McGee:  As you mentioned, there are obviously lots of different definitions of the mid-market. As we looked at it, companies between $50 million and $1 billion seemed to have a lot of the same characteristics. Although it is a wide spectrum, generally companies in that space and that size range are predominately private, although there are some public companies.  Further, I think that many of the other participants in the middle-market generally seemed to have a similar definition of that $50 million to $1 billion.

I think what’s interesting isn’t just the definition, but the importance of this market segment to the American economy. Companies in that size range have aggregate revenues of about $6.1 trillion, which is equal to about 41% of the US GDP, and they employ 25 million people, which is more than the entirety of the companies that comprise the S&P 500.  So it’s a huge part of the American economy. We kind of call it “the engine” of the American economy. Understanding that market segment - understanding what their viewpoints are, their perspective of the future - is incredibly important to understanding the American economy. And obviously, understanding our client base – again, 50% of our clients are in that market segment. What was surprising to me when we began to do this research was how little research has been done on this market segment. And so, in addition to helping us serve our clients, we also feel that the research is really helping understand the trends in the broader American economy, serving as something of a barometer of its direction.

PCEO: You have a lot of interaction with middle market executives, you do surveys and have published a lot of interesting data recently. In October, there was a survey that suggested that middle market CEOs had somewhat lessoned in their optimism in terms of long term growth prospects. Is that still what you’re hearing, or has there been any kind of up-tick in terms of optimism?

McGee:  What you’re referencing is a survey we did in October. As you mentioned, we surveyed about 700 mid-market executives. And at that time, there had been a real dip in optimism from our April survey. What we found was that companies in this space were really operating under a kind of cloud of uncertainty given the other broader trends that we’re all aware in the economy - the situation in Europe, the downgrade of US debt, etc.

More recently, I would say companies are a little bit more optimistic. I think I would say “cautiously optimistic,” but that cloud of uncertainty still does exist. The situation in Europe is still ever present, and there’s still uncertainty in a broader US economy. I think there are concerns about the clarity of the tax code, obviously the election on the forefront and what will come of that. So I think that although I would say that mid-market executives have become cautiously optimistic, I wouldn’t overstate it. I still think that cloud of uncertainty exists. And until that uncertainty becomes much clearer, and there’s more certainty over the future, I think that we’ll still have the level of caution that exists.

PCEO:  Now, in your experience do mid-market companies have a little bit more resiliency, or are perhaps a little bit less exposed to these types of uncertainties relative to larger or smaller companies?

McGee:  I think, first of all, when you think about the events of the last couple years -  the financial crisis etc. - mid-market companies have done a really good job of navigating themselves through these events. There was a tremendous focus upon balance sheet health, and companies have really done a good job, generally speaking, of positioning themselves to achieve growth in a really difficult economic environment. But mid-market companies are still a predominantly US-centric marketplace.

What I mean by that is that the vast majority of the revenues and employees are still domiciled in the US, and so what happens in the United States – with the health of the American economy, the outlook for the American economy, and so forth – has so much impact upon the mid-market.  That said, the expectation for these companies is to become much more global. But I think what happens within the United States in terms of things like tax policy, regulatory policy, etc., has a pretty profound impact on the mid-market.

PCEO:  You mentioned that is a primarily domestic-focused marketplace. I’ve seen some things recently coming out that suggest at least a reasonable chunk of the middle market is beginning to really look hard at going global. Is that what you’re seeing as well?
"More recently, I would say companies are a little bit more optimistic. I think I would say ‘cautiously optimistic,’ but that cloud of uncertainty still does exist."

McGee:  Yeah, I am. I think mid-market companies are beginning to really look globally, and not just from the standpoint of moving production operations off-shore but looking at global opportunities for growth - new markets, whether they’re emerging markets or more mature markets – really moving with customers, looking for revenue opportunities. So I absolutely believe that mid- market companies are looking global. Today, they’re not as global as some of their multi-national colleagues might be, but in the future it is certain that we will see more mid-market companies going global, for sure.

PCEO:  Are there any particular sectors within the middle market that seem to have a greater affinity toward expanding their global reach?

McGee:  I don’t know if I would say that a particular sector
is necessarily more likely to go global. I would say that as they become larger, they tend to look for global opportunities. And so, although $50 million to $1 billion might seem like a fairly finite size range, there’s actually a lot of diversity and differences between a company that’s $50 million and $1 billion dollars, so as you move up the size spectrum, companies that are larger tend to look global, tend to look for growth opportunities, etc.

PCEO:  You made reference to Europe, to the regulatory envi-
ronment, and other factors.  What do you see today as the major challenges faced by mid-market CEOs? Is it the fiscal issues, the taxation, regulation, all the above?

McGee:  I think it’s probably all the above. And I really do
think that this term of uncertainty is the operative term. I mean there are obviously some long term challenges that we all face as American citizens, and that the American economy is facing. And I think lack of clarity around some of the solutions are impacting mid-market executives.

PCEO:  I know private equity is a large part of your business. We’ve had some conflicting judgments as to what’s going to happen in the middle market with respect to investment and M&A in the next 12 to 18 months. Some people think that it’s going to have a very large ramp up. Others are saying that the uncertainty that you’ve been referring to is going to have sort of a dampening affect on the level of activity. What’s your perspective on that, being on the ground?

McGee:   I do think that uncertainty has a broad impact, whether it’s in private equity or just business in general. But you know, there is a tremendous amount of private equity that remains uninvested in the United States today – I think the most recent estimates are something like $400 billion. It is difficult to get some of the large mega-deals done today with the constraints upon financing. So we are seeing private equity clearly moving into the middle market and being active in the middle market. And as a percentage of deals done, some of the recent data would suggest that mid-market deals are becoming a larger part of private equity transactions.  So private equity has always been, I think, a big player in the mid-market . I would expect that to continue. As it relates to the broader M&A market and how much or how active that’ll be, I think a lot of that comes down to what happens in the broader economy. 
"There is a tremendous amount of private equity that remains uninvested in the United States today - I think the most recent estimates are something like $400 billion."
PCEO:    Obviously, to have a reasonably hot M&A marketplace you’re going to need financing, access to finance. The same is true for running and growing a business. Has the middle-market, in your mind, sort of cleaned itself up and strengthened it’s balance sheets in order to have access to that kind of capital, particularly with the uncertainty in the banking system in Europe and how that impacts the US?

McGee:    Our October survey, and actually our April report as well, indicated that mid-market companies had really focused pretty significantly on improving balance sheet health. And I think when you compare what their expectations were in April and October versus a few years prior to that, they clearly have improved the strength of their balance sheets.  As it relates to the broader financing  marketplace,  when we asked a number of questions around what they believe were impediments to growth, surprisingly, financing wasn’t one of the top items listed. Really it was uncertainty again - concern about the fiscal health of our country, debt levels in general, in the broader marketplace - that was the concern. But their access to capital and financing wasn’t at the top of their list as one of the concerns.

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