Despite drop in deals, dealmakers see strong market ahead

“Good companies are selling for good prices,” one investment banker said. The market’s strength comes despite a decline in deals.

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In November, U.S. Bancorp’s investment fund-service subsidiary said it would acquire Quintillion Ltd., an Ireland-based hedge fund administration firm, for an undisclosed amount.

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On Dec. 31, an investor group headed by Bob Lynch and Fred Simonson bought Anoka-based Victory Tool from Minnetonka-based MultiSource Manufacturing. Although terms of the private transaction were not disclosed, it’s safe to say it wasn’t the biggest corporate transaction in Minnesota last year.

But the acquisition of the 25-year-old maker of metal stamping dies and other equipment for manufacturers across North America underscores a positive economic trend.

“We bought it based on opportunity,” said Lynch, the president of Victory, which has 24 employees.

Niche manufacturing is surging in the United States, and Victory thinks it also can win new business from customers moving manufacturing back from foreign sources. And that confidence is radiating through many companies and industries as the U.S. economy warms in what is expected to be the fifth and best year of the economic recovery.

Sales of U.S. companies hit $1.8 trillion in 2013, the highest annual total since 2007, the last year before the Great Recession started shuttering shops and showrooms and sucking confidence and jobs.

Deal activity declined 19 percent last year to about 10,000 U.S. transactions, according to Dealogic, which tracks buyers and sellers of businesses. That’s partly due to a record number of transactions completed in the fourth quarter of 2012, driven by the fact that capital gains and income taxes were scheduled to rise in 2013 on high-buck earners.

In Minnesota, the number of deals and dollar volume dropped markedly, partly because the state’s largest companies did fewer large transactions than in the two previous years.

Confidence building

Yet investment bankers and lawyers who advise the companies say we’re in a pretty strong market, where confidence about the future has returned to buyers and prices are healthy enough to entice small-business owners who are looking to sell. And public companies and private equity firms have plenty of cash and banks have lots of low-interest money to lend for promising transactions.

“There was a steady stream of deals after the first quarter of 2013,” said Jamie Snelson, co-chair of the M&A practice at Fredrikson & Byron of Minneapolis. “We think 2014 will be another good year.

“Consumer confidence, or the lack there of, begets business confidence and that plays out in the deal market,” Snelson said. “If there is uncertainty in the projections for performance of the business you’re acquiring … it’s tough to get a deal done and agreement on the valuation. Businesspeople are more willing to take risks when they are confident.”

Health care was the leading sector for corporate transactions last year, and Fredrikson advised on several such local deals during the year.

For example, medical-products titan C.R. Bard of New Jersey in recent months agreed to buy Fredrikson client Medafor, which makes blood clot treatments, for $200 million in cash and up to $80 million more depending upon Medafor’s performance. And Bard, on a bit of a Minnesota shopping spree, also agreed to acquire Rochester Medical, a maker of urinary products, for more than $260 million.

Meanwhile, biotech firm Techne, also a Fredrikson client, acquired Massachusetts-based Bionostics Holdings for $104 million in cash. Techne, based in Minneapolis, makes controls used in hospitals and laboratories to check the accuracy of blood analysis instruments. Bionostics makes products for verifying the proper operation of medical devices used for blood glucose and blood gas testing.

Good values to be found

“Good companies are selling for good prices,” said Hunt Greene, a founder of investment banker Greene Holcomb Fisher, which represents sellers. “But not the kind of ‘overdone’ values that we saw back in 2005-06. And people are less cautious about cyclical businesses [such as auto parts makers, whose fortunes rise and fall with economic cycles]. They either think there’s a lot of good times left in this economy, or they are just too optimistic.”

Greene’s firm got some national notoriety in the investment banking trade for the sale of 12-year-old CorePower Yoga of Denver, a very hot company in a hot trend, to Catterton Partners. It was an unspecified private transaction that sold for what was speculated to be an eye-popping 12 or more times annual cash flow.

There also were some interesting trend plays.

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