Dell’s Overseas Cash May Be Key in LBO

Repatriating company’s $14 bln of cash, investments outside U.S. could mean tax bill.

Michael Dell’s plan to take his computer company Dell Inc. private may hinge in part on whether he’s able to exploit one of the company’s most valuable assets: as much as $14.2 billion of cash and bonds outside the U.S.

Like many of the world’s largest technology companies, Dell has legally avoided billions of dollars in income taxes by attributing profits to overseas subsidiaries in tax havens. Bringing the cash back to the U.S. to finance the buyout would risk subjecting the money to the 35 percent corporate income tax rate, with a credit for any foreign income tax they’ve already paid.

“You can be sure the buyout team is looking at the most effective way that asset can be used. They’re spending hours and hours on this,” said Antony Page, a professor at Indiana University’s Robert H. McKinney School of Law and a former mergers and acquisitions lawyer. “There may be loopholes in there that sophisticated tax lawyers can find that aren’t immediately obvious.”

A group including Michael Dell and private equity firm Silver Lake Management LLC is in talks with banks to raise the cash to purchase the Round Rock, Texas-based company in a leveraged buyout, people with knowledge of the matter said this week. Michael Dell, 47, is the company’s founder, chairman and chief executive officer, and he owns about 15.7 percent of the stock, according to data compiled by Bloomberg. David Frink, a spokesman for Dell, said the company doesn’t comment on speculation.

Dell, the third-largest maker of personal computers, rose 21 cents to $12.82 in Nasdaq Stock Market trading yesterday, its market capitalization reaching about $22.3 billion. At that size, it would constitute the largest leveraged buyout since 2007.

“Substantially all” of the computer maker’s $14.2 billion in cash and investments was outside the U.S. as of Sept. 30, according to a regulatory filing. That included about $11 billion in cash and cash equivalents such as money market accounts, and $3.2 billion of bonds and other investments.

Dell also had about $9 billion in short- and long-term debt as of Sept. 30.

U.S. companies have accumulated at least $1.6 trillion overseas in earnings untaxed by the federal government. Since 2010, they have lobbied on and off for a tax holiday on returning those earnings to the U.S.


‘Killer B’

Over the years, U.S. companies have employed a variety of tax-planning techniques for bringing that cash back to the U.S. while still avoiding the income-tax hit. The strategies have spawned colorful nicknames, inspired by the relevant sections of the tax code, like the “Killer B” and the “Deadly D.”

Some companies have found ways of using a merger transaction to repatriate cash without triggering certain taxes. Merck & Co., based in Whitehouse Station, New Jersey, brought more than $9 billion from abroad through its 2009 purchase of Kenilworth, New Jersey-based Schering-Plough Corp., routing the money through Dutch subsidiaries, Bloomberg News reported in 2010.

“There are ways of doing it in the context of a buyout or merger that are more flexible than what you can do in the normal operation of a business,” said Reuven Avi-Yonah, a tax professor at University of Michigan Law School.

Even pledging the offshore cash as collateral for a buyout loan could amount to “repatriation” and trigger a tax bill, said Robert Willens, an independent tax consultant based in New York. So companies often skirt this rule by instead pledging the stock of their foreign subsidiaries that hold the cash, he said. They can pledge as much as two-thirds of the equity before the cash is considered repatriated, he said.

“Dell is hoist by its own petard. They have systematically played the global tax avoidance game, and now find themselves with cash just beyond their reach, at least without taking a big tax and financial accounting hit,” said Edward Kleinbard, a professor of tax law at the University of Southern California, and former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP. “No doubt Michael Dell will urge Congress to let him off the hook by way of another repatriation holiday.”


Bloomberg News

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