Study compares 'middle market' firms


NEW YORK -- Key executives at U.S. media and entertainment companies with revenue of $25 million-$1 billion generally share the outlook and views of managers at firms of comparable sizes in other fields, predicting, for example, revenue growth for their company over the next year despite expectations of an economic slowdown, a new study has found.

However, interest in mergers and acquisitions is less pronounced in the entertainment space than elsewhere among senior financial decisionmakers at these so-called "middle market" firms, and the quality of their product and brand is more important to sector executives than to their peers, it found.

The survey by the Economist Intelligence Unit and financing and strategy firm CIT Group Inc., set to be unveiled Monday, is the first major report on the thinking of middle-market company executives, according to the firms. The study, "Perspectives From America's Economic Engine: The CIT U.S. Middle Market Outlook 2007," surveyed more than 502 middle-market senior financial executives.

Overall, 29% of such companies report that acquisitions are one of their primary objectives. "Potential hot sectors for middle-market M&A activity include financial services (40%), real estate (59%), health care/pharmaceuticals/life sciences (28%) and energy/natural resources (25%)," according to an executive summary of the study.

In entertainment, however, "there is less consolidation and more creation of new entities," said Kevin Khanna, senior vp at the CIT Communications, Media & Entertainment practice. He pointed to the recent creation of Overture Films by Liberty Media's Starz Inc. as an example. One key trend fueling the creation of content and distribution firms is the digital age, he added.

In another key difference, many middle-market managers cite customer relationships and their company's reputation as the most important factors of business success, while entertainment folks rank quality of product and brand strength the highest, Khanna said.

Overall, "there are a lot of similarities" between entertainment and other firms in the middle-market segment even though the entertainment field in general is "less closely correlated" to the state and outlook of the economy, Khanna said. "Everyone always talks about the entertainment business as being different," but "they are largely in line with other sectors."

One key example is companies' business outlook. Two-thirds, or 64%, of executives at middle-market players now are predicting revenue growth over the next year, up from 59% a year ago, "despite broader concerns of the U.S. economy," the study concludes.

Three-fifths of respondents think that U.S. economic growth is likely to fall off. "They are pessimistic about the overall U.S. economy, no matter which party wins the presidency next year," said Dan Armstrong, senior editor at the Economist Intelligence Unit.

For example, shortage of talent is a key obstacle to growth cited by respondents across industries, with 37.1% of entertainment executives listing it as the main expansion hurdle, compared with 35% across all industries. The issue figures prominently for middle-market managers even though they also mention labor costs as one of their top growth challenges.

Labor issues are particularly prominent in the entertainment space because of its reliance on creative talent and because of "talk of the looming possibility of a strike" in Hollywood, Khanna said.

Similar to people in other sectors, a three-quarter majority of entertainment respondents prefers to remain private because it allows for more flexible decisions than at publicly traded companies, according to the CIT and Economist Intelligence Unit study.

Thirty% said they want to avoid disclosing financial information, but a nearly equal 25% said that the financial information requirements that are part of the Sarbanes-Oxley regulation were not a reason for remaining private.

"Sarbanes-Oxley is clearly a burden -- but it's not the primary reason middle-market companies avoid going public," the executive summary of the study said.

Across all industries, 55% of respondents said that their companies have no plans to go public, while 43% are public, and the remaining 12% do hope to go public.

In terms of growth opportunities, 31.4% of entertainment executives -- slightly more than the average across all middle market firms -- surveyed said they expect to see an expansion in the Asia Pacific region.

According to CIT and the Economist Intelligence Unit, middle-market companies are a key driver of the U.S. economy.

According to the U.S. Census Bureau, the middle market accounts for more than $6 trillion in revenue and employs about 32 million Americans. That is more than twice the revenue and four times the staff of the companies that make up the Dow Jones Industrial Average.