StreamOfTheSky
Adventurer
Outside of combat, you can fit many medium-sized people in a 5x5 foot square, you don't even need to be grappling each other. In a combat situation, the 3.5 D&D rules state that each character can't share a square (unless they're prone/squeezing/grappling) and still fight effectively. So you could fit a dozen (exaggerating) people in a 5ft radius, but once combat starts and you surprise the enemy, those dozen people would have to spend that first round spreading out, negating any advantage you had in the first place.
Well, even if you had to spend all of your surprise round actions spreading out, it still might be useful, just for the fact the PCs know combati s coming (can buff beforehand). Also, the spell Shock and Awe comes to mind as something that would make such a trick valuable even without a surprise round -- iirc it's a swift or immediate action, and can only be cast in a surprise round, giving all foes surprised a huge penalty on their initiative rolls. Not saying that's overpowered, just...a smart usage of the situation.