Dell Inc.’s US$67 billion offer to buy data storage company EMC Corp. could be derailed by a tax bill of up to US$9 billion, technology news website Re/code reported, citing sources familiar with the matter.
Certain key aspects of the deal, particularly a tracking stock, may not qualify for the sort of tax treatment the companies consider essential for the transaction, Reuters quoted the report as saying.
“This is a valid worry, but not a deal breaker,” FBR Capital Markets analyst Daniel Ives said. “We see Michael Dell as making sure this deal goes through, even if it takes some deal tweaks along the way.”
Dell struck a deal to buy EMC in October, setting a record in the technology industry, as it tries to transform itself into a giant in the fast-growing market for managing and storing corporate data.
The offer valued EMC at US$33.15 a share. Dell will pay $24.05 per share in cash and will also give EMC shareholders a special stock that tracks the share price in VMWare Inc., the virtualization software maker majority-owned by EMC.
Tracking stocks allow stockholders to benefit from the performance of a specific unit of a publicly traded company, without giving away any ownership or control.
Dell insiders are concerned that the creation of the tracking stock will invite scrutiny by the Internal Revenue Service, Re/code said.
If the IRS ruled that the tracking stock qualified as a taxable distribution of shares, it would either require Dell to borrow more money to pay EMC shareholders or derail the deal, the report said.
“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.
Both EMC and Dell declined to comment.
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