Dell’s tracking stock offer for VMware could lead to a huge tax burden

In our October 13 EMC–Dell series, we discussed the various aspects of the biggest buyout in the technology space to date. On October 12, 2015, Dell and its investment arm SilverLake announced the acquisition of EMC (EMC) and VMWare VMware (VMW) for $67 billion.

On November 10, 2015, Re/code reported that Dell may have to incur a massive ~$9 billion tax burden following a regulatory review. This could make the EMC acquisition infeasible, possibly derailing the Dell–EMC deal.
Dell–EMC Deal Is in the Doldrums due to a Massive Tax Burden

Business structures

All three companies—EMC, VMware, and Dell—involved in this deal are already incredibly complex. The above graph shows their organizational, ownership, or capital structures. Teaming up with VMware and GE (GE), EMC formed Pivotal—an agile infrastructure for platform-as-a-service (or PaaS) and big data applications. This allows organizations to choose among EMC, Amazon (AMZN), or Microsoft (MSFT) Azure.

As shown above, Dell offered EMC shareholders approximately $24.05 per share in cash and tracking stock worth $9.10 per share, which tracks the share price in VMware in relation to EMC’s share in VMware. Dell’s management believe that the creation of tracking stock could attract scrutiny by the Internal Revenue Service. Management also believes that the company may be liable for paying taxes because the new shares are linked to EMC’s subsidiary, VMware, in the purview of EMC’s acquisition by Dell.

The tax burden of the Dell–EMC deal

Fenwick & West partner Michael Solomon commented on the nuances that might impede the Dell–EMC deal: “If you believe in this deal, then you’ve got to believe that it can only happen in a tax-free manner. If this deal turns out to be taxable, it becomes substantially more expensive to Dell.”

Investors can consider gaining exposure to EMC via the iShares Dow Jones US Technology ETF (IYW). IYW invests about 1.44% of its holdings in EMC.

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