Taking Clayton Homes Private

Abstract

Warren Buffett took Clayton Homes, Inc., private in 2003 in what was called a “ballad-like” manner; however, the ballad quickly turned into controversy, making this acquisition one of Buffett’s toughest. The controversy predominantly centered on the deal’s price. As Buffett is a value investor, he invests in deals that present a margin of safety or discount from estimated value, and thus this controversy can be reframed for analytical purposes as an inquiry into the margin of safety, both in the context of this acquisition and conceptually. This article begins its own inquiry into this case by valuing Clayton Homes at the time of the deal using the modern Graham and Dodd approach. It then assesses the deal’s price and explains the fairness and sound economic logic of the margin of safety with respect to Clayton’s acquisition price as well as conceptually, which could prove useful to future private equity acquirers and targets alike.