Buffett's Generosity Benefits Both Charity, Berkshire Investors

With Bill and Melinda Gates looking on, Warren Buffett discusses his financial gift to the couple's charitable foundation. Buffett and the Gateses appeared at a donation ceremony yesterday at the New York Public Library.
With Bill and Melinda Gates looking on, Warren Buffett discusses his financial gift to the couple's charitable foundation. Buffett and the Gateses appeared at a donation ceremony yesterday at the New York Public Library. (By Spencer Platt -- Getty Images)
By Allan Sloan
Tuesday, June 27, 2006

We've known for decades that Warren Buffett is brilliant at investing money. And now we know that he's brilliant at giving it away, too.

Buffett, who runs the Berkshire Hathaway conglomerate (and sits on The Washington Post Co.'s board) has committed to donate Berkshire stock currently valued at about $30 billion to the Bill & Melinda Gates Foundation, and about $6 billion more to four Buffett family foundations. That's about 85 percent of his Berkshire stake, and is the biggest single gift ever announced by anyone.

I'm not dealing with the social aspects of Buffett's gift -- that's not my world. My world is finance, and any finance fan has to love the clever way that Buffett has set up his gift to take advantage of the Gates Foundation's expertise while simultaneously maximizing the gift's impact on the charitable world and minimizing the gift's downward pressure on Berkshire's stock price.

Stock price matters because Buffett has obligations to look after Berkshire shareholders' interests. In addition, Buffett's gift, which is being given away over a period of years, is 12.05 million Berkshire B shares rather than a fixed amount of money. The higher Berkshire's stock price is over time, the more his gift will be worth.

The way Buffett has joined up with the Gates Foundation is so . . . well, Buffettesque. The Gates Foundation, the world's biggest charity, has spent years establishing an infrastructure, which some call a bureaucracy, to be able to effectively give away huge amounts of money. Buffett will get what amounts to a free ride on that infrastructure.

Had Buffett started a foundation with $30 billion of Berkshire stock, it would be required by U.S. law to give away at least $1.5 billion a year. Giving that much money away isn't simple, as Bill and Melinda Gates have discovered over the years.

Buffett has committed to give 10 million shares of Berkshire B stock to the Gates Foundation, but not all at once. He's giving 5 percent of the gift each year.

This means that the Gates Foundation will get 500,000 Berkshire B shares this year, 475,000 next year (that's 5 percent of the 9.5 million shares left in the grant) and so on. In return, the Gates Foundation has promised to give away the value of Buffett's annual contribution in addition to distributing at least 5 percent of the value of its other assets.

The bottom line: Buffett is using the Gates Foundation to give away what a Warren Buffett Foundation would have to give away. But Buffett won't have to set up and monitor his own foundation.

To the stock price. Not to be morbid, but Buffett is 75 and not immortal. Some investors feared that when he died and gave most of his Berkshire shares to charity, the charities would have to sell large portions of the bequest quickly, which would clobber Berkshire's stock price.

The Gates foundation, however, won't have to run out and sell its 500,000 Berkshire shares the day it gets them. The foundation has $30 billion of other assets and can dispose of its Berkshire stock in small pieces (or even hold it for a year or two) and still make the required gifts. That minimizes downward pressure on the stock.

I can't speak about the four Buffett family foundations. But even if they sell every Berkshire share they get, we're looking at only 100,000 shares a year. The market should be able to absorb that.

Careful readers will note that I'm talking about Berkshire B shares, but Buffett doesn't own any of those. He owns 474,998 Berkshire A shares, each of which is convertible into 30 B shares.

Buffett will convert the appropriate number of A's into B's, then give the B's to the foundations. Among other things, that will keep Buffett firmly in control of Berkshire, because his voting stake (currently 38 percent) will drop much less rapidly than his ownership stake (32 percent). The reason: A Berkshire A share has 1 vote, while a B share has only 1/200th of a vote.

There's one final goody here: Standard & Poor's. Berkshire is the biggest publicly traded U.S. company not in the S&P 500 because there are so few shares outstanding (1.26 million A's and 8.4 million B's) and Buffett's stake is so large. With Buffett converting so many A shares to B shares, it's not hard to see S&P putting B shares on the 500 within a few years. That would require S&P 500 indexers, such as index mutual funds and many pension funds, to buy hefty amounts of B, helping support the stock price.

See? Buffett really knows does know how to profit while giving money away.

? Disclosures: I own a substantial stake in Berkshire through Newsweek's 401(k) plan, as do some of my colleagues. The Post Co. has a big stake in Berkshire, and Melinda Gates sits on The Post Co.'s board.

Sloan is Newsweek's Wall Street editor. His e-mail address issloan@panix.com.

© 2006 The Washington Post Company