Block and Liberty: A marriage in the tax prep industry?

John Hewitt, founder of Liberty Tax Services, is reaching out to H&R Block to see if there might be a commercial marriage in their future.

Perhaps Hewitt feels a special kinship to H&R Block because that’s where he originally learned the tax business. Later he cofounded his own firm, Jackson-Hewitt. Now he is the chief executive of Liberty Tax, based in Virginia Beach, Virginia. On recent news of trouble within the walls of H&R Block, Hewitt is hoping to join two of the biggest names in the tax business.
 
Recently, Thomas M. Bloch – son of H&R Block cofounder, Henry Bloch – announced he won’t seek reelection to the board. Bloch is unhappy with the way things are going at his company. In a letter, he told the board that he worries the company will “bow to pressure from short-term oriented shareholders.” Bloch was once the CEO of H&R Block, but stepped down to become a teacher. Now he serves as president of a charter school he helped start in Kansas City, Missouri.
 
Tax preparation services in general have seen a decline in revenues because of competition from home tax-preparation software, as consumers look for ways to save money. H&R Block’s stock is up 4.8 percent in recent trading, but down 19 percent for the last three months, and 35 percent for the year.
 
At Jackson-Hewitt, the stock price is down 2.4 percent, and selling for $1.12 per share. Of the three firms, Liberty is the only one to show overall system growth in the current economy. Based on tax returns, Liberty has grown more than Jackson-Hewitt and H&R Block, combined, for eight straight years.
 
Hewitt said he has placed two calls to Bloch, but has not gotten a return call thus far. H&R Block, said Hewitt, is behind the times in technology. If the two firms combine, he would like to bring them up to date. Liberty has invested $30 million into the development of a new platform and software that will enhance competition. According to Hewitt, a business arrangement with H&R Block would make it possible to get this product out by next year.
 
So far, he said, he has not purchased any H&R Block stock, which rose 71 cents to trade at $14.69 on Tuesday. He doesn’t want to divulge his plans, but added that to make the deal, he would need financial partners. H&R Block, which is publicly traded, is valued at $4.72 billion. Liberty Tax Service, on the other hand, is closely held and valued at between $300 million and $400 million.
 
When reporters asked how a business combination would affect operations at a newly formed company, Hewitt was unwilling to be specific.
 
"I can't tell you those things because they would help Block, but I think my record is pretty clear," he said. About his own company he added, "We've grown by more tax returns than Block and Jackson Hewitt combined during the past decade" while having fewer offices.
 
In a statement from his corporate office, Hewitt said, “I am concerned about the tremendous upheaval in the retail income tax preparation industry. The Bloch family was instrumental in creating the concept and I would like to see what they think about the current landscape.”
 
Hewitt continued, “I’ve been thinking about this, and it seems like an opportune time for the Blochs and Hewitts to convene. My father Dan, my son Danny, and I would be honored to meet with them. My dad and I reached out to Tom Bloch in March of 1982 to bring our unique software to H&R Block. It will be interesting to see if we can align our interests 28 years later.
 
“Ultimately we share the same goal: to navigate a steady and successful future course for the major tax companies in challenging times. Anyone who has been as dedicated and involved in the retail tax preparation business like the Blochs and the Hewitts must be feeling a touch of sadness watching market share erode.”
 
Hewitt told reporters, "With no Blochs being involved at Block and no Hewitts at Jackson-Hewitt, I'd be interested in putting the two names together. I think it would be of great appeal if Henry Bloch and my dad and I and Tom stood together."
 
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