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Wednesday, June 30, 2010

BUSINESSWEEK: Berkshire Is a ‘Buy’ Amid Economic Recovery, Goldman Sachs Says

By Hugh Son

June 29, 2010, 2:15 PM EDT

June 29 (Bloomberg) -- Berkshire Hathaway Inc., the firm run by billionaire Warren Buffett, is a “buy” because its earnings will grow as the U.S. economy recovers, Goldman Sachs Group Inc. said.

Berkshire, which owns railroad Burlington Northern Santa Fe and auto insurer Geico Corp. and has stakes in firms including credit-card lender American Express Co., may rise about 25 percent in 12 months, analysts led by Christopher Neczypor said today in a research note. The note initiated coverage in the Omaha, Nebraska-based company.

“The non-insurance entities are tied to GDP growth and to a lesser extent, industrial production,” Neczypor wrote. “As the economy continues to emerge from its cyclical downturn, we would expect earnings to grow at a faster rate than what appears to be currently discounted in the stock.”

Buffett, the 79-year-old chairman of Berkshire, executed takeovers and stock picks to transform his firm over four decades from a failing textile mill into a seller of bricks, electric power and hurricane insurance with a market value of almost $200 billion. He called his $27 billion purchase of Burlington Northern, completed in February, an “all-in wager” on the U.S. economy.

“Post the acquisition of Burlington Northern, we estimate close to half of Berkshire’s intrinsic value will be derived from operating entities, as opposed to securities investments,” Neczypor wrote. This “reduces the long-term reliance on senior management’s equity investing decisions, and provides greater clarity into the source of future value for the company.”

Berkshire’s Class A shares declined $688 to $120,512 at 1:57 p.m. today in New York Stock Exchange composite trading, and have risen more than 21 percent this year.

--Editors: Dan Reichl, Dan Kraut

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Tuesday, June 29, 2010

BUSINESSWEEK: BYD Dreams of Electric Cars

China-based BYD wants to be the first to deliver a mass-produced, electric-powered, plug-in vehicle. It might just do it, too

For years, industry watchers have been betting on which company would produce the first reliable, plug-in, electric-powered car. Most experts assumed it would be whichever auto manufacturer first developed a battery powerful enough to run its cars. Would it be General Motors and its Chevy Volt? Or maybe Tesla Motors' Model S?

As it turns out, the pundits may have gotten things backwards. If all goes according to plan, battery-maker BYD could be the first company to deliver a mass-produced, electric-powered, plug-in vehicle, ahead of Detroit, Stuttgart, or Tokyo.

If you don't know the company, open the back of your mobile phone. Chances are the battery powering the device was produced by BYD, a 15-year-old company based in Shenzhen, China. Today, BYD is the leading supplier of batteries to Nokia (NOK), Samsung, and Motorola (MOT). Now it wants to be the leading supplier of power plants for a family of sedans, subcompacts, and sports coupes that will bear its name. Already BYD has attracted quite a following. Among those interested in the company: Warren Buffett, who plunked down more than $200 million to buy 10 percent of BYD in 2008.

Why would BYD be interested in the auto industry? Opportunity. The market for cars is on the cusp of an immense transition—from gas guzzlers to fuel-efficient and environmentally friendly vehicles. BYD senses a once-in-a-lifetime chance to shake up the established world order. Company leaders believe that newcomers have as good a shot at capturing the market as the incumbents. And what an opportunity it could be: According to various estimates, the worldwide market for electric vehicles could be as large as 10 million cars per year by 2016. That's more than 12 percent of the global market for automobiles. "It's almost hopeless for a latecomer like us to compete with GM and other established automakers with a century of experience in gasoline engines," says BYD's ambitious founder and chairman, Wang Chuanfu. "With electric vehicles, we're all at the same starting line."

An Especially Difficult Leap

To get to that starting line, Wang had to embrace a completely new business model to complement its existing model, something nearly impossible for most companies. To make the leap from invisible components to branded products, BYD had to develop a new workforce, create a consumer brand, ramp up government relations to engage national safety commissions, and create an entirely new supply chain. Any one of these can bury a company looking to augment its business model. And for good reason: These are extremely difficult challenges to overcome, all the more so in mature industries.

Despite the difficulty, some companies persevere. They do so because they believe new business models are the key to enormous value in the form of access to new markets, customers, investment capital, and profits. Take Disney (DIS): Within the Magic Kingdom are theme parks, television networks, cruise ships, merchandising operations, and film studios, among other interests. Although they have different financial models, success metrics, and fundamentals, they nonetheless provide Disney an unrivaled footprint in entertainment.

Most companies never achieve anything close to this level of diversification. But even big companies with broad portfolios need to remain attuned to the importance of business model innovation. Multiple business models provide a company a buffer against downturns in any one sector and an extra lift when times are good. They provide entry into adjacent markets and thus expand a company's opportunity and preserve its longevity should one of its revenue streams come under threat from increased competition, regulatory changes, or even internal challenges.

