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H&R Block buys Olde
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September 1, 1999: 2:25 p.m. ET
Tax preparer to pay $850M cash for privately held discount broker
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NEW YORK (CNNfn) - H&R Block Inc. agreed Wednesday to buy privately held Olde Financial Corp. for $850 million in cash, a move by the country's largest tax preparation services firm to expand into the discount brokerage business and online trading.
Investors reacted coolly to the deal, sending H&R Block (HRB) shares down 6-3/8 to 49-1/4 Wednesday afternoon.
Moody's Investor Service placed some of H&R Block's debt on ratings review in the wake of the deal.
The acquisition -- the largest in H&R Block's history -- may worry some investors who fear recent moves by the tax preparer create some uncertainty about the company's direction, said analyst Alexander Paris Jr., of Barrington Research. Paris said some investors also might be wary of Olde Financial's past. The firm's Old Discount Corp. brokerage unit and three top managers settled allegations by the Securities and Exchange Commission last year of fraudulent sales practices.
Olde Discount is the fourth-largest discount broker in the country with more than 600,000 active accounts worth a total of $37 billion, the company said. The Detroit-based firm runs 181 branch offices in 35 states and plans to launch an online trading service, SmartVest, by year's end. The service still needs regulatory approval by authorities in several states.
Kansas City, Mo.-based H&R Block said it wants to incorporate the online trading site into its overall Internet strategy. Block already provides online tax preparation services and offers tax and financial software.
"With the acquisition of Olde, we will have in place the major building blocks to achieve our vision of becoming the preferred tax and financial partner for our clients while offering an attractive product portfolio for new Block customers," H&R Block President and CEO Frank L. Salizzoni said.
The acquisition is expected to contribute to H&R Block's earnings beginning next year, adding 6 cents to 8 cents per share in fiscal 2000, assuming the inclusion of six months of Olde operations in H&R Block's results. Earnings should be boosted by 20 cents to 30 cents per share in 2001, the company said. H&R Block currently is in the second quarter of its fiscal 2000.
Block was anticipated to earn $2.70 in 2000 and $3.23 in 2001, according to the consensus estimate of analysts polled by research firm First Call Corp.
H&R Block, which does the taxes for an estimated 16.5 million Americans every year, doesn't plan to cut any jobs at Olde, Block spokeswoman Linda McDougall said. Instead, "we plan to grow the business beyond what it is today," she added.
More than taxes
The deal comes as a bit of surprise, because H&R Block had been making moves toward expanding into financial services on its own through the testing of H&R Block financial centers in several markets during the 1999 tax season, said Jason Horoschak, who follows commercial and consumer services at the S&P Equity Group.
But Horoschak thinks the combination is a good fit, linking two companies that primarily serve Middle American customers. The acquisition also will help smooth out Block's earnings, which now accrue almost entirely during tax season, in the company's fourth quarter.
"I think they've been trying to become a complete financial services provider," said Horoschak, who has an "accumulate" rating on H&R Block shares. "It quickly launches them into a complete offering of stocks, bond, mutual funds."
Paris said it is also essential for H&R Block to launch the online trading arm if it goes into the brokerage business.
"It's defensive -- you have to be able to have this competency or capability or you're going to lose your clients," he said. "Plus, this will dovetail well with e-commerce." He rates the stock a "long-term buy."
Besides tax preparation, H&R Block also offers home mortgage services and has purchased a number of accounting firms. The company said last month it wants to explore the sale of its wholesale mortgage unit.
Fines against Olde
Olde Discount Corp.'s settlement last year with the SEC, totaling more than $5 million, stemmed from allegations that its compensation and hiring practices in the early 1990s created an atmosphere that allowed some brokers to engage in abusive sales practices. The SEC said the firm provided substantially higher payouts for transactions in stocks that Olde recommended -- a situation that allegedly created a conflict of interest with customers and led to high-pressure sales techniques by brokers.
The commission said Ernest J. Olde, founder of the company, and two other managers were responsible for supervising the abuses and ordered them to pay individual penalties.
H&R Block said Ernest Olde, currently chairman of the Olde board, will have no ties with the combined company.
H&R Block management appears confident that Olde's problems are behind it, Paris said.
"There have been sweeping management changes at Olde," he said. H&R Block officials "are very comfortable in their due diligence process that that is not going to be an issue going forward."
The deal, which is subject to regulatory approval, is expected to close by the end of 1999.
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