Thomas Siebel could have achieved tax savings on a more common deal structure: a tax-free reorganization under Section 368. But under this structure, Siebel and other shareholders would have had to take at least 40 percent of the compensation in stock. It might have been a good deal for them, but it would have punished Oracle shareholders by diluting earnings per share beyond an acceptable level. Structured as the deal is now, with stock consideration limited to 30 percent of the merger's total value, dilution of Oracle's earnings per share will be modest, even if the Siebel stock payout reaches the full 30 percent.

Sometimes, double dummies are built into deals as a sort of safety net. Investment bankers have structured some mergers with a trigger that activates a double dummy under certain conditions. That ensures tax savings in volatile situations, but allows for a simpler deal structure when possible. Witness the $3.1 billion acquisition of Mitchell Energy & Development Corp. by Devon Energy Corp. in 2002. Devon offered a 50-50 cash and stock buyout of shareholders in Mitchell Energy. George Mitchell and his family, who owned 47 percent of Mitchell Energy, insisted that the transaction be structured to ensure that Devon common stock received by shareholders would be tax-free.

Bigger Targets
In its filings, Oklahoma City–based Devon offered a choice of two merger structures: a double dummy or the more commonly used reorganization under Section 368. At the time, points out Devon CFO Brian Jennings, oil and gas prices were falling, and consequently so was the company's stock price. If Devon's stock price had dropped before the reorganization was complete, the 40 percent equity-consideration threshold might not have been met and shareholders receiving stock, including the Mitchell family, would have been taxed immediately on the receipt of Devon stock. That's why Devon proposed a double dummy as a hedge. Ultimately, Devon and Mitchell never had to use the double dummy.

Delaware recently made it easier for companies incorporated within the state to expedite a double dummy with changes in state law. Delaware no longer requires stockholder approval for the "sale, lease, or exchange" of corporate assets between a parent company and its subsidiaries. Ozark Holdings is a Delaware corporation.

Marie Leone is senior editor of CFO.com.

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