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 this 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. We begin our own inquiry into this case by valuing Clayton Homes at the time of this deal using the modern Graham and Dodd approach. We then assess this deal’s price and explain the fairness of, 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.

Keywords: Private equity, acquisition, valuation

JEL Classification: G23, G34