business

What credit crunch?

Despite a volatile stock market and mounting losses from subprime loans gone bad, dealmaking continued at a furious pace in the fourth quarter. Investment banks that have strong links to Minnesota underwrote 23 initial public offerings and advised 80 mergers and acquisitions, the best quarterly performance since 2006, according to the Star Tribune Quarterly Deal Report.

Such robust activity seems surprising, given the market turmoil and the prospect of a recession this year. And investment bankers say that a recession would inevitably slow the pace of deals and that they don't expect to replicate their performance from 2007.

But "deals still get done in a difficult macro environment," said Glenn Gurtcheff, managing director of the Minneapolis office of investment bank Harris Williams & Co. "But what banks are worried about the most is the performance of the company [they represent]. So of course, [a recession] will impact our ability to get deals done."

Several factors explain the surge in fourth-quarter activity and indicates that the merger-and-acquisition market still has some life.

The tightening of credit markets, a consequence of defaults on subprime loans, mostly affected megadeals financed by private equity firms that relied heavily on cheap debt.

The number of deals for more than $1 billion in the second half of 2007 fell to 376, from 466 in the first half, according to tracking firm Dealogic. Yet overall deal volume rose 26 percent in 2007 over 2006. That suggests that investment banks are still doing deals, but of a smaller variety and for strategic buyers, such as corporations.

"Reports of the demise of the M&A [mergers and acquisitions] boom may be greatly exaggerated," according to a recent report by consulting firm McKinsey & Co.

"The slowdown over the last few months of 2007 was concentrated in the private equity sector. Corporate M&A lost none of its vigor as the year rolled on," the report said.

Middle market consistent

Peter de Vos, head of investment banking for RBC Capital Markets in New York, says deals in the middle market -- generally defined as worth $100 million to $1 billion -- have remained consistent, while major banks are "up to capacity with [big] deals they cannot fund."

"We still have a lot of capacity left," de Vos said. "This has been a very, very good time for us."

Another driving force in the U.S. markets has been the growing number of deals involving foreign companies, especially in Asia.

"Cross-border activity, replicating the fast-pace globalization of economic and financial flows, is increasing," the McKinsey report says. "Companies in emerging markets have increasingly and substantially established themselves as both buyers and sellers in this cross-border activity."

Take China, for instance. This month, WuXi PharmaTech, a major Chinese pharmaceuticals company, agreed to purchase St. Paul-based AppTec Laboratory Services Inc. for $162.7 million in cash and debt. The deal represents the largest Chinese takeover of a U.S. company since Lenovo Group bought IBM Corporation's personal computers business for $1.75 billion in 2004.

China's growing financial clout is also reflected in the number of Chinese firms looking to raise money in the United States. Last year, 33 Chinese companies went public on U.S. stock exchanges, the most of any foreign country, which helped the United States regain its position as the top destination for IPOs.

China good for Piper Jaffray

Piper Jaffray & Co. in particular has benefited from the surge of capital-hungry Chinese companies. The Minneapolis-based investment bank helped underwrite the IPOs of six Chinese firms, including the $886.6 million IPO of Giant Interactive Corp., the maker of China's most popular video game; and the $172.8 million stock debut of Gushan Environmental Energy, China's largest biodiesel maker. All told, Chinese firms made up more than a third of Piper's IPOs in the fourth quarter.

Investors have yet to share in the cross-border enthusiasm. All but one of the six IPOs handled by Piper were trading below their offering prices as of Friday.

Chinese companies "still view U.S. markets as a capable place to raise capital," said Chris McCabe, managing partner and co-head of Piper's clean-tech and renewables and technology teams. "Even with a recession, the U.S. still has the deepest pool of capital and the most creative, most efficient markets."

Staff writer Patrick Kennedy provided research for this report. Thomas Lee • 612-673-7744