This is an edited extract from Inder Sidhu's new book, Doing Both: How Cisco Captures Today's Profit and Drives Tomorrow's Growth (FT Press, June 2010).

Inder Sidhu is senior vice president of strategy and planning for worldwide operations at Cisco. His book, Doing Both: How Cisco Captures Today's Profit and Drives Tomorrow's Growth, was published by FT Press in June 2010. Sidhu is on Twitter: @indersidhu.

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Saturday, June 26, 2010

FORBES: If Buffett Likes Tesco, Should You?

George Anderson, RetailWire, 06.25.10, 03:00 PM EDT

The British retailer gets a slap on the back from Berkshire. Retail industry insiders weigh in on Tesco's expansion plans.

Warren Buffett doesn't mind buying British. This week his Berkshire Hathaway announced that it has raised its stake in retailer Tesco just above the 3% mark as a show of confidence. It's hardly a controlling interest, but it is at least a sign that the world's third-richest man (and arguably its best-ever investor) thinks Tesco has value.

Vying with Germany's Metro AG in recent years for the No. 3 ranking among global retailers, U.K.-based Tesco ( TESO - news - people ) is testing U.S. waters with its small-format Fresh & Easy grocery chain.

Before Tesco opened its first Fresh & Easy Neighborhood Market, there were plenty of people willing to predict it would rewrite the rules of retailing in the U.S. When the company hit some bumps in the road, there were just as many or more willing to claim it was just another British venture that wouldn't make it in the States.

Elsewhere Tesco has proved its ability to adapt to local markets--from the Czech Republic to China--with more than 4,800 stores worldwide. And life has been good, even throughout the recession. The chain delivered record profits last year, with a pretax jump of more than 10% to 3.4 billion pounds. According to the U.K.'s Guardian, Tesco will soon be adding 16,000 positions to its worldwide payroll of approximately 472,000.

Tesco's entry into the U.S. market in the fall of 2007 was met with a high degree of nervous anticipation from potential competitors as diverse as local convenience store chains and Wal-Mart Stores ( WMT - news - people ). However, the rollout of Fresh & Easy Neighborhood markets fell somewhat flat. And once the recession hit, Tesco slowed its pace, limiting store openings to Southern California, Nevada and Arizona.

While there is little question Fresh & Easy has faced challenges, company executives believe the right steps are being taken to help it achieve its top- and bottom-line goals. Just this week the chain announced it will acquire 2 Sisters Food Group and Wild Rocket Foods, suppliers that will cohabitate with its own California distribution facility to beef up its fresh food and meals-to-go sourcing.

The chain, which now operates 159 stores and is on schedule to open roughly one per week, is continuing to focus on putting its stores in locations where locals need them. Fresh & Easy is looking to Northern California as its next market for expansion.

"People are really looking for a good opportunity to do shopping right in their neighborhoods, right by where they live--fresh food at low prices, an easy shopping experience," Brendan Wonnacott, communications director for Fresh & Easy, told RetailWire.

Among the communities where Fresh & Easy is looking to open are so-called food deserts that others have avoided due to high crime rates and other factors.

"We had our job fair for the South LA store earlier this year. We had hundreds of people show up. We are just now coming up on our hundred-day anniversary of the store opening and we've really seen it's changed the lives of many folks that live around that store," said Wonnacott. "What we see is that people want access, that they want to be able to buy fresh produce, meats, eggs and cheese. And those are indeed the top-selling products in those stores, and we've been very excited about the performance of those stores across the board."

Location and a smaller footprint, according to Wonnacott, give its stores an edge.

"Our stores are about 30% more energy-efficient than a traditional supermarket of similar size, so we spend less on energy and we are able to keep our prices low because of that," he told RetailWire. "Another bit that's important for us is where we are located. We have access to an immense amount of great products here, and depending on season as much as 70% of our produce comes from the states we operate in."

In an online RetailWire poll, 56%t of respondents said they feel at least "somewhat more confident" in Tesco's ability to succeed with the chain than earlier in its rollout, while 24% have not changed their opinions. The lingering skepticism expressed by RetailWire's BrainTrust of industry experts was based typically on Tesco's penchant for shoehorning its methodology into U.S. market conditions.

"They don't have a chance," said Ryan Mathews, CEO of Black Monk Consulting, "until they rethink their supply chain model and the kinds of merchandising decisions it drives. It isn't size that's the problem; it's what's going on inside the four walls in terms of selection."

"When we first heard that Tesco was entering the U.S., I expected it would be with their proven Fresh Express concept," wrote convenience store expert Steven Montgomery. "Instead they elected to enter the market with a format that was neither convenience store nor supermarket. It was much more a superette/Whole Foods hybrid."

