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CEO Daily: Monday, 27th February

Good morning.

After meeting with President Trump on Thursday, Dow CEO Andrew Liveris called this “the most pro-business administration since the Founding Fathers.” The next day, Trump told the Conservative Political Action Conference that he would transform the GOP into the “party of the American Worker.”

Can Trump’s GOP be both the party of business and of workers? In theory, the answer is yes—that is the ultimate promise of capitalism. And Trump has already achieved an impressive move in that direction. Using the prospect of tax and regulatory relief and the powers of his Twitter bully pulpit, he has convinced American businesses to shift their focus to creating jobs at home, rather than outsourcing them overseas.

But now comes the hard part. Repealing the Affordable Care Act threatens to impose considerable pain on the working class, who stand to lose their new health benefits. That’s the reason Republicans now face protests at town hall meetings.

And tax reform will be even more difficult. The President has promised to cut taxes for both business and the middle class—huzzahs all around. But how will he pay for that largesse? The New York Times highlighted the difficulties in a front page piece Saturday.

The leading “pay for” candidate is the House’s proposal for a border adjustment tax, which would raise taxes on imports. But that will be a heavy blow to Walmart shoppers—and they will have Walmart executives by their side. Other money raisers—further limiting the real estate tax deduction, limiting the high-end health plan tax deduction, limiting the state income tax deduction—all will cause sharp cries of pain from affected constituencies. About the only pro-business, pro-worker tax increase being talked about is the elimination of the carried interest capital gains tax break for private equity and hedge funds—a needed change, but one that raises a minuscule amount of money in the tax reform scheme of things.

Moreover, as veterans of the 1986 tax reform can tell you (for background, pardon the plug, please read Showdown at Gucci Gulch), beating back the special interests that fight for every tax break is hard work, and requires coalitions that cut across parties. But cross-party cooperation has become all but impossible in today’s Congress.

So how will this play out? It’s still too early to say for certain, but the general drift seems to be toward tax cuts that are paid for by 1) the temporary revenue that comes from a one-time return of repatriated earnings now parked overseas because of high tax rates, and 2) likely-to-be-exaggerated projections of growth that will result from the tax changes.

In that scenario, business gets the tax changes it wants, workers get to keep their benefits, and everyone wins—except, of course, the poor souls in the future who will have to pay for our profligate deficit financing.

I’m on my way to Hong Kong this morning, for Fortune’s Most Powerful Women International event, and will report from there tomorrow. News below.

Alan Murray
@alansmurray
alan.murray@fortune.com

Top News

La La L-Oops

The Academy Awards ceremony often doesn’t go as expected, but rarely fails to go as planned. It did both last night as PwC, the accountancy firm that counts the votes for the awards, handed the wrong envelope for Best Picture to the presenters (the socially-charged Moonlight beat the escapist whimsy of La La Land to the prize). The snarl-up overshadowed first-ever Oscars for both Amazon (Manchester by the Sea) and Netflix (The White Helmets). Disney’s ESPN also bagging its first for the documentary OJ: Made in America, which will banish the blues about subscriber declines for a few days. But as firsts go, the biggest of the night was still the sight of Warren Beatty blushing. Fortune

Hard Power Trumps Soft in Budget Draft

President Donald Trump’s first budget proposal reportedly contained substantial increases in resources for the Pentagon at the expense of the State Department and the Environmental Protection Agency. It leaves Social Security and Medicare spending largely untouched, Treasury Secretary Steven Mnuchin said over the weekend. Reuters reported that the State Department’s budget could be cut by as much as 30%. Trump himself had promised “one of the greatest military buildups in American history” at a Conservative activists’ conference on Friday. One other interesting feature of the proposal is that it assumes economic growth of 2.4%, rather than the 4% ‘national goal’ touted by Trump during last year’s campaign. Fortune

Softbank Closes in on WeWork

Softbank’s investment spree in the U.S. is set to continue with a bet of over $3 billion on WeWork, the office-sharing startup. As with the acquisition of Fortress Investment Group, That represents a broadening of its traditional focus on technology companies to a broader cross-section of the modern economy. CNBC reported that Masayashi Son’s company wants to put in a primary tranche of $2 billion, to be followed by a secondary tranche of between $1-$2 billion. WeWork is looking to roll out its service beyond existing hubs, with Beijing one of the likely additions in the near future. Fortune

Has Brexit Killed Europe’s Exchange Mega-Merger?

The $32 billion merger between the biggest exchange groups in Germany and the U.K. is on the verge of falling apart. London Stock Exchange Group said late Sunday the EU Commission’s antitrust authorities had objected at the last minute to the merged group keeping MTS, a locally-dominant platform for trading Italian government bonds. It added that it wouldn’t be able to sell MTS by the deadline set by the EU. The announcement will cheer political opponents of the deal in both Frankfurt and London, who have voiced concerns for the future of their marketplaces in a post-Brexit world. However, there is no clear link between the decisions at first sight. Fortune

Around the Water Cooler

 

Allergan CEO Eyes Tighter Cost Discipline

Allergan CEO Brent Saunders told Fortune that he wants to bring price increases for branded drugs into line with inflation. That’s an ambitious extension of the ‘social contract’ he announced in September which aimed to cap price rises at 10% (this year’s average increase was 6.7% in gross terms). Saunders also said the company, more noted for its acquisition activity than its in-house R&D prowess, has six “star candidates” in late-stage development this year, which he estimated could have annual sales of over $13 billion. He singled out rapastinel, a drug for treating clinical depression.  Fortune

New Report Threatens to Embarrass Nike’s Running Project

A draft U.S. Anti-Doping Agency report raised new questions about the activities of Alberto Salazar, the track coach who heads Nike’s high-profile Oregon Project for distance runners. The U.K.’s Sunday Times said athletes coached by Salazar were given infusions of a research supplement based on the chemical L-carnitine. It also said Salazar e-mailed cyclist Lance Armstrong (before the latter’s downfall) to tout its benefits. USADA confirmed that it had prepared a report in response to a subpoena, and said the draft had apparently been obtained by the Russian-link Fancy Bears group of hackers. Fancy Bears has been out to prove drug cheating by western athletes ever since the World Anti-Doping Agency’s report on Russian doping got its track and field athletes banned from international competition. Reuters

Who Needs Smartphones Anyway?

Samsung came to the Mobile World Congress, the mobile devices annual schmooze-fest, without its new Galaxy S8, apparently preferring to double and triple-check the new model rather than risk repeating the Galaxy Note 7 fiasco. Instead, Samsung’s keynote presentation focused on tablets—an updated Galaxy Tab S3 and a new “Samsung Book” that runs Windows 10 software on Intel chips. The Note 7 episode had overshadowed the Korean company’s travails in tablets. In an overall market where sales fell 16% last year, Samsung’s fell 21%. The S8, meanwhile, will now see the light March 29 in New York. Fortune

A Real Lead in Virtual Reality

Sony has built up a handy lead in the race for supremacy in Virtual Reality. It said at the weekend that it had sold 915,000 units since launching PlayStation VR in October, putting it on course to beat its target of 1 million sales within six months. Its two main rivals, HTC’s Vive and Facebook’s Oculus Rift, have sold around 900,000 combined since launch. According to reviewers, Playstation offers a comparable experience for a much lower all-in price. Oculus Rift in particular has suffered some unwelcome distractions recently, losing a $500 million lawsuit and seeing its founder Palmer Luckey embroiled in political controversy. Fortune

Summaries by Geoffrey Smith Geoffrey.smith@fortune.com;

@geoffreytsmith