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BEHIND THE NEWS Safety firm's sale a bonanza-and that's no accident:

February 20, 2006

Aearo Technologies Inc., the maker of earplugs and other protective gear, has long been a quiet company. But given its recent performance and the announcement this month that a private equity firm is buying it for an eye-popping $765 million, no one would call it a sleepy one.

Indeed, interviews and a review of regulatory filings show the northwest-side company has been on a tear, boosting sales from $284 million in fiscal 2001 to $423 million in fiscal 2005. In that span, profit before interest expense and taxes ballooned from $20 million to $61 million.

Which helps explain why the British private equity firm Permira agreed to purchase Aearo for twice what New York investment firm Bear Stearns paid when it bought the company two years ago for $381 million.

Good things happen when companies perform well-and Aearo certainly has. Because Bear Stearns bought its controlling stake through a leveraged buyout, contributing just $80 million in equity, it will reap a 310-percent return, according to The Deal, a New York publication tracking mergers.

Eighty managers, who collectively own one-quarter of the company, will enjoy an even better percentage return, CEO Michael McLain said. They will roll over some of their gains into the new deal, giving them a 10-percent stake worth $76 million. Counting stock options the company will dole out, managers will own 25 percent.

Aearo's achievements are a credit to its management team, led by McLain, said Thomas Lister, head of U.S. operations for Permira, Europe's largest buyout firm.

"This company has terrific market positions," Lister said. "Mike has maximized those market positions in the eight years he's been with the company."

McLain, now 55, took the helm in 1998, after completing a turnaround at Indianapolis-based DowBrands and selling the maker of Ziploc sandwich bags and Saran plastic wrap to Wisconsin-based S.C. Johnson for $1.1 billion.

He faced a similar task at Aearo, whose owners at the time were eager to rev up its lackluster performance.

Among McLain's first moves: Shift the company's 17-person headquarters from Boston to lower-cost Indianapolis, where it already had operations, and bring on a new management team.

Today, that team has a decidely Dow-Brands flavor. Five of McLain's seven direct reports are DowBrands alumni. While previous management had a "classical industrial orientation," McLain said, the new team has a consumer-products mindset, with its focus on brand loyalty and product innovation.

As the company said in a regulatory filing, "Our senior management ... understands the importance of brand recognition and customer service to drive growth in a competitive market."

Aearo sells communication headsets, hard hats, first-aid kits and other safetyrelated gear under such brands as AOSafety, E-A-R, Peltor and SafeWaze.

The company-which employs 1,600, including 325 in Indianapolis-sells in 70 countries. Forty percent of revenue comes from outside the United States, and it's pushing to bolster that overseas presence.

Permira, with its investments and relationships throughout Europe, should be a big help, Lister said. "There isn't a big European country where we don't have an existing infrastructure," he said.

The private equity firm won't be in the picture forever, however. It typically holds an investment four to seven years then pursues an exit strategy, such as an outright sale or an initial public offering.

Aearo filed papers to go public late last year, viewing an IPO as an attractive "fallback" option if a buyer hadn't emerged with an attractive offer, McLain said.

In a few years, the company might find itself at the same, familiar crossroads. The Permira purchase marks the third time Aearo has been bought by an investment firm since Boston-based Cabot Corp. spun out the division 11 years ago in a deal with New York-based Vestar Capital Partners that valued the business at $205 million.

"Each time" Aearo has changed hands, McLain said, "everybody has done well."

O'Neal lands in jail

Orlando, Fla., police say James O'Neal Jr., the Carmel native accused of swindling millions of dollars from prominent Indianapolis businessmen, shoplifted $70 in goods from a Wal-Mart there last August.

Because of the incident, U.S. Magistrate Judge Karla Spaulding this month ordered O'Neal jailed. He had been free as he awaited sentencing in March on two felony charges of filing false federal tax returns.

Spaulding found probable cause to believe O'Neal, 60, violated his release conditions. She said his explanation he had misplaced a receipt when confronted by Wal-Mart security "did not ring true," The Orlando Sentinel reported.

A grand jury in 2004 indicted the Orlando resident on 82 counts stemming from the disappearance of millions of dollars of investors' money from a Carmel-based auto dealership firm he led. He avoided trial by pleading guilty to the two tax charges late last year.


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