business

Is the private equity-fueled buyout boom over?

Not quite. But judging from the rocky credit markets that marked the volatile third quarter, it won't be as easy -- or lucrative -- for private equity firms to finance deals, especially mega-acquisitions worth $1 billion or more.

"I think the free cheese is gone," said Jon Salveson, head of investment banking at Minneapolis-based Piper Jaffray & Co.

At the same time, analysts say, investors are swinging back to the stock market with the Dow Jones industrial average and S&P 500 posting sharp gains in recent weeks (Friday's sell-off notwithstanding). Minnesota investment firms in the third quarter underwrote 12 initial public offerings, three more than the previous quarter and two more than the same period a year ago, according to the Star Tribune Quarterly Deal Report.

And after a slow start, Minnesota-based IPOs are starting to pick up steam. Dolan Media Co., a Minneapolis-based legal publishing firm, raised $225 million from its IPO in August. Its stock is up about 80 percent through Friday. Compellent Technologies Incorporated's IPO, which came out in the fourth quarter, netted the Eden Prairie-based data-storage maker $81 million. Compellent shares have jumped about 30 percent through Friday since their debut earlier this month.

Three other local firms -- medical device makers EnteroMedics Inc. of Roseville and Transoma Medical Inc. of Arden Hills, and CSAV Holding Corp. of Savage, maker of audiovisual mounting equipment -- filed for IPOs this year.

"The stock market is trading at record levels," said Peter de Vos, head of investment banking at RBC Capital Markets in New York. "We see tremendous activity," especially in the middle market where deals are typically worth $100 million to $1 billion.

Sea change in credit markets

Normally, that type of enthusiasm has been reserved for private equity deals. Armed with cheap debt and piles of cash from investors seeking higher returns than the stock market, private equity firms over recent years have gobbled up large and small companies alike.

But the third quarter saw a dramatic change. Worries over bad subprime mortgages ravaged the credit markets with banks and investors imposing tougher terms on loans or pulling back altogether. To ease the ensuing "credit squeeze," the Federal Reserve last month cut short-term interest rates by one-half of 1 percentage point.

"The tougher credit conditions made it much more difficult" for private equity firms to use debt to finance deals, said Jeremy Payne, a senior vice president for S&P Capital IQ, a research and analystics firm in New York.

RBC, which managed Whole Foods Market Incorporated's $700 million acquisition of Wild Oats Markets Inc. in the third quarter, typically was not the first choice of private equity firms that needed financing, De Vos said.

"Now we are getting those calls," he said.

Investment banks who already committed to financing deals were left holding the loans on their books, unable to sell the debt to skittish investors, Payne said.

As a result, banks and buyout firms are backtracking from large deals.

J.C. Flowers & Co., J.P. Morgan, and Bank of America are trying to renegotiate a $25 billion deal for Sallie Mae, for example. And Home Depot agreed to sell its supply arm to three private equity firms for $8.5 billion, about $1.8 billion less than it originally expected.

"Investment bankers' stable of financing dried up," said Tim DeVries, managing general partner of Norwest Equity Partners, a Minneapolis-based private equity firm. "This was a big means for them to push prices up. Confidence is key to the M&A market, and a little of it was lost in this process."

Deal volume down