While mergers activity held up, stock offerings dropped as world markets gyrated.
Turbulent markets and global crosswinds slowed dealmaking in Minnesota and across the nation during the third quarter, a trend that could persist in the fourth quarter.
The value of mergers and acquisitions in the United States reached $819 billion through the first nine months of this year, the best showing since the Great Recession hit at the end of 2007, according to Dealogic, which compiles and analyzes the numbers from investment banks. But third-quarter volume fell 9 percent compared with the third quarter of 2010.
"The year-to-date numbers look different than the third quarter," said Bruce Engler, head of the mergers and acquisition practice at Minneapolis-based law firm Faegre & Benson. "The deal values are holding up better than the deal numbers.''
Engler predicted the fourth quarter will "be OK, but it won't live up to expectations. I thought 2011 was going to be a big ramp-up of middle-market deals, but we're in kind of a holding pattern.''
Investment bankers said the slowdown in mergers and capital markets paralleled the July-through-September markets decline that was triggered by recurring worries about the state of European banks and the rancorous debate in the United States over the pace of the economic recovery, raising the debt ceiling and gridlock in Washington.
Yet investment bankers and deal watchers who attended Faegre's annual M&A conference earlier this month said that the deals business may feel worse than it really is.
"It's a head-scratcher, because if you look at the paper ... you feel like the world is falling off the cliff," said Mike McFadden of Lazard Middle Market. "There's still high demand for companies. Corporations and private equity firms are sitting on a lot of cash. It all depends on performance. If companies continue to perform, the M&A market will stay active. If the economy falters, the market will stall."
Brian Holcomb of Greene Holcomb & Fisher called the market for deals under $500 million, the vast majority of M&A transactions, "alive and well. I'd even call it a seller's market .... Good companies are getting sold at very good prices and good terms."
A year ago, some merger activity was pulled into the last half of 2010 by transactions that were done in anticipation of an increase in long-term capital gains rates in 2011. Instead, that increase was postponed until at least 2013.
"That pulled a lot of deals from 2011 into 2010," said Glenn Gurtcheff of Harris Williams & Co. "The fundamentals are good."
Year-to-date M&A activity reached 7,706 deals through September (including 171 by Minnesota-affiliated advisers). But it will take a very strong fourth quarter to top 2010, when 9,953 transactions were completed nationally (including 298 by Minnesota advisers).
Among notable third-quarter M&A deals, Norwest Equity Partners sold Minnetonka-based portfolio company PeopleNet Communications, a provider of Internet-based onboard computing and mobile communications to the trucking industry, to Trimble Navigation of California.
Also medical device giant Medtronic Inc. acquired New Hampshire-based Salient Surgical Technologies, which makes products for sealing blood vessels. Piper Jaffray represented Salient in the $480 million cash deal.
Meanwhile, the number of companies raising equity in the public markets slowed significantly in the third quarter.
Just 68 companies nationally raised capital with secondary stock offerings in the third quarter, down from 155 in the second quarter and 174 in the first. Minnesota-affiliated underwriters assisted on just five secondary offerings in the third quarter, compared with 24 in the second quarter.
Craig-Hallum Capital helped Brooklyn Center-based Caribou Coffee raise $84.5 million in additional equity.
There were no initial public offerings nationally in September and only 23 for the third quarter, down from 46 in the second quarter, according to Dealogic.
In the IPO market, Piper Jaffray helped raise nearly $189 million in July for Skullcandy, a Utah-based distributor of headsets and other accessories.
Chad Abraham, an investment banker at Piper Jaffray, noted that the stock market dropped about 12 percent in August and September.
"Volatility spikes tend to be not very good for the IPO market," Abraham said. "You can still get IPOs done in markets where overall returns aren't great for investors, but when volatility is that high they really don't know if they are paying the right price for an IPO that day."
On a brighter note, dealmakers say there are sufficient initial public offerings in the pipeline for the fourth quarter that could go forward -- if the gyrating stock markets can achieve some positive momentum.