The Ballad of Clayton Homes

"We had run out of ideas" for gifts, says Auxier, whose previous presents to Buffett included an autographed football from the coach of the 1998 UT national champions, Phil Fulmer. This time, Wright, a senior, was the official emissary. "After [the Q&A], we went to go and take pictures, and I handed him Mr. Clayton's book," said Wright. "I said, 'I've been working with Mr. Clayton. These are your types of people.' "

As the legend goes, Buffett was so inspired by Jim Clayton's book that he decided to buy his company. But as with so much else in this story, there's a harder-edged reality beneath the folksy myth.

Buffett's response: "Well, tell [Clayton] he deserves a raise." By the time Wright brought Jim Clayton an autographed picture of Buffett holding the book, Buffett had already read it. As the legend goes, and as local papers and The Wall Street Journal have reported, Buffett was so inspired that he called Kevin Clayton, Clayton Homes' CEO, to begin serious discussions about buying the company, which by all accounts had never been for sale. (Buffett's code name in the talks: Mr. Sunshine.)

But as with so much else in this story, it turns out that there's a harder-edged reality beneath the folksy mythmaking. Buffett did not come across Clayton Homes completely by charming happenstance. Kevin Clayton initiated the contact, Auxier says, asking him to tell Buffett that the company was interested in exploring "a business relationship." That relationship quickly blossomed into Buffett's all-cash offer on April 1 to buy Clayton Homes for $12.50 a share, a 12.3% premium over the March 31 price. The Claytons leaped at the chance to become part of the Berkshire Hathaway empire. And Wright woke up one morning to see a picture of himself handing Buffett the book splashed across the front page of the business section of the Knoxville News-Sentinel, with the headline "Gift of Book Sparks Transaction."

Clayton's management and board has portrayed the offer as being as serendipitous as the sudden appearance of a rainbow on a gloomy day. Certainly, it made sense for Jim Clayton himself, who had turned over the day-to-day reins of the company to Kevin in 1999 but remained chairman; it allowed him a way to monetize the 28% of the stock he and his family foundation controlled for $470 million in cash without dumping his holdings on the open market. "They were rich, but rich on paper," says Greg Taxin, CEO of proxy adviser Glass, Lewis & Co. "The minute they sell a single share, the thing would tank. Along comes Warren Buffett." For Clayton's other executives, Berkshire's reputation for buying well-run family businesses and leaving them be seemed like ideal job security in a time of relative trouble. Also appealing was Berkshire Hathaway's AAA debt rating, a huge edge for a company as dependent on financing as Clayton.

Certainly, things in manufactured housing were not going smoothly. The industry had fallen into one of its worst down cycles in decades, as its overly aggressive lending practices sparked a boom that low interest rates for "real" houses helped turn into an enormous bust. The stock had fallen from a high of $19 in 2002 to its current $11, and earnings in 2003's third fiscal quarter were down 10%. The company's dependence on its financial-services unit, which had provided most of its profits in recent months, was seen as a risk. And the Iraq war, which began March 18, had driven down the overall stock market as well. It looked like a good time for value hunting.

At least that's what Buffett, the master of the no-hassle bargain-basement deal, thought. But country songs are filled with twists and turns, and this one was no different. Investors considered Clayton Homes to be the premier player, boasting an efficient vertical model with 20 manufacturing plants, almost 300 company-owned stores, hundreds of independent retailers, 86 manufactured-housing communities, and mortgages for some 168,000 people. Even the homes themselves have a superior look and feel. No tornado traps, they often sit on basements, boast slanted roofs, and, if you weren't there on drop-off day, could fool anyone. A five-bedroom Norris Home, one of Clayton's high-end brands and priced at about $60,000, features a working fireplace, a whirlpool bath, stainless steel sinks, a surround-sound stereo system, and GE appliances.

Certainly, the Claytons hadn't signaled a major problem: At the second (fiscal) quarter conference call for 2003 in January, Kevin Clayton, while bemoaning the state of the industry as being in a "full-fledged meltdown," also took pains to differentiate his own company's prospects. "We have a better model," he said. "You're not comparing apples to apples." Indeed, investors had held on to Clayton precisely because it had for years pursued a careful strategy while rivals such as Oakwood Homes lent their way into bankruptcy. At Clayton, dealers were required to bear much of the financing risk of their sales--giving them an incentive to find good customers, not just customers. Investors also believed in management and in the company's relatively pristine balance sheet.