Will Zuckerberg's Big Gift Hurt Facebook?

Big gifts of shares can represent an overhang on a stock.

Dec 26, 2012 at 9:00AM

For investors in Facebook (NASDAQ:FB), 2012 has been a tough year. With so many insiders deciding to sell out at the $38 initial public offering price, many investors are still livid at having paid so much for shares in the IPO only to suffer big losses almost from the outset, and some have become cynical, thinking that even the recent bounce in the shares could prove short-lived.

Even as other insiders have sold millions of shares when lockup periods ended, CEO Mark Zuckerberg stayed firm with a commitment not to sell shares for at least a year after the IPO. Yet investors may not have considered another way for Zuckerberg to divest himself of shares, even though in time, it could have much the same impact on the stock as an outright sale would.

Gifts that keep on giving
Earlier this month, Zuckerberg announced that he and his wife would donate 18 million Facebook shares to the Silicon Valley Community Foundation. By making the gift to a local community foundation, Zuckerberg said that he was establishing a framework from which to evaluate new projects dealing with education reform and health.

The gift is the second major donation that Zuckerberg has made, following up on a $100 million gift to Newark's public schools. He joined The Giving Pledge, a group of rich philanthropists who have all pledged to give the majority of their wealth to charity during their lifetimes, in 2010.

What about the shareholders?
Of course, Zuckerberg's generosity is laudable. But still, shareholders need to question what impact the gift could have on them.

According to the Silicon Valley Community Foundation's investment guidelines, donors are allowed choose one or more investment pools across which to allocate donations. The foundation's investment committee follows an explicit strategy that emphasizes the value of strategic asset allocation, diversification, and manager selection.

Given its investment policy, it seems likely that the foundation will sell any gift of Facebook shares. Admittedly, gifts like Zuckerberg's are unusual and call for extraordinary measures to avoid the market impact of selling a huge block of stock all at once. But in order for the foundation to keep from facing questions of prudent investment, eliminating a concentrated position in a single stock is the easiest way for it to demonstrate its independence and fiduciary duty to its charitable beneficiaries.

A drop in the bucket
Before you jump to conclusions about how a big gift of shares represents an end run to release more stock onto the open market, it's important to consider a couple of things. First and foremost, although Zuckerberg's gift is massive, it only represents about 1% of Facebook's outstanding shares. Given that the magnitude of shares in past lockup expirations has been well in excess of the 18 million that Zuckerberg is giving away, even an immediate sale wouldn't necessarily move the stock substantially.

In addition, even larger gifts of stock from other philanthropists in the past haven't demonstrated a market-disrupting event. Warren Buffett's huge gifts of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) stock to the Gates Foundation have led to measured selling of Berkshire shares by the foundation on a nearly daily basis over extended periods of time. Although some shareholders argue that the steady selling pressure from the Gates Foundation has held back potential price appreciation, it's hard to argue that the foundation isn't making a big effort to avoid unnecessary market impacts. The same was true for the Gates Foundation's initial donations of Microsoft (NASDAQ:MSFT) shares from founder Bill Gates, and other foundations in similar situations have found ways to be smart about diversifying their holdings without hurting the companies that produced their donors' wealth.

Stay calm and give on
Facebook investors certainly don't want any further downward pressure on the stock's price, and so it's reasonable to be concerned about the potential impact of a charitable sale of shares. In all likelihood, though, the gift will be a nonevent as far as shareholders are concerned -- and a much needed infusion of capital for hard-hit people in need.

Here at the Fool, we're also in the giving spirit. Find out about the charity we've chosen to support this year, and consider whether it's a charity you want to support as well.

Also, if you want to know more about Facebook, don't miss out on our premium research report on the stock. Inside, we consider all the factors in evaluating whether Facebook is a buy at current prices, so be sure not to miss out on this opportunity. Access your report by clicking here.

Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Berkshire Hathaway, Facebook, and Microsoft and has options positions on Facebook. Motley Fool newsletter services recommend Berkshire Hathaway, Facebook, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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