The Ballad of Clayton Homes

This flinty conservatism came straight from Jim Clayton's hardscrabble upbringing. Born into a destitute farming family near tiny Finger, Tennessee, that relied on a "thunder bucket" under the bed on winter nights rather than an outhouse, Clayton was working the fields by age 5, yet still managed to make it through high school and pursue his dream of being a country singer. While performing on a local show, Clayton crossed paths with the likes of Wink Martindale, Carl Perkins, and later Elvis Presley and Dolly Parton. He sold everything from vacuum cleaners to flower seeds, became a radio repairman and an accomplished pilot, and received an engineering degree and a law degree from the University of Tennessee while fixing up and reselling used cars.

Clayton was anything but a sucker. He never overpaid for an asset, prided himself on giving his customers good value, and even outsmarted his way out of bankruptcy when a local bank that had overextended itself suddenly foreclosed on his car lot. (Clayton was savvy enough to buy back the repossessed cars in an auction, using cash committed by customers who trusted him.) With Clayton Motors, and later Clayton Homes, he became famous throughout the South as a master of the deal who prided himself on rooting out the diamond chips in other people's trash piles. From cars, Clayton moved to homes, where he grew with a strategy of careful expansion, decent pricing, and high quality. "He's value-driven in everything he buys," says Tom Gunnels, a friend and tennis partner of Clayton. "Whether it's a pair of tennis shoes or a helicopter, he shopped around until he found the best deal."

Never had he accepted the first bid on anything--until now. So how was it, wondered many shareholders, that such shrewd businessmen as Jim and Kevin Clayton would leap at what seemed to be such a low offer when the industry had already hit bottom? Why not try to beat the bushes for a better bid? Could it be that the family's interests had diverged from those of its other shareholders? "I was in shock that night," says Carl Tash, CEO of Cliffwood Partners, a real-estate investment firm that held 1.2 million Clayton shares. "For a year we had been telling our investors that it would be a $20 stock. I thought it was an April Fools' joke." Tash was particularly upset because the previous October, he had offered Kevin Clayton help financing some newly purchased loan portfolios. "His point to us," says Tash, "was that it's a lucrative business, and we will do it ourselves." Both Claytons refused to comment on this point or any others, citing the ongoing litigation.

Quickly, opposition to the deal began to form. One criticism centered on the quality of the fairness opinion of Morgan Keegan, a local investment bank. Orbis Investment Management, the fourth largest holder of the stock with some 5%, complained that the bank didn't appropriately value the company. Proxy adviser Glass, Lewis & Co. figured the company was worth between $15.80 and $17.20 a share, well above Buffett's offer. Shareholders also noted that the stock prices of both Clayton and its peers had risen significantly since the offer was made, as the stock market surged. Clayton itself traded above Buffett's offer for the entire month of June, indicating that people expected either a better price or that the deal wouldn't close.

Dan Quayle showed up--representing a hedge fund named for the three- headed dog guard- ing the gates of hell.

Suddenly, the Claytons found themselves in the rather unusual position of having to convince investors of how bad their business was. Complicating matters was the general sense that if Buffett bids for something, it must, by definition, be undervalued. Michael Winer, portfolio manager of the Third Avenue Real Estate Value Fund, called Buffett as a courtesy before he issued a press release blasting the deal. "He tried to convince me that I was wrong," Winer says. "We agreed to disagree, but it was interesting to hear Warren Buffett say how bad a business it was, and he's paying $1.7 billion." Buffett wouldn't comment.

Shareholders were also worried about Clayton's record of corporate governance. In 2002, the Council of Institutional Investors put Clayton on its "focus list" of underperforming companies and criticized the company's independence standards. Of the then-seven directors, three were

Claytons, there was no nominating committee and a compensation committee board member, Thomas McAdams, was a partner at the company's primary law firm. Another outside member, C. Warren Neel, who currently heads up the UT's new Center for Corporate Governance, is a scuba-diving and skiing buddy of Jim Clayton and his wife Kay, and advised Clayton on the purchase of some local banks. Clayton calls McAdams "my special friend" in his autobiography and includes several photographs of Neel and his wife in social situations. "There was reason to doubt that this company had in its DNA the right level of care and responsibility to shareholders," says Glass Lewis's Taxin.