November 11, 2015

The Dell/EMC merger hits rocky waters

The future of the Dell/EMC deal could unravel if it draws IRS scrutiny.

The largest tech industry merger ever, valued at $67 billion, has hit a new snag that might affect the outlook of this costly deal. Computer giant Dell is seeking to buy the computer storage provider EMC, yet Dell does not have the revenue to do so.

To combat this problem, Dell is looking to acquire EMC through a combination of borrowed cash and tracking stock, which is representative of EMC's major asset controlling of software company VMware, according to Re/code.

This particular tracking stock is being called into question as it is a key element in the deal and was created to relieve the burden of debt Dell will incur, along with aiding the company to avoid expensive tax liability. Company officials stated that should the Internal Revenue Service (IRS) examine this deal, it could be potentially disruptive for how it will play out.

Essentially, an IRS ruling on this case will determine whether or not tracking stock qualifies as a taxable distribution of company shares from Section 355, according to Business Insider. If the IRS rules that it does, it would significantly affect Dell's financing options for the deal.

"At minimum it would require Dell to borrow more money to pay EMC shareholders for the full value of the company," Re/code reports. "As it is, Dell is expected to have an astounding $50 billion worth of debt on its books after the deal closes sometime next year. At worst, sources said, the added tax expense could derail the deal entirely."

To avoid running into difficulties with your merger or acquisition, consult an M&A advisor today. With expert assistance, your company can make a deal that exceeds its projected growth goals. Contact us today to see how your company can benefit from a partnership with our skilled team of professionals.