Managing Your Cash Flow

Dell gets creative with merger in order to avoid a hefty tax bill

2 min read

19 October 2015

Tech giant Dell has recently announced that it made an offer to acquire EMC, and the internet has been awash with comments from experts on how its use of tracking stock as part of the proposed deal will help it avoid a tax bill.

The company’s $67bn acquisition of EMC will not only be one of the largest tech deals ever, it could also be one of the most leveraged, experts have suggested. 

This is due to it somewhat acquiring VMware – a seperate public company which EMC owns about 81 per cent of, and controls 97 per cent of votes – at the same time. So by acquiring EMC, Dell is also acquiring control of VMware.

According to the Wall Street Journal, EMC shareholders would receive $24.05 a share in cash, and another 0.111 shares of a tracking stock tied to EMC’s stake in VMware

“That works out to roughly $9.10 a share, based on VMware’s $81.78 share price,” it said. “The tracking stock would essentially comprise a new class of shares that track the assets held by VMware.

“The holders won’t actually own a stake in the company, however. The stock will simply reflect the performance of VMware. Dell won’t be distributing shares or spinning off VMware’s assets, both techniques which create taxable gains.”

The tracking stock structure would allow Dell to avoid a tax bill that could have topped $10bn, said tax specialist Robert Willens. EMC’s cost basis in VMware is very low, and so Dell would have to pay tax on almost the entire $26.59bn value of EMC’s stake in a sale.

“It’s a great tax strategy,” said Willens.

However, EMC shareholders who get the cash and shares will still have to pay between 20 per cent and 39.6 per cent of tax on any gains they make.

The two different stocks could also confuse investors, Willens said. He claimed that after a deal closes, stock investors will be able to buy either the tracking stock, or part of the 20 per cent of VMware that EMC doesn’t own.

On the deal, Dell’s chief financial officer, Tom Sweet, said: “The combination of EMC and Dell, while maintaining a tracking start from VMware will make the company more competitive and enable to make investments for the long term. Unencumbered by the short term orientation of the public markets.”