The Cutting Edge: COMPUTING / TECHNOLOGY / INNOVATION : H&R; Block to Spin Off CompuServe
KANSAS CITY, Mo. — After months of pressure from shareholders who felt its stock was undervalued, H&R; Block Inc. announced Tuesday that it will spin off its CompuServe Inc. online services company.
Block said it will make a public offering of less than 20% of CompuServe stock in April. It will distribute its remaining ownership through a tax-free spinoff within about a year.
CompuServe would become the second stand-alone online services firm. The other is its larger rival America Online Inc., which has seen its stock triple in value in the last year.
Kansas City-based Block, the nation’s largest tax-preparation company, also reported a loss of $5.5 million, or 5 cents a share, for the quarter ended Jan. 31. Revenue rose 16%, to $312 million from $268 million.
Block said the loss resulted from heavy spending at CompuServe in new marketing programs and expansion, including development of a second online service. A year ago, H&R; Block earned $8.1 million in the quarter.
Investors sent H&R; Block’s stock up $1.75 at $41.625 on the New York Stock Exchange.
Analysts said Block’s stock has been undervalued by Wall Street, and they saw the spinoff as a way to realize that hidden value. Block executives seemed to agree, saying the spinoff would unlock the value of both CompuServe and Block’s core tax businesses.
“We fully believe this step constitutes the right step at the right time,” said Richard H. Brown, Block’s chairman and chief executive. “We are acting forcefully and decisively to position both businesses to profit in the future and unlock benefit for our shareholders.”
Brown said CompuServe will benefit from an infusion of investment capital and that Block will be able to focus on its core tax businesses.
He discounted concern that after the spinoff, Block will again have the seasonal vulnerability it had before it acquired CompuServe in 1980. Brown cited the company’s financial-services software businesses and said it has other plans to make the business less seasonal.
Paul Mackey, an analyst at Dean Witter Reynolds in New York, said he isn’t worried about the prospect of volatile earnings by Block on its own.
“The tax business has been a steady, consistent, 7% grower, year in and year out,” Mackey said. “And there’s still a long way for Block to grow. It’s nowhere near mature. They only do one in seven returns.”
Shareholders had pressured Block for the spinoff and Mackey said it was inevitable. “For whatever reason, the market doesn’t seem to appropriately value the parts” of Block, he said. “It tends to view Block as a stodgy tax-preparation company.”
Abhishek Gami, an analyst at Duff & Phelps Investment Research in Chicago, praised the announcement. He had Block stock valued at $50, far higher than the mid-$30s it was trading in recently.
Gami said America Online’s success has been fed by its ability to pay for acquisitions with shares in itself. A stand-alone CompuServe would have the same flexibility, he said.
