A reasonable acquisition price sets the stage for profitable growth, productive working relationships, and a successful investment. CHPIII's acquisition of Ion Track, Inc. in January 2000 is a case in point.

Our objective is always to increase the long-term value of any business we acquire by expanding it, improving its profitability and reducing debt. Too high an initial price can burden the acquired company with excessive debt, squeezing cash flow needed for growth. Too big a debt load may lead management to take unacceptable risks in trying to meet financial obligations, fraying the productive and essential relationship of mutual trust and confidence between owners and management.

Yet driving too hard a bargain with a selling company's owners, or its managers (whom we rely on to continue running the business), can foster ill will, damage a hard-won reputation for fair dealing, or derail an attractive acquisition.

When we acquired Ion Track, it was already a leader in advanced equipment for detection of minute traces of explosives and illegal drugs. Escalating terrorist attacks over the previous decade had spawned strong government and military demand for Ion Track's patented detection devices. Management, having concluded that the company needed more capital and financial expertise than its then owner was willing to provide, sought a qualified partner to help the company achieve its potential.

Castle Harlan studied the company and the evolving security industry thoroughly, recognized Ion Track's long-term growth potential and offered management a substantial stake if it met performance goals. Management backed Castle Harlan's bid, and the owners agreed to sell 80 per cent of the company for $27.6 million, or approximately five times cash flow. Castle Harlan subsequently worked in close partnership with management to build the business, giving strategic guidance, adding experienced industry executives to its board, and putting up more capital to accelerate growth.

The combined effort to grow Ion Track paid off, as demand for its products escalated in the U.S. and abroad, particularly after the terrorist attacks of September 11th. The management team exceeded its incentive targets, achieving an enhanced ownership stake. Castle Harlan, together with management, agreed to sell Ion Track to the General Electric Company in September 2002 for $200 million, generating a return of 7.2 times on CHPIII's investment.