As for the Fresh & Easy's food desert strategy: "There is a reason the supermarkets have avoided this market," Montgomery says. "The operational challenges outweigh the profits. With its product mix and pricing strategy, it will be very interesting to see if Fresh & Easy can sustain these operations."

And yet another saw marketing savvy and perhaps something admirable in Tesco's inner-city approach.

"The food choices and prices available to what is politely called the 'underserved markets' are a national disgrace," wrote Bill Emerson, President, Emerson Advisers. "The reality is that these are largely land-locked communities where the only alternative to fresh, wholesome food involves a long ride on public transportation.

"Are these markets complex to operate in? You bet. Is there enough disposable income available to make them profitable? Yes, if the offering fits the market. Does the local community appreciate and reward the presence of retail choices that the suburban shopper takes for granted? More than you can imagine."

James Tenser of VSN Strategies is also a fan of Fresh & Easy, but questions "some of its particulars."

"The stores are designed to support a highly efficient distribution mechanism," said Tenser, "with pallet-deep gondola shelving providing space for a high level of stock-on-hand. They have a compact footprint with no food prep on premises. Everything--including packaged produce, prepared foods, ready-to-cook entrees and baked goods--arrives shelf-ready from the distribution center."

However, Tenser believes the format's reliance on high merchandise turnover presents limitations. "In stores with high foot traffic," he observed, "the appearance of fresh foods on display was quite attractive. In less busy locations, produce often looked tired beneath the plastic film, and some entrees looked downright toxic."

Overall, however, few commentators were willing to write off a competitor such as Tesco just yet.

"Tesco has a great opportunity to get in with an advantaged cost structure in this market environment," commented Jonathan Marek, senior vice president, APT. "I'm sure the rents they're seeing pale in comparison to U.K. rents. They've got a massive pool of potential employees seeking jobs. Tesco has a real 'grind away at it' mentality that serves retailers very well."

Tenser was so bold as to suggest Tesco is simply being patient while American consumers catch up to its better way of doing things.

"For U.S. supermarketers who have carpeted suburbia with oversized, over-assorted stores with vast parking lots," wrote Tenser, "the Fresh & Easy concept may seem very foreign indeed. Its success depends in part upon shoppers' willingness to adapt. I believe that's a key reason why adoption has been slower than Tesco anticipated."

RetailWire's interview with Brendan Wonnacott of Fresh & Easy, along with other retailer interviews, are available on its Facebook page

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TELEGRAPH.CO.UK: Warren Buffett raises Tesco stake in sign of support for new chief

Warren Buffett, the 'Sage of Omaha', has upped his stake in Tesco, in a tacit sign that he supports the supermarket retailer's succession plans.

By James Quinn, US Business Editor

Tesco

Mr Buffett's Berkshire Hathaway investment conglomerate raised its stake in Tesco to 3.02pc, following a recent share purchase.

A disclosure to the London Stock Exchange by Berkshire disclosed that it recently bought 1.85m shares, taking its total holding to 242m shares.

Tesco shares rose 3½ to 400.8p on the news that the world's third richest man – Forbes estimates Mr Buffett's fortune to be $47bn – has faith in the company's strategy.

The increase comes just two weeks after Sir Terry Leahy announced plans to step down in March next year, to be replaced by Phil Clarke, the retailer's international chief, in one of smoothest succession plans seen at a FTSE100 company in some time.

Although the regulatory statement did not contain any comment by Berkshire or Mr Buffett, it is thought that he must approve of the supermarket group's strategy and must also feel that Tesco's shares are undervalued in order to top up his holding.

Berkshire first appeared on Tesco's share register in May 2006, when it took a 1pc stake, and has been increasing it gradually since then.

Although perhaps better known for his investment in the insurance and financial services sector – not least the canny bets he made on Goldman and General Electric during the financial crisis – Mr Buffett has a quite the passion for retailers and consumer-focussed companies.

One of the companies he holds dearest to his heart is Coca-Cola - maker of his beloved Cherry Coke – which is Berkshire's single largest investment.

Berkshire also controls Dairy Queen, the iconic American ice cream chain of whose low-cost desserts Mr Buffett is a regular indulgee.

Other consumer investments include Kraft, the chief executive of which Mr Buffett lambasted at Berkshire's annual meeting in May for pulling off a "dumb deal" in buying Cadbury, the British confectioner.

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Friday, June 25, 2010

REUTERS: Warren Buffett lifts stake in UK grocer Tesco

June 24 2010 (Reuters) - U.S. investor Warren Buffett has raised his stake in British supermarket group Tesco (TSCO.L) to over 3 percent, according to a regulatory filing published on Thursday.

Buffett's investment firm Berkshire Hathaway (BRKa.N) has bought around 2 million shares in the world's third biggest retailer to take its stake to 242 million, or 3.02 percent of the total, the filing showed.

