Selling Your Business To Warren Buffett


#1

Kevin Clayton is the CEO of Clayton Homes, the largest factory built homebuilder in the United States. The company was purchased by Warren Buffett’s Berkshire Hathaway in 2003 for $1.7 billion. For nearly one hour, author Robert Miles interviews Kevin Clayton and covers all aspects of the business from getting started, to taking over from his father, and to selling to Warren Buffett. H/T to Gautam for bringing this wonderful interview to our attention.

We transcribed this video interview for members HERE. We have posted an excerpt of this transcript below the video.

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Robert Miles: You sold the business to Warren Buffet and it started after Warren was visited by students from the University of Tennessee. They gave him a book.

Kevin Clayton: Correct. He fortunately read the book and placed a call into us. He called my father and dad was out snow skiing. My dad retired in 1999 so this was late '02 or 2003. My dad passed the call along to me and what an honor it was to, of course, call Warren. We talked for several minutes and before I knew it, he became very interested in our company. I sent a small package to him. Of course, I’ve heard that story from other people. You send a small package to Warren and he lets you know very quickly what interest he has.

Robert Miles: Possibly for the first time in history, somebody’s been phoned by Warren Buffett and he didn’t call him back.

Kevin Clayton: That’s right.

Robert Miles: Your dad instead gave the phone call to you because you were managing the business.

Kevin Clayton: Correct.

Robert Miles: Pretty amazing. Even the Bank of England calls Warren, but your dad knew that you were running the business and let you handle the call.

Kevin Clayton: Yeah.

Robert Miles: Selling your business to Warren, you sent him a package of three years’ financials?

Kevin Clayton: No, it was very … Being a publicly traded company, we had a current road show, which is 15-20 slides. Basically that and then any public information, a very small package. As you’ve heard, Warren keeps up with almost every publicly traded company out there and all the connections and contacts he has, it didn’t take him long to size our company up.

Robert Miles: Why sell the business?

Kevin Clayton: At that time in our industry, financing … Many of our competitors had really tapped into this Wall Street asset backed securitization process and some of those people’s loan performances were terrible. The industry was plagued with foreclosures so we looked out, talked to the board, and ultimately the board came to a consensus. $12.50 a share was the best thing for our current shareholders.

Robert Miles: Which should be about a billion seven?

Kevin Clayton: That’s correct. We went through the process of getting a fairness opinion and looking at what other alternatives were out there and ultimately the board believes and it was in the shareholders’ best interest. Certainly history now since then has shown that was a very wise decision because financing has literally dried up and changed forever for this industry.

Robert Miles: Did it take you any time at all to realize that it would be a good thing to sell the business? Was there any hesitation on your part?

Kevin Clayton: Absolutely hesitation. My father and I worked all of our lives building the company, and we knew we were owned by shareholders. We had to have their interest at heart. Of course, my father owned I guess between the family and my father, there’s roughly 47% of the company so we had a strong vested interest into make sure that if we were going to sell the company to get as much for it as possible. Later as you know, the company was ultimately … We had Blackstone, Cerberus. A group of people came in to pay more and ultimately decided that it wasn’t worth more than $12.50. There again was another check to see … Ultimately, the board made the right decision.

Robert Miles: What has changed since you sold the business?

Kevin Clayton: I would tell you that nothing has changed. Certainly some things have and every one of those are absolutely wonderful positive changes. Of course, my life is much more fun now to not be begging for capital. We were needing over $1.2 billion in capital for mortgages each year. The cost of capital had continued to rise and rise. Not be doing that and not having the public company pressures has given us all more time to spend on the business. The best thing, of course, is that having capital in an industry has opened up many more opportunities for us.

I love to tell this story, and people don’t believe it, but we’ve made a lot of acquisitions over the last 24-36 months. Literally every time when I would talk to Warren he would say, Kevin, you and the team need to make that decision. Just rest assured you have plenty of capital to do so. It doesn’t get much better than that.

