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Why Block and Liberty Will Not Merge

Adam Rust's picture

Posted July 20, 2010

Although there could be some value in a merger between Block and Liberty, there are also some good reasons to believe that it won't happen. Here are a few:

  • Credit Markets: John Hewitt will have a hard time getting financing for this deal. Right now, investors are risk averse. Even if you think there is a value in a combination, it is still going to be hard to drum up dollars at this time. It doesn't help that the problems in the economy are complemented by problems within the tax prep sector.
  • Regulators might see a monopoly: Block and Liberty, if combined, would control a large portion of retail tax prep. When you consider that Jackson Hewitt might be gone after 2011, the monopoly thesis has even more merit. True, no one said anything when the banks were consolidated.  But let's be honest - tax prep firms like Block and Liberty don't have the same lobbyist budget to call upon as do the Big Banks.
  • People. There is a problem with the personalities involved: Breeden and Hewitt will never get along. If Tom Bloch wanted to press for a merger, he would have been better off staying on the board.
  • Not a fix for the real issue: A merger of two bricks and mortar chains doesn't address the real problem facing both companies: how do you compete with TurboTax?
  • H&R Block doesn't seem too keen on the deal.Block has some reason to believe that next year will be much better. They will benefit from another year of building the  H&R Block at Home product. Many JTX consumers, having been denied a RAL last year, will probably flock to Block next year. Alan Bennett may not move to Kansas City, but he probably wants to spend some time building the company before he sells.
  • Price. The deal won't make sense if Block's shares gain. At $14, Hewitt sees possibilities. What about at $17? I've heard that some analysts think a fair value is $19. If employment comes back, then Block might right its own ship.