At 1025 GMT Tesco's shares were up 1.4 percent at 401.85 pence, among the top risers in the UK's FTSE-100 index .FTSE. (Reporting by Mark Potter; Editing by Greg Mahlich)


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Tuesday, June 22, 2010

BUSINESSWEEK: Buffett Wins World Cup Bet as France Falls to Host

By Andrew Frye and Hugh Son

June 22 (Bloomberg) -- Warren Buffett won his bet against France in the World Cup when the 1998 champion was eliminated by South Africa.

France fell 2-1 to the host nation today, after drawing Uruguay and dropping 2-0 to Mexico. Berkshire Hathaway Inc. had sold insurance requiring the Omaha-based company to pay a client if France won the tournament, Buffett told CNBC in March.

“I think we’re going to lose 30 million bucks or something like that” if France wins, Buffett, Berkshire’s 79-year-old chief executive officer, said at the time. He didn’t say who purchased the coverage. An assistant to Buffett had no immediate comment.

Ajit Jain, who runs one of Berkshire’s insurance units, sold the contract, Buffett told the business news channel in March. Berkshire has previously guaranteed against the potential cancellation of a college basketball tournament and a possible payout of $1 billion in a contest sponsored by PepsiCo Inc. The firm also sells coverage on natural disasters.

“The odds of any one team out of 32 winning is very small, so you could determine the odds and see what the payoff would be,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “From a numerical standpoint, it was probably in his favor to take this bet. I’m sure he’ll smile when he sees the results.”

Martin said Buffett’s client could be any business that expected to lose money with a French victory. Jordan’s Furniture, a Massachusetts-based chain owned by Berkshire, reimbursed about 30,000 customers for purchases after the Boston Red Sox won baseball’s World Series in 2007. The firm had an insurance policy to cover costs of the promotion, CEO Eliot Tatelman said at the time.

Jain, who runs a Berkshire reinsurance business, “is known as the man to call when something both very large and unusual needs to be insured,” Buffett said in his annual letter to shareholders released Feb. 27.

--Editors: Dan Kraut, William Ahearn


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INDIA COMPANY NEWS: Buffett makes modest entry into insurance business in India

by Manajit Pal on June 21st 2010 and filled under Insurance

21 Jun 2010, 0532 hrs IST,Mayur Shetty,ET Bureau

MUMBAI: Warren Buffett’s entry into the Indian insurance market is not happening through a big bang takeover of a company or acquisition of a strategic stake in a private firm. Instead Berkshire Hathaway, the company promoted by the world’s most famous investor, is making a modest entry into the Indian insurance market through a corporate agency.

Berkshire Hathaway will set up a wholly-owned subsidiary in India, which will acquire a corporate agency licence from Irda to sell auto insurance policies from Bajaj Allianz General Insurance. The subsidiary will sell motor insurance online and make investments of close to Rs 50 crore to set up a support structure, including a call centre. Sources close to Irda confirmed the development. A spokesperson for Bajaj Allianz General Insurance refused to comment on the issue.

The decision to get a corporate agency was taken by Ajit Jain who heads Berkshire Hathaway’s reinsurance businesses and is regarded as a possible successor to Warren Buffet. Mr Jain is a regular visitor to India and his company has been underwriting reinsurance contracts of Indian companies for years. Although Berkshire itself is a reinsurance company, it has significant interests in direct insurance.

US direct insurer Geico (formerly Government Employees Insurance Company) is a wholly-owned subsidiary of Berkshire. Geico’s speciality is that it sells covers or insurance policies either through the internet or the telephone. Considering the high cost of distribution in retail, Geico is able to generate substantial savings by selling online and pass on the savings to buyers in the form of discounts. The company’s tagline in all its advertisement is — 15 minutes can save you 15%.

According to sources, Berkshire is using this route because the low foreign direct investment limits in all other insurance business make it unattractive to the US giant. Whether it is life or general insurance or even insurance broking, current regulations do not permit foreign investors to hold more than 26% equity stake in the business.
Corporate agency is, however, an exception. Under current regulations, any entity, including a foreign bank or any foreign-owned finance company can become an insurance agent by acquiring a corporate licence.

A corporate agency, however, has its limitations. For one, every individual selling insurance in a corporate agency firm has to undergo training. Secondly, the agency can sell products for only one company. A corporate agency can, however, look forward to decent margins with commissions going up to 15% of the premium amount.

In the past, Buffett has been extremely bullish about the direct marketing insurer. In his 2009 letter to shareholders, Buffet said: “As we view Geico’s current opportunities, Tony (Geico chief Tony Nicely) and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.”

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Thursday, June 17, 2010

FORTUNE: The $600 billion challenge

16 June 2010

Bill Gates, Melinda Gates, and Warren Buffett are asking the nation's billionaires to pledge to give at least half their net worth to charity, in their lifetimes or at death. If their campaign succeeds, it could change the face of philanthropy.

