business

Huge Baxter International's announcement in December that it would acquire St. Paul-based Synovis Life Technologies for $325 million sounded like good medicine to Synovis shareholders.

Still, despite some high-profile local and national deals such as Baxter-Synovis, there weren't enough in 2011 to top 2010, a year of rebound after the recession. Last year started out strong, then grew weak.

"There is no question the deal market got choppier in the back half of the year -- everything was harder and took longer -- but good deals got done," said Glenn Gurtcheff, manager of the Minneapolis office of investment bank Harris Williams & Co. "We had our third-best revenue year ever."

Matthew Knopf, chairman of the 100-lawyer national merger-and-acquisition practice at Dorsey & Whitney, said gridlock in Washington, D.C., and uncertainty in Europe slowed dealmaking. It didn't stop M&A activity in the third and fourth quarter, "but it made it more focused," Knopf said.

Overall, the number of announced deals by Minnesota-related investment bankers slipped from 298 in 2010 to 241 in 2011. According to Dealogic, nationally the number of mergers and acquisition slid from 9,968 to 7,932 in 2011.

The 2010 numbers got a fourth-quarter boost amid investor fears that long-term capital gains tax rates might rise from 15 to 20 percent. That was averted under an 11th-hour deal by President Obama and Congress.

In the first half of 2011, the global dollar volume of announced mergers worldwide neared the highest levels since the financial crisis, according to Dealogic. However, M&A volume was down 16 percent to $1.28 trillion in the second half of 2011.

Meanwhile, the number of companies raising money through stock offerings declined in Minnesota and nationally in 2011 over the brisk pace of 2010.

The fourth-quarter deals in Minnesota included New York buyout firm Kohlberg Kravis Roberts' $1.12 billion acquisition of Capital Safety of Red Wing, a maker of safety and fall-protection equipment. It was acquired from London-based Arle Capital Partners, which owned Capital since 2007.

Centre Partners, a New York-based private equity firm, acquired majority interest in the late Jeno Paulucci's Bellisio Foods, in a private transaction for a price said to be around $400 million. Bellisio, which is based in Minneapolis but manufactures mostly in Ohio, produces the Michelina's line of frozen foods and private label entrees for major retailers. The Paulucci family had tried to sell the firm, off and on, for at least several years, the company confirmed last week.

Bellisio CEO Joel Conner, who remained with the company, said the acquisition was a good deal all around. He led about 25 management employees who joined Centre Partners as minority investors in the deal.

In other deals, Eden Prairie-based SurModics sold its SurModics Pharmaceuticals assets to Evonik Industries for $30 million in cash, and Mill City Capital purchased Wholesale Produce Supply for an undisclosed price.

The Baxter-Synovis deal, at about $28 per share, represented a 50 percent premium on the price of Synovis shares, which traded around $18 per share before the acquisition announcement in December.

Outlook for 2012

With less fear of another recession and with the stock and credit markets improving, dealmakers seem confident about 2012.

Ernst & Young, the tax and financial advisory business, said it expects cash-rich corporations to be big buyers this year as they try to gain market share and expand their portfolios, and that there should be more successful public offerings.

"We are positive about the M&A environment, as it has been strong and continues to look promising," Herb Engert, Americas Strategic Growth Markets practice leader at Ernst and Young, said last week. "I think we will still see some choppiness in the markets, but overall confidence is returning among investors."

Private equity shops, which drive many M&A deals, are reloading with fresh capital. They buy private companies, try to resurrect or build them, then sell to larger strategic buyers or take them public. They also are under pressure from investors to sell long-term holdings.

For example, Tonka Bay Partners, a venerable private equity firm that buys and grooms small manufacturers and distributors, has just raised $150 million in fresh investor funds, its third round of capital since 1998.

"There's a lot of capital that needs to be put to work ... including funds that are coming to the end of their investment period," said Tonka Bay principal Cary Musech. "The [sales multiples] have swung back. We think 2012 will be a good year. The markets are liquid, the banks are liquid. Some of the entrepreneurs are looking to sell now, particularly the ones who couldn't sell before the recession."

Moreover, sellers know there is a chance that long-term capital gains taxes may rise in 2013.

Knopf of Dorsey & Whitney said the M&A market could be good in 2012 but won't approach the overheated levels of 2006-07.

He pointed to two deals in which Dorsey was engaged, the Synovis acquisition by Baxter and Best Buy's $167 million acquisition of Mindshift Technologies, as examples of typical strategic deals of late.

Large, cash-rich companies are doing "tuck-in" acquisitions that add a product line or "complementary acquisitions" that can help strengthen them across business lines, Knopf said.

Commercial bankers, once again, are willing to lend in excess of five times operating profits (before earnings, interest, taxes and depreciation) to fund "high-quality" deals, said investment banker Gurtcheff.

"Seller performance is always a driver of M&A activity," Gurtcheff said. "Perhaps it's a matter of more realistic growth assumptions, but our clients are meeting or beating the forecasts they've laid out much more regularly than they did in 2011."

And CEOs of big companies, caught in a low-growth, low-inflation environment, have rebounded from the recession with hoards of cash. They are "back on the prowl with trillions of dollars on their balance sheets," he said.

John Brower, co-chair of the M&A practice at Gray Plant Mooty, sounded a cautionary note: "My fear is that the continued uncertainty about both the domestic economy and Europe will dampen activity," he said. "I have several clients who do significant business in Europe. For them, the continuing issues with the eurozone are definitely a concern."

nstanthony@startribune.com • 612-673-7144 pkennedy@startribune.com • 612-673-7926