The Schwartz Report

Blog archive

Will Potential Tax Liability Derail Dell-EMC Deal?

Could the historic deal reached by Dell to acquire EMC for $67 billion unwind if the IRS decides it wants a piece of it? Dell officials are reportedly concerned that the IRS could rule that the transfer of the tracking stock that comes with EMC's 81 percent stake in VMware could trigger a taxable distribution that would add $9 billion to the bill.

That's a worst-case scenario posed by the tech business site Re/code, citing multiple unidentified Dell insiders saying such a scenario is a concern. According to the report, Section 355, a provision of the U.S. tax law, describes circumstances that could trigger a tax upon the transfer of the VMware shares.

"Simply put, the law is intended to prevent corporate spinoffs or share distributions from helping pay for an acquisition, which appears to be what Dell is attempting to do,"  wrote Re/code author Arik Hesseldahl.  "If the IRS were to rule that the tracking stock qualifies as a taxable distribution of shares as defined in Section 355, it would remove a key plank of Dell's financing for the transaction. At minimum it would require Dell to borrow more money to pay EMC shareholders for the full value of the company. At worst, sources said, the added tax expense could derail the deal entirely."

Dell is aware of the risks, he noted, having made note of it in the Oct. 12 merger agreement on file with the SEC, which states: "Neither the Company nor any of its Subsidiaries has been a 'controlled corporation' or a 'distributing corporation' in any distribution occurring during the two-year period ending on the date hereof that was purported or intended to be governed by Section 355 of the Code."

Rather because EMC hasn't assumed any control of VMware over the past two years, the deal should "qualify as an exchange described in Section 351 of the Code," according to the merger agreement.

"This is a valid worry, but not a deal breaker," FBR Capital Markets analyst Daniel Ives told Reuters. "We see Michael Dell as making sure this deal goes through, even if it takes some deal tweaks along the way."

Posted by Jeffrey Schwartz on 11/10/2015 at 12:39 PM


  • Microsoft Offers More Help on Windows Server 2008 Upgrades

    Microsoft this week published additional help resources for organizations stuck on Windows Server 2008, which fell out of support on Jan. 14.

  • Microsoft Ups Its Carbon Reduction Goals

    Microsoft on Thursday announced a corporatewide carbon reduction effort that aims to make the company "carbon negative" by 2030.

  • How To Dynamically Lock Down an Unattended Windows 10 PC

    One of the biggest security risks in any organization happens when a user walks away from their PC without logging out. Microsoft has the solution (and it's not a password-protected screensaver).

  • First Stable Chromium-Based Microsoft Edge Browser Released

    Microsoft on Wednesday announced the first release of its Chromium-based Microsoft Edge browser at the "stable" commercial-release stage.

comments powered by Disqus

Office 365 Watch

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.