Deals are poised for growth in second half

Investment bankers in Minnesota and nationwide expect merger-and-acquisition activity to accelerate in the second half of this year, despite slower dealmaking during the first two quarters of 2013.

"We still have all the fundamentals in place," said John Potter, a national transactions partner in the Minneapolis office of PricewaterhouseCoopers, the tax and consulting firm. "Growth is the No. 1 objective of CEOs in our annual survey. Their focus is on acquisitions. They're being selective. They want to create long-term value with a strategic fit.''

In a slow-growth economy, large companies are willing to buy growth through acquisitions. They can borrow or use their rising stock prices as acquisition currency to acquire companies that extend existing product lines or broaden their offerings. And corporate balance sheets are flush, and credit is cheap.

"I would expect that 2013 will prove to be consistent or a slightly better year than 2012, even with that [gigantic] fourth quarter we had. We will have more deals in technology, health care, social media and big data. Pharmaceuticals will continue to pick up."

Last year's fourth quarter produced a rush of mergers and acquisitions that got done in anticipation of higher long-term capital gains rates that took effect this year as a result of an 11th-hour congressional deal in Washington.

Dealmakers say it takes months to refill the transaction pipeline after such a rush. Yet conditions and intentions are ripe for a strong second half. And the number of pending deals in the M&A pipeline picked up in the second quarter.

"I am optimistic,'' said Bruce Engler, head of the mergers practice at law firm Faegre Baker Daniels. "The foundation there is solid: credit markets with low interest rates, healthy corporate balance sheets, lots of private equity capital available and attractive valuation multiples for sellers.''

For example, in the Minnesota food industry alone, Hormel Foods Corp. acquired Skippy peanut butter in a $700 million transaction with Unilever, the consumer product conglomerate, in the first half of the year. Hormel, known for Spam and turkey products, plans to parlay this non-meat protein into a new product category and expand its international reach.

St. Paul-based Pearson Candy Co. bought Bit-O-Honey from huge Nestlé in a bid to focus on a flagging afterthought for Nestlé. And Bellisio Foods, which itself was acquired a few years ago by a private equity firm with deep pockets, acquired Overhill Farms for $85.7 million in a bid for product and geographic diversification.

Meanwhile, Piper Jaffray, the securities firm, in a bid to beef up its capacity, announced last spring that it would pay $21 million for public-finance firm Seattle-Northwest Securities. And, in June, Piper announced it would buy Edgeview Partners for an unspecified amount.

In technology, Minnesota-based HighJump Software, sold to 3M by its founders for $90 million in 2003 and resold reportedly for less in 2008 to a Boston private equity shop, just acquired Denmark's Evenex, said to be that country's largest provider of business-to-business supply chain management software firm. HighJump, which was downsizing in 2008, has grown to about 450 employees.

The flip side of acquisitions often is large, diversified companies that are selling their "orphans" that may no longer fit their strategic mix. And private equity firms, also loaded with investor cash, are on the prowl for such units that need growth capital. They also have been active buying out family or other private owners that have been waiting for prices to fully rebound in order to take cash out of their business.

Chip Fisher of Minneapolis-based Greene Holcomb Fisher said last month that his business is ramping up for a strong second half and prices are "as strong for good companies as we've ever seen." Fisher recently represented 12-year-old CorePower Yoga in its sale to private equity buyer Catterton Partners.

Meanwhile, public corporations have eagerly gone to investors to raise money through initial public offerings as stock markets have reached record highs. Investors have returned to the stock markets in search of higher returns four years into a bull market that some say is getting long in the tooth.

The number of IPOs and follow-on offerings by existing public companies hit a postrecession high during the first six months of this year, according to Dealogic. That included 91 IPOs in the United States, compared to 73 during the first half of 2012. And 364 public companies raised additional equity in the first and second quarter.

Most recently, Datalink, the Edina-based builder of data storage centers and related services, announced plans to sell up to 3.8 million additional shares of common stock. The company's stock has moved from $5 per share to more than $12 over the past couple of years. The company indicated it may acquire businesses or technologies that fit its growth model.

"The stock market going to new highs has given companies confidence," said Rick Hartfiel, director of investment banking at Craig-Hallum Capital. "They're not just repairing balance sheets anymore. Companies are focused on growth. And there's less talk of fiscal cliffs, presidential elections and catastrophe in Europe than the last couple of years."

Also during the first half of 2013, three small Minnesota companies sold themselves to larger operators. They are Digital Angel, Multiband and MakeMusic.

Neal St. Anthony • 612-673-7144