Warren Buffett and Bill Gates figuring out how to get billionaires   to give half.

Flying cross-country in March, Bill Gates stopped in Omaha to lunch near the airport with Warren Buffett at a Hollywood Diner, giving it a small place in history as one venue where the two made plans for their drive to boost giving. Buffett paid for lunch. Click on the photo for more pictures.

By Carol J. Loomis, senior editor-at-large

FORTUNE -- Just over a year ago, in May 2009, word leaked to the press that the two richest men in America, Bill Gates and Warren Buffett, had organized and presided over a confidential dinner meeting of billionaires in New York City. David Rockefeller was said to have been a host, Mayor Michael Bloomberg and Oprah Winfrey to have been among those attending, and philanthropy to have been the main subject.

Pushed by the press to explain, Buffett and Gates declined. But that certainly didn't dim the media's interest in reaching for descriptions of the meeting: The Chronicle of Philanthropy called it "unprecedented"; both ABC News and the Houston Chronicle went for "clandestine"; a New York magazine parody gleefully imagined George Soros to have been starstruck in the presence of Oprah. One radio broadcaster painted a dark picture: "Ladies and gentlemen, there's mischief afoot and it does not bode well for the rest of us." No, no, rebutted the former CEO of the Bill & Melinda Gates Foundation, Patty Stonesifer, who had been at the meeting and had reluctantly emerged to combat the rumors. The event, she told the Seattle Times, was simply a group of friends and colleagues "discussing ideas" about philanthropy.

And so it was. But that discussion -- to be fully described for the first time in this article -- has the potential to dramatically change the philanthropic behavior of Americans, inducing them to step up the amounts they give. With that dinner meeting, Gates and Buffett started what can be called the biggest fundraising drive in history. They'd welcome donors of any kind. But their direct target is billionaires, whom the two men wish to see greatly raise the amounts they give to charities, of any and all kinds. That wish was not mathematically framed at the time of the New York meeting. But as two other U.S. dinners were held (though not leaked), Buffett and Gates and his wife, Melinda, set the goal: They are driving to get the super-rich, starting with the Forbes list of the 400 wealthiest Americans, to pledge -- literally pledge -- at least 50% of their net worth to charity during their lifetimes or at death.

Without a doubt, that plan could create a colossal jump in the dollars going to philanthropy, though of what size is a puzzle we'll get to. To begin with, a word about this article you are reading. It is the first public disclosure of what Buffett and Melinda and Bill Gates are trying to do. Over the past couple of months Fortune has interviewed the three principals as the project has unfolded, as well as a group of billionaires who have signed up to add their names to the Gates/Buffett campaign.

In a sense this article is also an echo of two other Fortune stories, both featuring Buffett on the cover. The first, published in 1986, was "Should you leave it all to the children?" To that query, Buffett emphatically said no. The second article, "Warren Buffett gives it away," which appeared in 2006, disclosed Buffett's intention to gradually give away his Berkshire Hathaway (BRK.A) fortune to five foundations, chief among them the world's largest, the Bill & Melinda Gates Foundation. (For Buffett's thinking on the disposition of his wealth, see "My philanthropic pledge.")

Since then, in four years of contributions, Buffett has given the foundation $6.4 billion, not counting the 2010 gift, to be made this summer. The foundation in turn has in that same period combined Buffett's money and its immense gifts from the Gateses to raise its level of giving to about $3 billion a year, much of it for world health. One small example: the Medicines for Malaria Venture, heavily funded by the Gates Foundation, has worked with pharmaceutical company Novartis (NVS) to develop good-tasting malaria pills and distribute them to millions of children -- the principal victims of the disease -- in 24 countries.

Another fact about the 2006 Buffett article is that it was written by yours truly, Carol Loomis, a senior editor-at-large of Fortune. Besides that, I am a longtime friend of Buffett's and editor of his annual letter to Berkshire's shareholders. Through him, my husband, John Loomis, and I have also come to know Melinda and Bill Gates socially. The Loomis team has even occasionally played bridge against Warren and Bill.

LOOK WHO  CAME TO DINNER

LOOK WHO CAME TO DINNER: The crowd at the inaugural event added up to a list that would make any charity – or any conspiracy theorist – swoon. Left to right: Bill Gates, Oprah Winfrey, Warren Buffett, Eli and Edythe Broad, Ted Turner, David Rockefeller, Chuck Feeney, Michael Bloomberg, George Soros, Julian Robertson, John and Tashia Morgridge, Pete Peterson

All that said, the question of what philanthropy might gain from the Gates/Buffett drive rests, at its outset, on a mystery: what the wealthiest Americans are giving now. Most of them aren't telling, and outsiders can't pierce the veil. For that matter, the Forbes 400 list, while a valiant try, is a best-guess estimate both as to the cast of characters and as to their net worth. (Buffett says he knows of two Berkshire shareholders who should be on the list but have been missed.) As Bill Gates sums it up, "The list is imprecise."

