Acquisitions slow, but revival on horizon

While the recession caused sales to drop rapidly this year at many Minnesota manufacturers, it also hampered the ability of some companies to expand through acquisitions.

Through mid-October, fewer than 25 deals were announced by Minnesota-based manufacturers. That's a much slower pace of dealmaking for acquisitions than the two previous years. Minnesota manufacturers unveiled about 70 acquisitions in 2008 and nearly 90 in 2007.

But the climate for acquisitions may become more friendly as the economy mends.

Last week, Toro Co. and Ecolab Inc. announced purchases -- albeit small ones with terms not disclosed -- and Polaris Industries Inc. CEO Scott Wine said during a quarterly earnings call that "we will likely make at least one acquisition in 2010."

3M CEO George Buckley, during a recent trip to Singapore, told Bloomberg News that his company expects to spend about $1 billion on acquisitions over the next 12 months.

Jack Militello, a management professor at the University of St. Thomas, said he anticipates Minnesota manufacturers will forge more deals in 2010 compared with this year.

"In a recession, it's very difficult to buy and sell," Militello said. "A lot of companies may be holding off a sale, waiting for their sales to go up," so they can negotiate higher sale prices with their suitors.

Patrick Campbell, 3M's chief financial officer, said during a September analysts' conference that 3M has done about 50 deals in recent years. But the company only announced a couple of deals this year, including the acquisition of a line of pressure-sensitive adhesive tape from a New Jersey firm.

"I honestly had anticipated that the merger-and-acquisition market was going to be a better market during this recessionary period," Campbell said at the Morgan Stanley conference. "It really hasn't panned out that way."

3M, a global company with $25.3 billion in sales last year, was on the prowl for deals during the recession. The leaders of some companies that were potential targets were focused on "where their stock price was before" the economic downturn, he said. "Obviously that's the price they wanted, and of course we weren't ready to pay a price that was based upon a previous peak."

Ecolab and Toro took disciplined approaches to analyzing the acquisition landscape before consummating deals.

Ecolab Vice President Michael Monahan said, "We think acquisitions are an important component of our overall growth," even though Ecolab expects most of its sales expansion will occur organically from its existing product lines.

In the acquisition arena, Monahan said, "We have been more active this year simply because we think there are more opportunities in this market."

Filling gaps in product lines

The St. Paul-based company, which had sales of $6.1 billion last year, on Wednesday said it was buying the ISS pest-elimination business in the United Kingdom. It didn't reveal a transaction price, but ISS has been generating about $6 million in annual sales. "It gives us additional share in the U.K. pest market, an area we are trying to grow," Monahan said.

Earlier this year, Ecolab acquired certain assets from Corpak Medsystems Inc., broadening Ecolab's product offerings to reduce health care-related infections.

Toro, based in Bloomington, has a team of people that's dedicated to pursuing and analyzing potential deals.

So far, Toro has done only one small deal this year, buying equipment that can be used on golf courses and sports fields from Ty-Crop Manufacturing, a privately held company in British Columbia.

"It clearly fits a strategic need or a gap in our product line," said Kurt Svendsen, director of business development at Toro. In addition to the product fit, Svendsen said, a deal was successfully reached in large part because of "the relationship we had cultivated with the sellers of that business for many years."

When Svendsen is scanning the business world for deals, he's looking for three types of transactions. Some consist of buying a particular technology, and others are considered a new enterprise -- one in which Toro is not involved in that line of business. One example of the latter is Toro's purchase several years ago of a Nebraska company, called Exmark, which makes a line of zero-turn mowers.

The Ty-Crop deal falls within Toro's third category of deals, those in which Toro has active businesses. In this case, the Ty-Crop products will supplement the golf course equipment Toro already makes.

Militello, the St. Thomas professor, said deals are pursued for many reasons, including buying products, gaining access to new markets and hiring executive or technical talent.

"It's not that easy just to set up shop in a foreign country," Militello said, so acquisitions are an effective way for U.S. companies to expand overseas.

On the domestic and international fronts, Militello expects to see more deals struck as the global recession eases. Through an acquisition, he said, "you are buying things you can't build yourself, you are buying progress."

Staff writer Patrick Kennedy contributed to this report. Liz Fedor • 612-673-7709