The Horizontal Double Dummy - How Tom Siebel Avoided Taxes When Selling His Company to Oracle

By Praveen Puri

In 2006, when Tom Siebel sold his company, Siebel Systems, to Oracle, he wanted to avoid having to pay $58 million in taxes.

Normally, the way to avoid taxes in a merger is if the buyout consists of at least 40% stock. But Oracle did not want to dilute its existing shareholders by issuing so many new shares.

They finally decided to make the merger tax free by using a legal entity called the "horizontal double dummy". This technique was first used by Unilever in 1978. A tax expert once said that "back in 1978, this was the tax equivalent of inventing penicillin".

Here is how the Oracle-Siebel horizontal double dummy merger worked:

1. A new holding company called Ozark Holdings was set up.

2. Two subsidiary companies were set up under Ozark Holdings. These were the "dummies".

3. Oracle merged with the first dummy subsidiary in a 100% stock deal. In other words, Oracle stock was swapped for Ozark stock.

4. At the same time, Siebel Systems merged with the other subsidiary. This deal was done in a combination 30% stock and 70% cash deal.

5. At this point, Ozark Holdings now owned both Oracle and Siebel Systems in its two subsidiaries.

6. As a final step, the subsidiaries were dissolved, and then Ozark Holdings was renamed as Oracle.

This shows how, in matters of finance and investing, it's not enough to study who companies merge with. It is also important to watch how these mergers are structured. Large corporations have access to a lot of creative thinkers and tools when it comes to avoiding taxes and not diluting existing shareholders during mergers and buyouts.