Walgreen becomes government whipping boy

Posted: 2014-08-07

By Jeff Macke

We have met the enemy and he is us. Yesterday, in a series of hits as operatic and brutal as the last 15 minutes of the Godfather, the government effectively made inversion through corporate merger an offense punishable by corporate death.

Using the threat of an unlimited Treasury investigation, the President and Senator Dick Durbin stopped Walgreen (WAG) from moving to Switzerland. The wreckage of some $10 billion in lost stock value for mostly Main Street investors was left as a grim reminder not to cross the government by, in this case, following the letter of our own stupid laws.

Related: Walgreen stays at home

As a refresher, inversion is what it's called when a U.S. corporation buys a foreign outfit and in effect moves their headquarters to that country, which inevitably has a lower tax rate. It's not a classy move but it's legal because that's the way Congress wrote the tax codes. The U.S. has a 35% corporate tax rate but no one actually pays that much. If the government wanted to maximize its tax revenue you could write our whole tax code on a dinner napkin. Instead it's tens of thousands of pages. To those with the best accountants go the biggest savings.

No one likes inversion except investment bankers and accountants. A company like Walgreen has plenty on its plate trying to be the world's largest chain of pharmacies and employing 175,000 Americans full time. Still, they're public and that makes maximizing profits job number one. The check on that greed is supposed to be the law. Since Congress and the White House can't even agree to change rules that everyone hates we've been talking about countries stashing some $2 trillion overseas and doing another quarter of a trillion in inversion M&A deals since 2011.

It's demagogic blather to say it's unpatriotic to seek lower tax rates. This country was literally founded on a tax beef. "Taxation without representation." Ring a bell? The corporations are doing their job. The government is there to hold their greed in check. All of this has been debated and settled for hundreds of years. The U.S. has a Kant / Locke hybrid model that generally works pretty well.

Related: Two M&A deals evaporate; Walgreen makes non-inversion purchase of Boots

Ironically the public had already stopped Walgreen. It's unlikely they would have moved simply given the PR nightmare it would have created, but we'll never know for sure. There was political capital to be had and this is an election year so the government more or less forced Walgreen to complete the merger in a wildly inefficient way. While the President walked around like he'd just won Wrestlemania, Walgreen shareholders got shelled to the tune of 15% and $10 billion. If your immediate reaction is "good!" you're getting played. The biggest shareholder of Walgreen isn't some evil rich guy. It's you and me. Vanguard has about 50mm shares. State Street has 37 million. Those are widow and orphan pension mutual fund companies. The government couldn't do it's job so it hammered Main Street investors and played it off like a triumph of good over evil.

It's easy to make big business the enemy but it's also wrong. The enemy is us and the people we elect. The villain here is ignorance. We'll all be richer in mind and money if we seek to hold the right folks accountable for our collective failings.

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http://finance.yahoo.com/news/walgreens-becomes-government-whipping-boy-121835957.html

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