In a world of simple economics, the Pfizer-Allergan merger wouldn’t raise an eyebrow. Of course, the world isn’t that simple.
Pfizer CEO Ian Read has become either a hero or a villain. He acknowledges readily that his giant deal to merge with Irish-domiciled Allergan AGN 2.84% is meant mostly to reduce his company’s taxes by billions of dollars as a result of moving its own domicile to Ireland. It’s an outrage! “Disgusting,” Donald Trump called it. Bernie Sanders agreed: “This merger would be a disaster for Americans who already pay the highest prescription drugs prices in the world.” Or, good for him! American companies face the world’s highest corporate tax rates, and without this deal, Pfizer PFE 2.82% must confront foreign rivals “with one hand tied behind our back,” as Read put it.
I don’t see Read as a hero or a villain. This deal is an especially big, high-profile example of a CEO making a type of judgment that every CEO makes every day, and the right judgment is far from obvious.
The deal is clearly legal. It will undoubtedly reduce Pfizer’s tax bill. As CEO, Read must fulfill a fiduciary duty to serve his shareholders’ interests. And as Judge Learned Hand famously said, “there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.” In a world of simple economics, the Pfizer-Allergan merger wouldn’t raise an eyebrow.
Of course the world isn’t that simple. Read has to balance tax advantages that can be calculated to the dollar against uncertain but possibly huge costs from consumer outrage and resulting government action that could increase Pfizer’s taxes, damage its brand, add regulations, and restrict future options. In the real world, doing this deal might actually reduce Pfizer shareholders’ wealth from what it would have been.
What’s the right decision? When Walgreen announced its merger with Alliance Boots last year, it planned on a tax inversion, moving its domicile to Alliance’s home country of Switzerland. But the outcry was sufficiently great that CEO Greg Wasson canceled the inversion because it would have led to “potential consumer backlash and political ramifications.” The deal went ahead, and Walgreens Boots Alliance today is a Delaware corporation.
CEOs make these decisions on a smaller scale all the time. Do I cancel our philanthropic program for an immediate, definite economic gain, or continue it for an uncertain but possibly greater gain in the form of goodwill? Do I close the money-losing plant that is sapping the value of pension funds that own our stock but that employs thousands in an economically depressed area, or do I keep it open? These are not choices between right and wrong. Those are easy. Like all real dilemmas, these are choices between right and right. Legitimate arguments support each choice, but the leader can choose only one.
It’s often overlooked that the most committed advocates of corporate social responsibility agree with free-market stalwarts that these decisions are, in the end, about the best way to maximize long-term shareholder wealth. I have yet to meet even one CSR advocate who believes otherwise. The socially responsible course, they invariably argue, is best for increasing the corporation’s value over the long run. But what’s really socially responsible? That’s what the Pfizer-Allergan debate and the many others like it are all about.