Hefty tax bill could kill off what could be the largest acquisition deal in tech history for Dell and EMC
Dell’s planned $67 billion (£44bn) acquisition of storage giant EMC, is reportedly in danger over concerns of a hefty bill from the taxman.
The deal, which will be the largest technology acquisition in history if it goes ahead, could result in Dell being liable for a tax bill of up to $9bn (£5.9bn).
Unnamed sources told Re/code that Dell company executives are concerned that the tax issue will complicate, or even scupper the deal entirely.
The main concern stems from how the American Internal Revenue Service (IRS) will treat the ‘tracking stock’ in VMware, which is an EMC subsidiary (EMC owns 81 percent stake in VMware).
Last month Dell offered EMC shareholders $33.15 (£21.84) a share for the company. Dell will pay the EMC shareholders $24.05 (£15.85) per share in cash. The remaining $9.10 (£6) will come from VMware ‘tracking stock’.
The use of this ‘tracking stock’ is intended to offset the amount of debt Dell would have to take on, and also help it avoid avoid a heavy tax bill. But it depends on the American IRS interprets the use of this tracking stock.
According to the report, tracking stocks were commonly used during the dot.com boom years in the 1990s, and its use in the deal could invite scrutiny by the Internal Revenue Service.
“Dell’s plan to create tracking shares in a company it does not yet own (that’s VMware) would, if successful, amount to a clever threading of a needle in US tax laws,” said Re/code. “It is intended as neither a distribution of shares nor the spinoff of a subsidiary, both of which are typically taxable events. Instead, EMC shareholders will face taxes in the range of 20 percent to 40 percent for the gains on the cash and the value of the tracking shares.”
Both Dell and EMC have reportedly declined to comment on the matter.
TechweekEurope also approached Dell, but recieved no response at the time of writing.
Dell has to step carefully when dealing with EMC shareholders. Both firms have had to deal with activist investors in the past.
Indeed, CEO Michael Dell had a very tough time from an activist investor a couple of years ago. He had wanted to take Dell private in 2013, but a number of large investors baulked at the $13.65 (£8.51)-per-share price, saying it was too low.
Activist investor Carl Icahn made his own bid for Dell, and a bitter fight ensued for the hearts and minds of Dell shareholders. Michael Dell eventually upped his bid and Dell’s board of directors changed the voting rules – in September 2013, and Dell’s shareholders approved the deal.
EMC also has an activist investor and shareholder, in the form of Elliott Management Corp, which had been campaigning for the company to spin off its VMware division.
EMC’s management team resisted that pressure, but had to deal with challenge financial results. In January EMC admitted that a number of staff would lose their jobs in a fresh round of redundancies. Those job losses came despite a major restructuring in 2013, which saw the loss of 1,800 jobs.
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