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C A S E I N P O I N T
F
R U I T O F T H E
L
O O M
, 2 0 0 2
In 2002, Warren Buffett bought the core business (apparel) of
bankrupt Fruit of the Loom for $835 million in cash. With the
purchase, Berkshire acquired two strong assets:
an outstanding
manager and one of the country’s best-known and best-loved
brand names. It also acquired some $1.6 billion in debt, and a
bitter history of ill will among shareholders, suppliers, retailers,
and consumers.
The company that sells one-third of all men’s and boys’ un-
derwear in the United States started as a small Rhode Island mill
in 1851. Over the next century, it grew into the nation’s leading
maker of underwear and T-shirts. It could not, however,
escape
the economic struggles that increasingly threatened the apparel
industry, and in 1985 was snapped up by financier William Far-
ley, known for acquiring financially troubled companies.
Farley, often described as “f lashy” and “f lamboyant,”
guided the company through a few years of growth and then
into a disastrous decline. Everything seemed to go wrong. An
aggressive $900 million acquisitions program left the company
over-leveraged—long-term debt was 128 percent of common
shareholders’ equity in 1996—without providing the expected
rise in revenues. Suppliers went unpaid
and stopped shipping raw
materials. Farley moved 95 percent of manufacturing operations
offshore, closing more than a dozen U.S. plants and displacing
some 16,000 workers, only to find that the net result was serious
problems of quality control and on-time delivery. To counteract
the delivery snafus, he parceled out the manufacturing to con-
tract firms, adding enormous layers of overtime costs. He created
a holding company for Fruit of the Loom and moved its head-
quarters
to the Cayman Islands, avoiding U.S. taxes on foreign
sales but triggering a massive public relations headache.
The headache got worse when Farley, in a maneuver that is
now illegal, convinced his hand-picked board to guarantee a
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personal bank loan of $65 million in case he defaulted—which
he did. The board, which earlier had set his compensation at
nearly $20 million and repriced stock
options to signif icantly
favor key executives, then forgave $10 million of the loan.
In spite of the cost-cutting attempts, the company was
sinking deeper into the red. In 1999, Fruit of the Loom posted
losses of $576 million, seven times larger than analysts’ expec-
tations; and gross margins sagged to a paltry 2 percent, not
enough to cover the $100 million interest expense needed to
service its $1.4 billion debt. That
same year the Council of In-
stitutional Investors listed Fruit of the Loom as one of the na-
tion’s twenty most underperforming companies. Shareholders
cringed as the stock price plunged: From $44 a share in early
1997 to just over $1 by the end of 1999; in that one year, 1999,
the shares lost more than 90 percent of their value.
Few were surprised, therefore,
when the company filed for
Chapter 11 bankruptcy protection in December 1999. The com-
pany’s shares sank even lower, and by October 2001 were down
to $0.23.
So why would Warren Buffett be interested? Two reasons:
a very strong brand that offered growth potential under the
right management, and the arrival of a man on a white horse.
John B. Holland had been a highly respected executive
with Fruit of the Loom
for more than twenty years, including
several years as president and CEO, when he retired in 1996. In
2000, he was brought back as executive vice-president charged
with revamping operations.
Holland represents a perfect example of the management
qualities Buffett insists upon. Although publicly he remained
largely silent about Farley, beyond a brief reference to “poor
management,” Buffett has made no secret of his disdain for ex-
ecutives who bully their boards
into sweet compensation deals,
and boards that allow it. In contrast, he is enthusiastically vocal
about his admiration for Holland.
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