Buffet's gift ripples across investing worlds

01:00 AM EDT on Sunday, July 9, 2006

The stock price of Berkshire Hathaway Inc. slipped after Warren Buffet's blockbuster decision to donate the bulk of his holdings to the Bill & Melinda Gates Foundation.

But the shares quickly regained their footing after Buffet said that while he plans to eventually give 85 percent of his stake in the company to charity, he has "no plan or desire to step down" as chairman and chief executive.

But what about the future of Berkshire Hathaway after Buffet, 75, starts to unwind his holdings, and eventually leaves the company?

Buffett's plan calls for him to start giving away more than $30 billion worth of Berkshire stock later this month, a process that will reduce the bulk of his total holdings by 5 percent each year for the rest of his life. The gift will gradually erode Berkshire's dual-share structure and make the Gates Foundation, not Buffett, the company's largest single shareholder.

It also raises the possibility that an accelerated sale of shares by the foundation could put pressure on the stock price.

But Buffett has told investors to "reasonably expect" the value of their shares to rise. And the move allows him to focus on Berkshire rather than on building a new charity.

Class A shares of Berkshire closed Friday $90,200, down $50. Some Wall Street investors suggested that the announcement might initially have prompted fears about Buffett's own mortality, despite Berkshire's succession plans. Others were pleased that the plan would mean Buffett could devote more time to overseeing the company and would secure Gates' service as a director on the Berkshire board.

A broader ownership base might increase the stock's liquidity and pave the way for Berkshire's inclusion in the Standard and Poor's 500-stock index, further enhancing interest in the stock.

"I think it is actually a long-term positive for Berkshire Hathaway shares," said Tom Kersting, an analyst with the Edward Jones investment advisory firm. "It eliminates the uncertainty of what happens to Buffett's shares and provides an orderly plan for their distribution."

He added: "Short term, it could cause some pressure on the stock over concern that the Gates Foundation will potentially liquidate" some of the shares it receives.

According to a letter from Buffett to the Gates Foundation, Buffett will convert the bulk of his Class A shares into 10 million Class B shares that will be earmarked for the foundation. Starting this month, he will give away 5 percent of the balance of those shares for the rest of his life. Should he die before all the shares are distributed, the foundation will receive the remaining shares.

Tax experts said the charitable gift essentially provides $30 billion in income tax credits -- something that Buffett is unlikely to use in his lifetime. It will also allow him to avoid about $4.5 billion in capital-gains tax. And giving away the shares will also help avoid taxes on his estate. Estate-planning experts called it a simple and pragmatic approach, true to form for Buffett.

Yet the donation is a somewhat unusual capstone for a man who has promoted the benefits of diversification through much of his professional career.

Buffett, perhaps the world's most admired investor, applied that strategy to Berkshire Hathaway, transforming it from a small textiles and insurance company in the 1960s into a holding company for businesses such as NetJets, Dairy Queen, MidAmerican Energy and Geico, as well as large investments in Coca-Cola and Wells Fargo.

But in his philanthropic life, Buffett appears to be emphasizing the benefits of concentration. He is placing billions of dollars of stock with the Gates Foundation, where he will serve as a trustee alongside his longtime friends and fellow billionaires, Bill and Melinda Gates.

The donation will clearly enhance the charity's annual giving, but it also poses the risk of placing too many eggs in the basket of a single stock. The W.K. Kellogg Foundation, which had the bulk of its endowment in Kellogg Co. shares, suffered in the late 1990s when the company's shares faltered. And the David and Lucile Packard Foundation's decision to keep nearly all of its assets in Hewlett-Packard stock proved costly when the foundation's assets plummeted to $6 billion at the end of 2001, from $18 billion, after the stock was battered in the wake of a merger with Compaq Computer.

"They were so concentrated in a single stock and it really threw the foundation into turmoil," said Mark R. Kramer, managing director at FSG Social Impact Advisors, a nonprofit consulting group that has advised many large charities, including the Gates Foundation.

The Gates trustees may, over time, have concerns about having half their funds in a single stock, especially after watching the price of Microsoft shares fall. "Certainly they diversified their Microsoft shares as soon as they got them," Kramer added.

Yet Buffett's holdings will not be the only source of the Gates Foundation's liquidity, giving it the flexibility to determine the pace at which any Berkshire shares might be sold. And Buffett's letter appeared to be carefully worded to assuage investor fears of a major selloff.

"I believe that you can reasonably expect the value of Berkshire shares to increase, in an irregular manner, by an amount that more than compensates for the decline in the number of shares that will be distributed," Buffett wrote. "I regard Berkshire as an ideal asset to underpin the long-term well-being of a foundation."

Estate planners, meanwhile, said that Buffett's method of donating his fortune could be an inspiration to investors, just as his stock-picking philosophy was in helping them build their wealth.

"It's a great model of simple, efficient tax planning," said Howard Zaritsky, an estate planning lawyer at the Pitcairn Financial Group in Vienna, Va., and the author of several tax planning books. "People are always looking for the complicated loophole. The simplest way to save taxes is to take something that has grossly gone up in value and give it to charity."

He added, "Frankly, other people who have somewhat less than Warren Buffett should look very closely at what he is doing."

With reports from The Wall Street Journal and The New York Times