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The Dell NASDAQ:DELL Leveraged Buyout is a Tax-Avoidance Plan

Dell CEO Michael Dell, private equity fund Silver Lake Partners, Microsoft NASDAQ:MSFT and 4 banks, reached an agreement to buy the company for $24.4-B.

The attention focused on the fact that if it gets done, it is largest buyout deal since the Great Recession, and one of the largest ever, and not on its tax implications.

This leveraged buyout will not bring in new and better management, the management will not change after this deal if it makes. The CEO is the largest shareholder, and the leadership team will remain in place at DELL, just the company’s financial structure will change.

Ok, DELL has come on some hard times due to the gains of SmartPhones and Tablets, but it is cash heavy from PC’s prime years.

And most of that Cash Pile is in offshore accounts to avoid US taxes. For company shareholders to be receive the cash as dividends or for the firm to use the money to buy out the shareholders, the money would have to come back to the US and pared by the 35% US corporate income tax.

Now, in a leveraged buyout, money to buy shares are borrowed from banks and some of the interest payments can be made with the repatriated cash. That is good for Dell because interest payments on corporate debt are tax-deductable, which helps the company avoid the US 35% corporate tax.

Of course there are other reasons are behind the buyout, but avoiding taxes is a Key one I believe.

The Dell transaction is about financial engineering rather than business strategy says one analyst I read.

Most of the DELL’s $14.2-B in cash and investments is outside the United States, according to the company’s SEC filings, and this buyout deal brings that money for the most part tax free.

According to the data, American companies hold at least $1.6-T overseas where it cannot be taxed by the US government unless they bring it home according to the US Tax Code.

Companies have the best legal and accounting resources at their hands and they use them, rightfully so, to save on the corporate tax when repatriating offshore funds.

A well planned complex leveraged buyout is one way to do it, but there are lots of hurdles to jump before this deal gets done, both Shayne and I are aligned on that.