86
CASE IN POINT
FRUIT OF THELOOM, 2002In 2002, Warren Buffett bought the core business (apparel) of
bankrupt Fruit of the Loom for $835 million in cash. With the
purchase, Berkshire acquired two strong assets: an outstanding
manager and one of the country’s best-known and best-loved
brand names. It also acquired some $1.6 billion in debt, and a
bitter history of ill will among shareholders, suppliers, retailers,
and consumers.
The company that sells one-third of all men’s and boys’ un-
derwear in the United States started as a small Rhode Island mill
in 1851. Over the next century, it grew into the nation’s leading
maker of underwear and T-shirts. It could not, however, escape
the economic struggles that increasingly threatened the apparel
industry, and in 1985 was snapped up by f inancier William Far-
ley, known for acquiring f inancially troubled companies.
Farley, often described as “f lashy” and “f lamboyant,”
guided the company through a few years of growth and then
into a disastrous decline. Everything seemed to go wrong. An
aggressive $900 million acquisitions program left the company
over-leveraged—long-term debt was 128 percent of common
shareholders’ equity in 1996—without providing the expected
rise in revenues. Suppliers went unpaid and stopped shipping raw
materials. Farley moved 95 percent of manufacturing operations
offshore, closing more than a dozen U.S. plants and displacing
some 16,000 workers, only to f ind that the net result was serious
problems of quality control and on-time delivery. To counteract
the delivery snafus, he parceled out the manufacturing to con-
tract f irms, adding enormous layers of overtime costs. He created
a holding company for Fruit of the Loom and moved its head-
quarters to the Cayman Islands, avoiding U.S. taxes on foreign
sales but triggering a massive public relations headache.
The headache got worse when Farley, in a maneuver that is
now illegal, convinced his hand-picked board to guarantee a