Buyout boom isn’t all bad for Hoosiers

Announcements that major Indiana companies have been acquired are traditionally met with trepidation. After all, new owners
inevitably make changes–and not always to the locals' liking.

But a rash of recent buyouts of Indiana companies shows they're not always bad news. For the past several years, private
M&A funds have been raising spectacular amounts of money with the intent to purchase and grow companies, not gut and shutter
them.

"If you'd asked me two years ago, 'Could Biomet be taken private?' I'd have said there's no way
in hell," said Joe Broecker, co-managing director of Indianapolis-based investment banking firm Periculum Capital Co.
LLC. "That's the enormity of what's changed in the last two years."

A consortium led by the Blackstone Group and Goldman Sachs, both based in New York, announced Dec. 18 that it plans to buy
Warsaw-based orthopedic device-maker Biomet Inc. for $10.9 billion. Four days later, a group of private equity firms agreed
to acquire Carmel-based auto auction company Adesa Inc. for $3.7 billion.

Both are multibillion-dollar examples of a trend. These days, financial funds are far more likely to buy Indiana companies
than are competitors. The upshot: New owners flush with cash offer resources for growth. And they have little reason to move
operations away from Indiana's business-friendly environment.

A case in point is Fishers-based Marsh Supermarkets Inc., which Florida-based Sun Capital Partners acquired in October for
$88 million, plus the assumption of $237 million in debt.

Sun, with $3.5 billion in equity capital under management, has far greater financial firepower at its disposal than Marsh
had as a public company. And because Sun wasn't in the grocery business, it kept most of Marsh's 420 headquarters
employees.

In 2003, U.S. buyout funds raised $28 billion to purchase companies across the country, according to Dow Jones Private Equity
Analyst. By last year, that figure had more than quintupled to $149 billion. Such financial firepower has transformed the
merger game.

"We're seeing money flow in to finance those kinds of deals at unprecedented rates," said Barnes & Thornburg
LLP partner David Millard. "It's just supply and demand, frankly. There's so much liquidity going into the market
in that direction. Credit is fairly easy out there. It's very easy to find a bank partner when you want to do a deal."

Historically, mega-deals were driven by the chance to achieve strategic benefits. With most banking mergers, for instance,
the bigger bank immediately boosts profit by eliminating duplication at the smaller one. There's no need for two sets
of telephone systems or middle managers. So the merged firm cuts away the excess fat. And folks on the wrong end of the acquisition
equation go home with pink slips.

"Usually, the in-house counsel is the first to go," joked Ice Miller LLP partner Steven Humke, president of the
Indiana Chapter of the Association for Corporate Growth. "Strategic buyers are more likely to 'rightsize' the
company."

Billions for buyouts

But these days, buyout funds have different goals–and the resources to fund them.

The enormous Blackstone Group, for example, has $67 billion under management. Goldman Sachs Capital Partners manages $35
billion. On their own, such funds can target all but the largest companies. And to buy the biggest, they simply work together
in "club deals."

"In the past, the thought process has been that strategic buyers will always pay more than financials, because of the
synergies in a strategic acquisition," said City Securities Corp. CEO Mike Bosway. "However, with as much private
equity money as is out there today, [buyout funds] are getting into the catbird seat."

Without the benefits of cost savings, financial buyers look for other ways to justify the prices they pay. Those include
finding hidden value-such as real estate on a company's books that could be sold for a rich profit-and accelerating expansion.

"These buyers want to see their companies grow. That's how they make money," Broecker said.

"People misunderstand buyouts. They're very productive. You're [often] changing family business owners who are
in some respects very lackadaisical for owners who are very productive and interested in return, as opposed to, 'How many
nieces and nephews can I employ?' Private family businesses get into a lot of bad habits over time."

Indeed, before a purging last year, Marsh employed nine members of the Marsh family, who collectively received $3.1 million
in annual pay.

Some M&A experts speculate Sun bought Marsh because it believed its real estate holdings, as well as its catering and
floral divisions, were undervalued. They expect Sun eventually will break up Marsh.

But others say Sun is making the hard decisions necessary to turn the underperforming grocer around, and plans to continue
to operate it. Within weeks of buying Marsh, Sun cut 40 headquarters jobs and announced plans to close 12 groceries, or 10
percent of its total.

"I know that the hope of the people at Marsh that I used to work with is, yes, they'll be able to grow the company,
and jobs will be ultimately saved, beyond the ones that have already been cut," said Danny O'Malia, former president
of Marsh's O'Malia division. "I think it's a better bet with an investment company than it would have been."

Regulatory filings show that, of the five suitors that went beyond preliminary discussions with Marsh, four were financial
firms and just one was a strategic buyer.

Just a few years ago, experts say, most of Marsh's suitors would have been other grocery chains eager to turn a profit
by eliminating overlap.

Picking off private firms

Buyout funds aren't just prowling for public companies. In many cases, they're scooping up private businesses that
a few years ago would have chosen to raise expansion capital by going public.

In late 2005, for instance, Indianapolis-based Aearo Technologies, an Indianapolis-based maker of safety equipment, filed
to go public, in part as a strategy to draw potential acquirers out of the woodwork.

It worked. Last February, the British private equity firm Permira agreed to buy Aearo for $765 million, double what the New
York investment firm paid just two years earlier.

Flipping companies fairly quickly is part of the private equity game. Buyers typically hold companies about five years, then
pursue an exit strategy–sometimes selling the business outright or taking it public.

An initial public offering could be the course Indianapolis-based H.H. Gregg is on. The Los Angeles-based investment firm
Freeman Spogli and Co. bought 80 percent of the consumer-electronics-and-appliance retailer in February 2005. Company regulatory
filings note an IPO is an eventual possibility.

Then again, perhaps another private equity player would offer a richer price. As competition among buyout firms with billions
of dollars to invest intensifies, sellers are offering ever-higher prices.

But many industry insiders are starting to wonder how long the private equity boom can last. Eventually, they warn, some
of the buyout funds' heavily leveraged portfolios will fail–particularly if interest rates rise, or if the national economy
slows down.

"I hope that we're not too exuberant and there's too much greed here," Broecker said. "I fear there's
going to be, like in anything, some excesses."