Those qualifiers noted, the magazine stated the 2009 net worth of the Forbes 400 to be around $1.2 trillion. So if those 400 were to give 50% of that net worth away during their lifetimes or at death, that would be $600 billion. You can think of that colossal amount as what the Buffett and Gates team is stalking -- at a minimum.

Leaving aside the Forbes 400 and looking simply at Internal Revenue Service data for both annual giving and estate taxes, we can piece together a picture of how far the very rich might be from a figure like that $600 billion. Start with an admirable fact about Americans as a whole: The U.S. outdoes all other countries in philanthropic generosity, annually giving in the neighborhood of $300 billion.

Some of that gets reported as charitable deductions on the tax filings made by individuals. But taxpayers at low income levels don't tend to itemize, taking the standard deduction instead. At higher income levels, charitable gift data begin to mean something. To take one example for 2007 (the latest data available), the 18,394 individual taxpayers having adjusted gross income of $10 million or more reported charitable gifts equal to about $32.8 billion, or 5.84% of their $562 billion in income.

And billionaires? Here, the best picture -- though it's flawed -- emerges from statistics that the IRS has for almost two decades been releasing on each year's 400 largest individual taxpayers, a changing universe obviously. The decision of the government to track this particular number of citizens may or may not have been spurred by the annual publication of the Forbes list. In any case, the two 400 batches, though surely overlapping, cannot be identical -- for one reason because the IRS data deal with income, not net worth.

The IRS facts for 2007 show that the 400 biggest taxpayers had a total adjusted income of $138 billion, and just over $11 billion was taken as a charitable deduction, a proportion of about 8%. The amount deducted, we need quickly to add, must be adjusted upward because it would have been limited for certain gifts, among them very large ones such as Buffett's $1.8 billion donation that year to the Gates Foundation. Even so, it is hard to imagine the $11 billion rising, by any means, to more than $15 billion. If we accept $15 billion as a reasonable estimate, that would mean that the 400 biggest taxpayers gave 11% of their income to charity -- just a bit more than tithing.

Is it possible that annual giving misses the bigger picture? One could imagine that the very rich build their net worth during their lifetimes and then put large charitable bequests into their wills. Estate tax data, unfortunately, make hash of that scenario, as 2008 statistics show. The number of taxpayers making estate tax filings that year was 38,000, and these filers had gross estates totaling $229 billion. Four-fifths of those taxpayers made no charitable bequests at death. The 7,214 who did make bequests gave $28 billion. And that's only 12% of the $229 billion gross estate value posted by the entire 38,000.

All told, the data suggest that there is a huge gap between what the very rich are giving now and what the Gateses and Buffett would like to suggest is appropriate -- that 50%, or better, of net worth. The question is how many people of wealth will buy their argument.

Buffett, Gates, and Gates -- who have a combined net worth of around $100 billion -- have already committed most of their money to charity.

The seminal event in this campaign was that billionaires' gathering in May 2009 -- the First Supper, if you will. The Gateses credit Buffett with the basic idea: that a small group of dedicated philanthropists be somehow assembled to discuss strategies for spreading the gospel to others. The Gateses proceeded to arrange the event. Bill Gates says, with a grin, "If you had to depend on Warren to organize this dinner, it might never have happened." In his office, meanwhile, Buffett scrawled out a name for a new file, "Great Givers."

The first item filed was a copy of a March 4 letter that Buffett and Gates sent to the patriarch of philanthropy, David Rockefeller, to ask that he host the meeting. Rockefeller, now 95, told Fortune that the request was "a surprise but a pleasure." As a site for the event, he picked the elegant and very private President's House at Rockefeller University in New York City, whose board he has been on for 70 years. He also tapped his son David Jr., 68, to go with him to the meeting.

The event was scheduled for 3 p.m. on Tuesday, May 5 -- a day urgently desired by Bill Gates, who wanted to fit the meeting into a short U.S. break he'd be taking from a three-month European stay with his family. Because Melinda elected to remain in Europe with their three children, she did not attend the first dinner, but lined herself up for any that followed. (The Gateses have considered this campaign to be a personal matter for them, not in any way a project of the Gates Foundation.)

Melinda also insisted from the start that both husbands and wives be invited to the dinners, sure that both would be important to any discussion. Her reasoning: "Even if he's the one that made the money, she's going to be a real gatekeeper. And she's got to go along with any philanthropic plan, because it affects her and it affects their kids."

