Dell’s $67 billion merger with storage giant EMC could raise a tax challenge that would make their integration unfeasible, according to a re/code report. But the difficulties may be reflected across the industry as cloud drives future convergence, according to one analyst.

Deal’s funding of the EMC takeover, by using a new type of stock share, is under regulatory review and could lead to a $9 billion tax bill. The tax logic is built on the success enjoyed by EMC’s investment in the software vendor VMware, whose value rose by ‘tens of billions of dollars’ after EMC acquired it in 2003.

Dell plans to offer EMC shareholders $33.15 a share for the company, with $24.05 in cash and the balance from tracking stock linked to VMware. EMC owns an 81% stake in VMware. The tracking stock would offset the debt Dell would otherwise be burdened with and help Dell avoid tax.

But the scheme is likely to be reviewed by federal regulators who may revise he tax burden as high as $9 billion, according to the report’s sources.

It reports that Dell management are trying to ensure that key aspects of the deal don’t qualify for the level of transaction tax that would make the merger fail. Dell has reportedly hired the New York firm of Simpson Thacher & Bartlett to influence events in Dell’s favour.

The deal isn’t off, yet, but Dell’s funding options are a bit brazen, said analyst Clive Longbottom at Quocrica. “Dell would do better to sell 61% of the VMware shares direct to the market instead,” said Longbottom.

Making VMware a totally separate business would bring in $20 billion, would be totally legal and result in a much lower tax bill,” said Longbottom. The wider issue for the cloud industry, he said, is the scale of consolidation that is being driven by the cloud and the measures to which companies are big forced to finance them. “These tracking shares worry me. It seems to be a case of smoke and mirrors,” said Longbottom.

“This was never going to be an easy deal and Michael Dell has already stated that it will be a minimum of 9 months before it can close. It then comes down to whether the US government decides that having EMC and Dell survive is a good thing and whether other vendors are also happy for the government to allow this to happen.”