The Ballad of Clayton Homes

By now, all that sweet music Buffett and Clayton had made together was a distant memory. On July 25, an institutional shareholder, the Denver Area Meat Cutters and Employers Pension Plan, which held some 45,000 shares, suddenly filed suit in Blount County Circuit Court, charging "self-dealing, abusive control, and lack of candor" on the part of Clayton Homes. Who was representing this heretofore-unknown group of red-blooded activists? Milberg, Weiss, Bershad, Hynes & Lerach LLP, the New York law firm whose name strikes fear in the heart of any public company executive. "They sold the company in a way that hurt our members," says Ernest L. Duran Jr., president of the United Food and Commercial Workers Local 7 in Wheat Ridge, Colorado, the umbrella union that includes the Meat Cutters (which still has a separate pension fund). "Our larger concern is to keep corporations more accountable." Darren Robbins, the tough-talking Milberg attorney, puts it more bluntly. "Their shutting down the meeting," he says, "was akin to [former California governor] Gray Davis ordering the National Guard to shut down the polls. It's a well-known fact that they committed a fraud." Other suits continued in Delaware, creating still more confusion because there were similar cases in different jurisdictions.

Then, another potential suitor emerged--a secretive hedge fund called Cerberus Capital Management, named for the three-headed dog guarding the gates to Hades. Cerberus, which in partnership with others had recently outbid Buffett by spending more than $650 million for Conseco's mobile-home lending unit, had written to Clayton expressing possible interest a few days before the meeting. On July 21, Cerberus and its chairman of global operations, former vice president Dan Quayle, showed up to kick the vinyl siding. Some 50 due diligence specialists spent more than a week holed up in high-end double-wides adjoining the main offices and pored over the books. Quayle played the good-cop role, shaking hands and assuring the community that Cerberus's intentions were true. "This is an important company to Knoxville, and we understand that," he told the Knoxville News-Sentinel. "You've got good management--the issue is capital."

But if Clayton was in earnest about attracting bids to rival Buffett's, it also must have known that there was one big roadblock to any other transaction. According to the proxy, competing bids could be considered for just a little over a month. If another bid came in after that, the 28% stake owned by Jim Clayton and his foundation would still remain committed to Buffett's deal for another 12 months. With only about 80% of shareholders likely to vote, virtually every single remaining vote would have to support an alternative bid for it to have any hope of going through. In the end, Cerberus decided not to bid.

On July 30, the adjourned meeting finally came to order, starting on time and following the set agenda. The deal barely passed, with just 52.3% of shareholders voting in favor, including the 29% owned by the family/management block. That meant outside shareholders voted against the deal by more than two-to-one, points out Jerry V. Bruni, president of J.V. Bruni & Co., a Colorado-based money-management firm that held about 308,000 shares. "Opposing anything management supports is unusual," Bruni says.Buffett would take control of Clayton Homes, at the original offer of $12.50 per share, even as the S&P 500 rose 15% and the manufactured-housing industry had bottomed out, although it hasn't yet gone into recovery.

Just to be sure, after an August 6 ruling in Blount County allowed the deal to go forward, Clayton filed merger documents at the crack of dawn allowing it to delist the stock. "The filing was done carefully and consciously," says Goolsby, the Clayton attorney. The company knew that it would be incredibly difficult to re-verse a merger once the stock had stopped trading. A flurry of appeals and counterappeals by the Meat

Cutters and Clayton followed, leaving the merger in a legal no-man's land where the stock no longer traded, but Buffett hadn't paid the shareholders, either. Finally, on September 3, the appeals court ruled that there was "not a scintilla" of evidence of fraud that should keep the merger from being consummated. Said a jubilant Kevin Clayton in a statement: "I hope this puts a stop to the character assassination that has been all too common in this lawsuit." A final appeal failed, but the court did allow the plaintiffs to pursue a class-action suit to try to recover damages from the Claytons and the board. It's in process today.

Months after he had expected to, Buffett returned to Knoxville on October 14 to thank the 40 UT students who had visited him in Omaha the previous winter. In the University Center Ballroom, he gave a speech, then donned a mortarboard and pulled out a stack of leather binders. As he called the name of the students, he handed each a certificate that bestowed an honorary PhD "to this phenomenally hardworking deal maker in appreciation for your insights and advice in the Clayton Homes acquisition," signed by "Dean/Chairman Warren E. Buffett." Along with each diploma was one share of Class B Berkshire Hathaway stock, valued at about $2,700. For Professor Auxier, there was an even better prize: a Class A share, worth about $81,000. The students were thrilled, although Wright jokes that a proper finder's fee for the deal would have been more like 1%, or $17 million. And so ends the ballad of Clayton Homes--once again with a pleasing, homespun passage that seems to conceal a sour note. Was Clayton Homes sold for a fair price, or for a song?

Jennifer Reingold (jreingold@fastcompany.com) is a Fast Company senior writer.