H&R Block Inc. said today that it has agreed to buy Olde Financial Corp. for $850 million in cash, further diversifying the largest tax-preparation company into stock brokerage.
Block shares fell $4.62 1/2, to $51, a two-month low, amid concern about fraud investigations and fines Olde has faced. The proposed acquisition also prompted analysts' warnings that Block may be taking on too much debt in a two-year diversification spree.
Block has bought eight accounting firms since 1998, and two mortgage brokers and a stockbroker-dealer since June 1997. It is opening 70 H&R Block Financial Centers this year to offer financial planning, investment services and home mortgages as well as tax preparation to help generate more revenue after the tax season.
"This is just another step in the transformation of Block from a tax-preparation firm to a full-service financial services firm," said Alexander Paris Jr., an analyst at Barrington Research Associates.
That transformation has come at a cost, credit-rating companies said. Block now has $1.3 billion of debt, according to rating firm Egan-Jones Ratings Co., including $290 million for its June acquisition of most of accounting firm McGladrey & Pullen LLP. It had a debt-to-equity ratio of 30 percent in its fourth quarter.
"HRB's strategy of broadening its services is sound," Egan-Jones said. "The debt financing is what concerns us." It downgraded Block's debt rating to BBB+ from A-.
Moody's Investors Service put the debt under review for a possible downgrade, saying H&R Block's effort to diversify brings "significant execution risk."
Detroit-based Olde Financial, a private company, owns Olde Discount Corp., the fourth-largest discount broker. It has 1,200 representatives in 181 offices in 35 states and earned $33.2 million on $171.5 million of revenue in the first six months of this year, Block said.
Olde made headlines last year when the company, founder and chairman Ernest Olde, and two other top executives agreed to pay $7 million to settle allegations that its management practices encouraged brokers to defraud investors.
Olde Discount brokers promoted high-commission stocks over lower-commission stocks more suitable to clients' needs, the Securities and Exchange Commission alleged. Brokers who didn't sell the quota of high-commission stocks were forced to forfeit their clients to other Olde Discount brokers, the SEC said.
The SEC gave investors from 1992 to 1995 until March 9, 1999, to file claims against Olde Discount for reparations.
Olde Discount and one of its traders were also fined $35,000 by the National Association of Securities Dealers for harassing a competitor.
In addition, the New York Stock Exchange fined the company $1 million for bribing an exchange official to obtain waivers of job requirements for more than 285 employees between 1993 and 1995.
Olde Discount's regulatory problems caused delays in efforts by its Internet trading subsidiary, SmartVest, to gain permission to provide online trading services. Block spokeswoman Linda McDougall said the company is ready to begin offering online service later this year.
"Olde's had some issues in the past that may have damaged their reputation. However, I think they're working through them," said Peter Heckmann, an analyst at George K. Baum & Co.
Block said Olde has paid its fines and made management changes. In addition, Ernest Olde will not be associated with the company after the acquisition is completed, sometime later this year, Block said.
H&R Block, which has about 9,000 tax-preparation centers, is now profitable only in its fourth fiscal quarter, which ends April 30 and includes the tax season. The firm is aiming to eliminate the seasonality through adding other financial services to produce annual earnings growth of more than 15 percent a year, company officials have said.