Dell Inc's $67 billion plan to acquire store giant EMC Corp., including VMware Inc., could be derailed thanks to a tax bill of up to $9 billion, sources familiar with the matter revealed. Key aspects of the deal, particularly tracking stock, may not qualify as the type of tax treatment the companies believe is required for the deal, according to Re/Code.
The report, which was first published by Re/code, was disputed by other sources close to Dell who claimed they were confident there was no such threat. They claimed that tax authorities would treat the tracking stock in line with similar transactions made in the past, adding that the merger agreement has no requirement on this issue that would prevent the deal from closing.
The deal in question refers to a $67 billion offer made in October by Dell to EMC, in its attempt to become a veritable force in the corporate data storage and management market, according to the International Business Times. The PC maker has lined up a debt package of up to $49.5 billion, and is also preparing to sell around $10 billion in non-core assets to help finance the planned acquisition.
Dell's offer values EMC at $33.15 a share, and will pay the storage giant $24.05 per share in cash, as well as give its shareholders a special stock that tracks the share price in VMware Inc.
The tracking stock would allow its holders to benefit from the performance of a specific unit of a publicly traded company, all while not giving away ownership or control, reported Reuters. However, Dell insiders fear the creation of such a stock would invite scrutiny from the Internal Revenue Service.
If the IRS rules that the tracking stock qualifies as a taxable distribution of shares, then it would either force Dell to borrow more money to pay EMC shareholders, or derail the deal entirely.
"I would be surprised if EMC-Dell had not considered the implications of the tracking stock before they went ahead with the deal," Macquarie Research analyst Rajesh Ghai said.
EMC shares fell 2.2 percent at the end of trading on Tuesday landing at $25.25, while VMware's shares rose 1.7 percent to end at $60.44.
Assuming the acquisition isn't derailed, the transaction is expected to close between May and October.