Robert Miles: It’s been rumored that when Warren makes an acquisition, he doesn’t visit. Some people think that he doesn’t do his due diligence because he doesn’t visit. What’s your take on … Is it true that he did not visit you before he acquired you?

Kevin Clayton: That’s exactly right. We sold the company. Of course my father being the chairman, having built this company, sold the company without ever talking to Warren or certainly Warren ever visiting us, we were fortunate enough to have him come afterwards. What a great experience that was. He’s so intelligent that it doesn’t take him long to do due diligence. He literally stays current, I think, with most companies out there in most industries. With all the contacts he has, he sized up our industry very quickly.

Robert Miles: How long did it take you to realize how much of a knowledge base Warren had about your particular industry?

Kevin Clayton: Instantly. I’ve never been around anybody that … For instance, he sized up our industry problems that you could write a book about easily, he sized it all up in one sentence. He says, Kevin, it seems like the problem with your industry is resale. Every part of our problem at that time in the industry stems right back to that. We’re doing a lot of things to address that now.

Robert Miles: Then on the time you sold the business, you had about $100 million in earnings and now about five times that?

Kevin Clayton: That’s right. We had definitely a triple back in I think '98 was our most profitable. We were 200 plus pre-tax and we looked to zero in on 500, north of 500 this year.

Robert Miles: Wow. Congratulations.

Kevin Clayton: Well thank you. Of course, Warren has invested billions of dollars in our company since he spent $1.7 billion. I take great pride in telling that story because here’s a company paid $1.7 billion for and within 12 months, he was investing north of $2-3 billion annually. Since the purchase, it’s north of $7 billion. The confidence and faith he has in our team and the faith he has in this industry is so obvious from that.

Robert Miles: Warren likes to say that he requires no meetings of you as a CEO. He requires no budgets. What is his standing order to you? What does he want you to do?
Kevin Clayton: Everything you just said is exactly true.

Robert Miles: No meetings?

Kevin Clayton: No. Once a year there’s an optional invitation. I was fortunate enough to get invited to come and actually be around the board at a recent board meeting. That just even gelled my thinking. The culture of Warren and what’s he’s created, I think, will go on a long, long time after Warren as well. Everything’s optional, and there’s nothing mandated whatsoever.

Robert Miles: You send financials monthly to headquarters.

Kevin Clayton: Correct.

Robert Miles: You call Warren whenever you would like to, but does he ever call you?
Kevin Clayton: Occasionally. It’s something he’s heard or has an inquiry about. There’s never directing the business.

Robert Miles: Warren doesn’t like to talk about synergy, but what have been some of the Warren Buffett effects or the Berkshire Hathaway effects of joining a large conglomerate?

Kevin Clayton: People find it hard to believe that we’re not mandated to buy Johns Manville insulation for our homes, MiTek gang nails, Shaw carpet. The list goes on and on. We’re not whatsoever. Circling back to what I said earlier, not making one of our businesses prop up another one, it’s the same philosophy. If we’re mandated to start buying those materials, they could not be as competitive as we could get on our own. Really, management would lose some accountability if Warren is dictating these things down. I think he’s very, very wise in the way that he does things.

Robert Miles: How would you manage the other CEOs?

Kevin Clayton: The same that Warren does, understanding that philosophy of there’s certain obviously … He says the right thing. It’s reputation, protect the company and the entities that we have, be as competitive as you possibly can be. Deepen and widen that moat every day, but not dictating down to managers how to accomplish the results that they need to because I genuinely believe they start losing accountability when you do that. It is real clear that if I mess this company up, if it gets messed up, it’s clearly my doing and not his.

Members can access the Full Transcript HERE.


Intelligent Fanatics June 2018 Digest
#2

I loved the story in the beginning when Warren Buffett called to talk to Kevin’s father, the founder of the company, and his father let Kevin talk to Buffett because Kevin was operating the business by that time. That simple gesture shows the honor and integrity of the family Buffett wanted to buy into.