138 THE WARREN BUFFETT WAY
Clayton Homes
Berkshire’s purchase of Clayton was not all smooth sailing; a legal bat-
tle erupted over the selling price.
At $12.50 per share, Buffett’s April 2003 offer for Clayton was at
the low end of the $11.49 to $15.58 range that bankers had assigned to
the shares a month earlier. Clayton management argued that the deal
was fair considering the industry’s slump at the time. But Clayton
shareholders mounted a battle in the courts, saying that Berkshire’s offer
was far below the real value of Clayton’s shares. James J. Dorr, general
counsel for Orbis Investment Management Ltd., which voted its 5.4
percent stake against the merger, grumbled, “The fact that it’s Warren
Buffett who wants to buy from you should tell you that you shouldn’t
sell, at least not at his price.”^15 For a value investor, that is probably a
very high compliment.
Warren Buffett defended his offer. At the time of the shareholder
vote, he wrote, “the mobile home business was in bad shape and com-
panies such as Clayton, which needs at least $1 billion of f inancing
each year and faces declining sales, would continue to have a hard time
f inding funds.” Clayton’s board apparently agreed. Then, as evidence
of his commitment to Clayton, Buffett added that he had advanced
the company $360 million of f inancing since his offer.^16 Buffett and
Clayton management ended up winning the shareholder battle by a
narrow margin.
Warren Buffett is one of the few people who could charac-
terize $105 million as a “small amount,” but, in fact, after tak-
ing into account these interest payments, the net purchase price
for the company was $730 million.
At the time Berkshire’s offer was being reviewed by the
bankruptcy court, a reporter for the Omaha World-Herald
asked Travis Pascavis, a Morningstar analyst, about the deal. He
noted that companies like Fruit of the Loom usually sell for
their book value, which in this case would have been $1.4 bil-
lion. So with a bid of $835 million (ultimately, $730 million),
Berkshire would be getting the company for a bargain price.^14