Dell Inc’s $67 billion offer to buy data storage company EMC Corp (EMC.N) could be derailed by a tax bill of up to $9 billion, technology news website Re/code reported on Tuesday, 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, the report said.
Sources close to Dell disputed the Re/code story, telling Reuters they were confident there was no such threat to the deal since tax authorities would treat the tracking stock in line with previous similar transactions. The merger agreement also has no requirement on this issue that would prevent the deal from closing, the people added.
EMC shares fell 2.2 percent on Tuesday, ending at $25.25.
Dell, which is trying to become a giant in the fast-growing market for managing and storing corporate data, struck a deal in October to buy EMC.
The offer valued EMC at $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 (VMW.N), the virtualization software maker majority-owned by EMC.
Tracking stocks allow stockholders to benefit from 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 reported.
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, Re/code 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.
VMware’s shares rose 1.7 percent to end at $60.44.
EMC does not comment on rumors and speculation, spokeswoman Katryn McGaughey said. Dell spokesman David Frink declined to comment.
Dell has lined up a debt package for up to $49.5 billion to finance its planned acquisition of EMC, the second-largest M&A financing on record.
The PC maker is also preparing to sell around $10 billion in non-core assets, including software and services, to reduce the heavy debt load it will be taking on, people familiar with the matter told Reuters last week.
The companies have said the transaction is expected to close between May and October.