The letter of invitation, dated March 24, went to more people than could come. But the hosts and guests who arrived on May 5 certainly had enough economic tickets to be there: a combined net worth of maybe $130 billion and a serious history of having depleted that amount by giving money to charity. Leaving aside the semi-observers, Patty Stonesifer and David Rockefeller Jr., there were 14 people present, starting with the senior Rockefeller, Buffett, and Gates. The local guests included Mayor Bloomberg; three Wall Streeters, "Pete" Peterson, Julian Robertson, and George Soros; and Charles "Chuck" Feeney, who made his money as a major owner of Duty Free Shoppers and has so far given away $5 billion through his foundations, called Atlantic Philanthropies. When Feeney was dropped from the Forbes 400 in 1997, the magazine explained his departure in words not often hauled out for use: "Gave bulk of holdings to charity."

The out-of-towners included Oprah, Ted Turner, and two California couples, Los Angeles philanthropists Eli and Edythe Broad, and Silicon Valley's John and Tashia Morgridge, whose fortune came from Cisco Systems (CSCO). Both the Broads and the Morgridges had equivocated over whether to accept the invitation, regarding the trip as an inconvenience. But there were the signatures at the bottom of the letter -- from left to right, Rockefeller, Gates, Buffett. "Impressive," Eli Broad thought.

So on the appointed day the Broads found themselves seated with everyone else around a big conference table, wondering what came next. They mainly got that message from Buffett, whose quick sense of humor left him playing, says David Rockefeller Jr., "the enlivener role." He remembers Buffett as keeping the event from being "too somber" and "too self-congratulatory." Buffett set the ball rolling by talking about philanthropy, describing the meeting as "exploratory," and then asking each person, going around the table, to describe his or her philosophy of giving and how it had evolved.

The result was 12 stories, each taking around 15 minutes, for a total of nearly three hours. But most participants whom Fortune has talked to found the stories riveting, even when they were familiar. David Rockefeller Sr. described learning philanthropy at the knees of his father and grandfather. Ted Turner repeated the oft-told tale of how he had made a spur-of-the-moment decision to give $1 billion to the United Nations. Some people talked about the emotional difficulty of making the leap from small giving to large. Others worried that their robust philanthropy might alienate their children. (Later, recalling the meeting, Buffett laughed that it had made him feel like a psychiatrist.)

The charitable causes discussed in those stories covered the spectrum: education, again and again; culture; hospitals and health; the environment; public policy; the poor generally. Bill Gates, who found the whole event "amazing," regarded the range of causes as admirable: "The diversity of American giving," he says, "is part of its beauty."

At the dinner that followed, the conversation turned specifically to how giving by the rich could be increased. The ideas advanced included national recognition of great philanthropists (presidential medals, for example), or a film, or a philanthropy guidebook, or a conference of the rich. There was no talk of a pledge. Of the dinner, the junior Rockefeller says, "The most important thing my dad and I came away with was that increasing giving would take work by many in that room -- delicate, and probably prolonged, one-on-one work."

The dinner, of course, had its unexpected coda: the leak. The leaker, with little doubt, was Chuck Feeney, and the leakee was his longtime friend Niall O'Dowd, the New York publisher behind the grandly unknown IrishCentral.com. (Fortune did not succeed in reaching Feeney; of our account, O'Dowd said, "I can't confirm that.") On May 18, two weeks after the meeting, IrishCentral.com posted an article of 14 short paragraphs headlined "Secret meeting of world's richest people held in New York."With that, the fame of the website spiked, as the rest of the press picked up the news and ran with it.

The IrishCentral article exhibited some confusion about which Rockefeller starred at the dinner, or was even there, but otherwise provided the names of all the participants -- with the notable exception of Feeney, who apparently didn't realize he looked more conspicuous to the others by being left out. Feeney, however, appears to have been quoted anonymously in the piece, once as an "attendee" who thought Gates the most impressive speaker of the day, Turner the most outspoken (surprise!), and Buffett the most insistent on his agenda for change. In a second instance, Feeney was a good bet to have been the awed "participant" who extolled his fellow guests: "They were all there, the great and the good."

The main effect of the leak was to place a "cone of silence" -- that's a description from the Gates camp -- over everything that transpired in the giving campaign over the next year. But there was certainly action, including a few small dinners abroad. Bill and Melinda Gates hosted a dinner in London, and Bill held a few others in India and China. Raising the philanthropic bar in foreign countries is a special challenge: Dynastic wealth is widely taken for granted; tax laws do not commonly allow deductions for gifts to charity; a paucity of institutions and organizations ready for gifts makes knowing whom to give to just not that obvious. Nonetheless, were the Gateses and Buffett to succeed in their campaign in the U.S., they would probably take it overseas.

But as last summer and fall progressed, Buffett and the Gateses did not even have a plan for how the campaign was to be structured. In this vacuum the idea of a pledge took hold and gained strength. It helped that more dinners were to be held. At them, says Melinda, the three principals would "float the pledge idea to see if it would fly."

