H&R Block Plunges After CEO Smyth Quits Tax Preparation Firm

H&R Block Inc., the biggest U.S. tax preparer, was the largest decliner on the Standard & Poor’s 500 Index after Russ Smyth quit as president and chief executive officer to join a private company.

H&R Block declined $1.27, or 8.2 percent, to $14.22 at 4:20 p.m. in New York Stock Exchange composite trading. It fell as much as 13 percent, the most since November 2002, and traded for as little as $13.44, the lowest since May 2001.

Investors are likely to conclude that Smyth decided to “throw in the towel” after almost two years as CEO, analyst Bill Carcache of Macquarie (USA) Equities Research wrote in a note to investors today. Kansas City, Missouri-based H&R Block has been losing market share to online competitors such as Intuit Inc.’s TurboTax.

“There’s nothing positive about Mr. Smyth’s departure,” wrote Carcache, who has a “neutral” rating on the stock. “Without him, we now quite frankly view H&R Block as an organization that may lack the drive, fierce competitiveness, and strong leadership necessary to outperform.”

Smyth, 53, was brought in by Chairman Richard Breeden, 60, the hedge-fund manager and former chief of the U.S. Securities and Exchange Commission, to help turn around H&R Block. The stock has lost a quarter of its value since Breeden became chairman, and last month the company said profit for fiscal 2010 from continuing operations dropped 4.7 percent.

Proxy Contest

Breeden staged a proxy contest and ousted CEO Mark Ernst in 2007 after the firm posted losses of at least $1 billion tied to subprime mortgages. Director Alan Bennett, the acting CEO in 2007 and 2008, will take over as CEO, the company said in a statement.

Smyth’s departure follows those of Chief Financial Officer Becky Shulman on April 30 and general counsel Brian Woram on July 2. Smyth spent 21 years at McDonald’s Corp., where he rose to president of the company’s European unit.

H&R Block didn’t name Smyth’s new employer; he couldn’t be reached for comment and senior executives including Breeden weren’t immediately available.

“The decision to leave was made by Russ and it was a personal one, not one that reflects some underlying negative with H&R Block,” Alexander Paris, an equity analyst at Barrington Research Associates Inc., said in an interview. “He had the opportunity to return to his hometown of Chicago and back to the industry from which he came.”

Paris said he spoke with interim CFO Jeff Brown about Smyth’s reasons for leaving. Brown did not tell him the name of the company, only that it was a large private company that “sounds like something in the food industry,” Paris said.

Profit Slides

Smyth closed 400 under-performing tax offices and cut about 400 jobs after the company said in February that it wouldn’t meet its fiscal 2010 earnings forecast.

Paris, who cut H&R Block from “outperform” to “market perform,” said he hasn’t lost confidence in the company and that the damage has already been done to the stock. The company is undervalued and might attract bids from buyout firms.

“It is a very high-quality company that produces a lot of free cash flow that is even higher than its reported net income,” Paris said. “It has a great balance sheet and low capital intensity. This would be a perfect private transaction.”

Vance Edelson, an analyst with Morgan Stanley, said there’s no reason to look for a buyer and that an outsider wouldn’t necessarily do better with a turnaround. Breeden “is likely to see if the company fares better next tax season with yet another new management team in place.”

Bennett previously was CFO at Aetna Inc., the third-largest U.S. health insurer, according to the H&R Block statement. He’s also a director at oilfield-services provider Halliburton Co. and at TJX Cos., owner of the T.J. Maxx and Marshalls discount retail chains.

To contact the reporter on this story: Laura Keeley in New York at lkeeley@bloomberg.net.

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