The meeting with Buffett planted the seeds of mutual interest in an acquisition of Shaw Industries by Berkshire. Later that summer, the two made a deal. Berkshire acquired 80 percent of the company, with the Shaw and Saul families retaining the rest for several years—which Berkshire eventually acquired as well. At the time of Berkshire’s acquisition, Shaw Industries, with annual sales of $4 billion, was among Berkshire’s largest non-insurance businesses.30 It remains a stalwart, focusing on what it has always done best.31
If Shaw’s detour into branding and retailing taught lessons about sticking to one’s knitting, a final lesson concerns being modest in one’s capital structure. This lesson in corporate finance comes from Fruit of the Loom, Inc.
Two old textile companies are the roots of today’s Fruit of the Loom: Knight Brothers and the union Underwear Company.32 Knight Brothers was a New England family business dating to the mid-nineteenth century. In that era, clothing was typically sewn by hand at home using fabric bought from textile manufacturers. In 1851, Knight Brothers gave their fabric a homespun name, Fruit of the Loom, an innovation in branding decades before such marketing strategies became commonplace. (Some speculate that Fruit of the Loom was a play on the biblical phrase “fruit of the womb,” meaning children.33) In 1871, when the U.S. Patent and Trademark Office opened, the Knight Brothers were among the first of millions to register a trademark, Fruit of the Loom’s logo featuring an apple at the center of a fruit cluster.
By the early 1900s, competitors began manufacturing ready-made garments for homemakers eager to outfit families “off the rack” rather than continue to fashion homemade clothes. Knight Brothers shifted Fruit of the Loom’s market focus from homemakers to wholesale apparel manufacturers. In 1928, in another innovation, the company licensed the Fruit of the Loom brand to garment makers. Among these was the young Jacob (“Jack”) Goldfarb, who focused on the most popular style of low-priced men’s underwear of the period, called the “union suit.”34 Goldfarb bought a twenty-five-year license from Knight Brothers to use the Fruit of the Loom label.
Although only a licensee of the brand, Goldfarb took the unusual step of investing his own funds in consumer advertising for Fruit of the Loom.35 By the mid-1950s, union Underwear was Fruit of the Loom’s largest licensee by far. Thanks to Goldfarb’s efforts, consumers associated Fruit of the Loom almost entirely and instantly with underwear rather than fabric, though Fruit of the Loom continued to be a leading fabric seller. In a twist, therefore, the licensee had become bigger than the licensor.
In 1955, the Philadelphia & Reading Coal and Iron Co., which ran an ailing business looking to diversify, acquired union Underwear. In 1961, Philadelphia & Reading also acquired Fruit of the Loom Licensing Company, bringing licensor and licensee together under the same corporate roof. Goldberg retired in 1968, when Northwest Industries, a Chicago-based conglomerate, acquired Philadelphia & Reading. Despite such ownership changes, both Philadelphia & Reading and then Northwest let the company maintain the entrepreneurial spirit Goldfarb had infused.
union Underwear continued Goldfarb’s practice of branding through innovative advertising. To boost the Fruit of the Loom brand, it hired celebrities such as sportscaster Howard Cosell to feature in television commercials. An ad campaign of 1975 became a pop-culture sensation: three men dressed as elements of the brand, an apple, a leaf, and a grape bunch. The company bought the BVD trademark, an upscale brand, and expanded its own product lines to include blank T-shirts for customers to customize with silk-screen selections—a craze in the period.
By the 1980s, Northwest Industries had become a diversified conglomerate engaged not only in the underwear business but in such fields as car batteries, chemicals, liquors, railroads, steel turbines, and wines. The array drew the attention of leveraged buyout operators of the period—just as Scott Fetzer had attracted interest in 1986 from the likes of Ivan Boesky before Berkshire rescued it from his clutches.
In the 1980s, leveraged buyouts spread across corporate America. To acquire companies, operators borrowed funds secured by the target’s assets and repaid by steadily selling off many of those assets. In 1985, Northwest Industries was the subject of such an LBO, organized by one of the most famous leveraged buyout operators ever, William F. Farley—the fellow whose targeting of West Point-Pepperell delivered its carpet business into the hands of Shaw Industries.
The Northwest Industries LBO followed the playbook: large borrowings repaid by sales of the target company’s assets—except for union Underwear, which Farley renamed Fruit of the Loom in recognition of the brand’s value. Farley made a fortune in the process and then, in 1987, took Fruit of the Loom public. That move added to Farley’s payoff while hobbling Fruit of the Loom with considerable unpaid LBO debt.