There then occurred the second and third U.S. dinners, most of whose guests have not been publicly outed because of the cone of silence. Secrecy, a Gates spokesman says, is partly a bow to moguls who have been exposed to the philanthropic sales pitch but would be embarrassed to have been identified in case they chose not to step up to the challenge.

In any event, the names of some of the participants are known. The noted philanthropists at the second dinner, held at the New York Public Library in November last year, included New York investment banker Kenneth Langone and his wife, Elaine, and H.F. "Gerry" Lenfest and his wife, Marguerite, from Philadelphia. Lenfest got rich when he sold his Pennsylvania cable television company to Comcast (CMCSA) in 2000, netting $1.2 billion for himself and his family. He promptly vowed that he would give most of it to charity in his lifetime. Now 80, he has so far meted out $800 million, a good part of it to schools he attended (Columbia Law School, Washington and Lee, Mercersburg Academy).

Lenfest's favorite moment at the November dinner was Buffett's declaration that Marguerite Lenfest had put forward the best idea of the evening when she said that the rich should sit down, decide how much money they and their progeny need, and figure out what to do with the rest of it. Says Lenfest: "The value of Buffett and Gates is that they're going to make people sit down and think these things through."

The Third Supper, held in December in Menlo Park, Calif., at the Rosewood Sand Hill hotel, is known as the Bay Area dinner but drew from all over the state, including its entertainment precincts. In attendance were some veteran philanthropists, including venture capitalist John Doerr of Kleiner Perkins and his wife, Ann, and the Morgridges, who had selected the meeting site. This dinner was somewhat different from the other two, says Melinda Gates, because a few people there were relatively new to huge wealth and were still forming their opinions about giving. Talk went on for hours, so long that the beef being prepared for dinner became somewhat overcooked. This is reported to have dismayed Rosewood's management, which may have noticed that the crowd in the Dogwood room was worth having back.

The dinner also brought out some of the fears that people have about philanthropy. What does going public with big gifts do to the peace in your life? Won't pleas from charities be unending? How do you deal with giving internationally, which too often seems like throwing money down a hole? These are valid concerns, say the Gateses, the kind raised by people who want to feel as smart about giving as they were about making their money. But the questions didn't stop the two from plugging the satisfactions of philanthropy. At those dinners, says Bill, "no one ever said to me, 'We gave more than we should have.'"

Nor did the idea of a pledge get shot down at those dinners. It "floated" nicely, in other words. So as 2010 arrived, a pledge became the strategy. The idea of aiming for a 50% slice of net worth was pragmatically pulled from the sky, being less than the principals would have liked to ask for but perhaps as much, at least initially, as they can get. The pledges, meanwhile, were never envisioned as legal contracts but rather moral obligations to be both memorialized in writing and taken very seriously. They are in fact to be posted on a new website, givingpledge.org, whose construction Melinda Gates oversaw. The 99% pledge that Buffett is making is likely to be the No. 1 document on the website, if he is not beaten out by his Seattle friends.

Enthusiastic about leading the search for Great Givers, the Gateses and Buffett nonetheless have wanted a phalanx of strong supporters. Already committed to at least a 50% pledge are the Broads, the Doerrs, the Lenfests, and the Morgridges. With the online publication of this article, moreover, the three principals will send e-mails and make calls to other billionaires judged likely prospects. A bit later, all of the pledgers may join in sending a letter to a large number of other billionaires, asking them to join the growing crowd. In the fall there may even be a Great Givers conference.

The definition of success in this venture may take years to figure out, but each of the principals has reflections about the matter. Buffett knows that everyone rich has thought about what to do with his or her money: "They may not have reached a decision about that, but they have for sure thought about it. The pledge that we're asking them to make will put them to thinking about the whole issue again." He warns, most of all, against the rich delaying the decision of what to do with their money: "If they wait until they're making a final will in their nineties, the chance of their brainpower and willpower being better than they are today is nil."

Bill Gates regards the 50% as a "low bar" encouraging high participation. People, he thinks, may be drawn in by that proportion and then surprise themselves and find they are giving at higher levels. "This is about moving to a different realm," he thinks, and it will take time for everything to sort out.

Melinda Gates separates the near-term from the far. There are so many reasons that rich people don't give, she says: They don't want to plan for their death; they worry that they'll need to hire someone to help with the work; they just don't want to take the time to think about it all. So the initial goal of the pledge campaign, she thinks, must be simply to cut through that and get them moving in the direction of giving. And eventually? "Three to five years down the road, we need to have a significant number of billionaires signed up. That would be success."

Society cannot help but be a beneficiary here, by virtue of at least some dollars and perhaps many. Nor will it be just the very rich who will perhaps bend their minds to what a pledge of this kind means. It could also be others with less to give but suddenly more reason to think about the rightness of what they do.

Reporter associate: Doris Burke

Related: Billionaire peer pressure behind the Buffett-Gates Challenge


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