But a strong June keeps hopes alive for a strong second half, and competition for middle-market M&A transactions is driving up their prices.
Mergers and capital-raising activity slowed slightly in the second quarter after a brisk first quarter that had dealmakers betting that 2012 could be the best year since the Great Recession.
"We faded in the second quarter after a positive first quarter, and now I'd characterize things in the third quarter as steady, but not living up to our expectations at the beginning of the year," said Bruce Engler, head of the mergers-and-acquisition practice at Minneapolis-based Faegre Baker Daniels.
"There was a lot of optimism that a potential [capital gains rate tax increase in 2013], solid credit markets, low interest rates and corporations with lots of cash would drive activity,'' he said.
But, as they have for the past two years, worries about the slow U.S. recovery and debt woes across Europe conspired to undermine investor confidence.
The number of M&A deals announced nationally declined 6.7 percent from the first quarter to 2,837 in the second quarter, according to Dealogic and Star Tribune research. Minnesota-affiliated investment bankers did somewhat better, with 77 second-quarter deals compared with 71 in the first quarter.
John Potter, a Minneapolis-based partner in the PricewaterhouseCoopers (PwC) transaction-services department, said the global uncertainty has led to only a modest recovery in the deals business. However, PwC detected an uptick in activity in June, the most active month of the second quarter.
For sale signs
"We feel confident that the second half will be busy," Potter said. "There is a lot of dry powder available. The better businesses have been bought and sold for two years. There are a lot of other businesses out there for sale ... that can help a strategic buyer outperform the market .... We're optimistic."
Investment bankers took 75 companies public during the first half of the year (including 13 deals for Minnesota underwriters) compared with 77 nationally in the first six months of 2011.
Facebook's much-anticipated IPO priced on May 17 and raised $16 billion. One of the largest IPOs ever, the social media giant utilized 33 investment banks including lead underwriter Morgan Stanley. Among the co-underwriters were Piper Jaffray, RBC Capital Markets and Wells Fargo Securities LLC.
Piper also had a share of one of the largest additional equity deals of the quarter, a $676 million follow-on offering for Ulta Salon Cosmetics & Fragrance Inc., an Illinois-based beauty retailer. Piper and Craig-Hallum Capital Group LLC also helped Web.com Group Inc. sell 8 million shares in a follow-on offering that raised $135 million.
The most notable -- and so far the only Minnesota-based IPO this year -- was Proto Labs. The quick-turn manufacturer of custom-machined and injection-molded parts raised nearly $70 million in its February initial public offering at $16 per share. The stock has traded as high as $38 per share in recent days.
On the other end of the capital-raising spectrum, little Bio-Plastic Solutions, a Blooming Prairie, Minn., plastic-components manufacturer, raised $1 million in the second quarter from individuals, development partners and customers, to expand production of a line of framing, edging and trim products used in building and furniture construction. The products are made from cornstarch-based polylactic acid instead of petroleum-based resins.
CEO Gary Noble, 53, who struggled with falling sales and layoffs during the 2008-09 recession, expects the fresh capital and growing demand to help drive sales and employment from $1 million and eight workers in 2011 to $5 million-plus and 25 workers by 2014.
The financing was raised through the Minnesota Angel Network, which helps promising companies develop their business plan and investor pitches.
Among the big M&A deals, Minneapolis-based Graco, a big manufacturer and exporter of paint sprayers and other fluid-handling equipment, closed on its $650 million acquisition of the finishing business of Illinois Tool Works. Graco is still negotiating with federal regulators over which ITW units it must divest to satisfy antitrust concerns.
Meanwhile, in June Minneapolis-based Norwest Equity Partners, which manages $5 billion through a series of debt-and-equity funds, invested in fast-growing health care-related firms in Chicago and Philadelphia.
Norwest staked $50 million for a minority position in GoHealth, a Chicago-based technology concern that links health insurers with agents and consumers through GoHealthinsurance.com.
The 165-person company was founded in 2001 as one of the industry's "first multicarrier quote engines."
Norwest Equity also acquired Philadelphia's Pentec Health, a 300-employee provider of specialty infusion services outside of the hospital. Terms were not disclosed. Pentec revenue grew from $22.2 million in 2007 to $61.9 millon in 2011.
Middle-market deals, such as the June investments by Norwest Equity, accounted for $123 billion, or 35 percent of total deal value -- a notable uptick for the first half of 2012, according to PwC. Competition for middle-market transactions is driving up prices, the accounting firm said.
That's confirmed by M&A banker Glenn Gurtcheff, who runs the Minneapolis office for Harris Williams.
"Our closings year-to-date are well ahead of last," Gurtcheff said. "M&A deal activity is actually quite good right now ....For anyone who wanted to close a deal before yearend, given fears over the November presidential election or [rising] capital gains tax rate fears, they would have started [sale proceedings] a long time ago. In short, it's very busy out there right now for more mature deals and probably will be through the end of the year."