Dell could be landed with a $9bn tax bill for buying EMC - a deal-breaker. That’s what Dell insiders are telling the Silicon Valley publication Re/Code.
At the heart of their concern is how the Internal Revenue Service will treat the tracking stock in VMware, an EMC subsidiary, that Dell plans to issue to help fund the acquisition.
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In October, Dell agreed to buy EMC for $67bn - and will take on $50bn debt to do so. This works out at $33.15 a share - $24.05 in cash and $9.10 in a new tracking stock linked to VMWare, a company with a market cap of $25.08bn at time of writing.
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 U.S. tax laws: 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.
But how will the IRS view such cleverness? Under US tax law, companies are not supposed to pay for acquisitions using corporate spinoffs or share distributions without incurring tax, Re/Code notes.
Wrong, wrong wrong, says Dell in an “sources close to” briefing with Reuters. The company is “confident there was no such threat to the deal since tax authorities would treat the tracking stock in line with previous similar transactions".
It would say that, wouldn't it? Let's see what the IRS makes of it all.
We shall find out soon enough. ®