The U.S. Justice Department sued H&R Block Inc. (HRB) to stop its proposed purchase of the owner of TaxAct products, saying the companies’ merger would stifle competition and raise prices in the growing market for consumer tax- preparation software.
The department claimed in an antitrust complaint filed today in federal court in Washington that the deal would eliminate a company that has competed aggressively with H&R Block and “disrupted” the U.S. digital do-it-yourself tax- preparation market through low pricing and product innovation.
H&R Block, the biggest U.S. tax-preparation firm, agreed to buy closely held 2SS Holdings Inc., the developer of TaxAct digital tax-preparation products, on Oct. 13 in a transaction valued at $287.5 million.
“The documents we acquired from the parties during the course of our investigation will show that the principal purpose of the transaction was to eliminate a competitor,” Christine Varney, the head of the Justice Department’s Antitrust Division, said during a conference call today.
An end of head-to-head competition between TaxAct and H&R Block would leave only two major providers of digital tax- preparation services for consumers, the department said in a statement.
William C. Cobb, H&R Block’s president and chief executive officer, said today in an e-mailed statement that the Justice Department’s decision would “stifle smart business growth.”
Cobb said the Justice Department had rejected guarantees it wouldn’t raise prices as a result of the acquisition. “The synergies and enhanced functionalities realized from this merger would create a more competitive landscape for tax preparation,” Cobb said. “We continue to believe this merger makes sense, is pro-competitive and will greatly benefit consumers.”
H&R Block “will explore all legal options with regard to this matter,” according to the statement.
H&R Block, based in Kansas City, Missouri, fell 7 cents, or 0.4 percent, to $16.26 in New York Stock Exchange composite trading.
“Companies that are mavericks, innovators and price cutters have a special portent to the market,” said John Briggs, co-chairman of Axinn, Veltrop, Harkrider LLP’s antitrust group and managing partner of the law firm’s Washington office. “They may be small, but they are nimble and quick and they can have a big impact by bending the conduct of the elephants to the most innovative level.”
If the documents obtained by the Justice Department do show H&R Block’s main motivation in buying TaxAct was to eliminate a competitor, that’s “a gigantic red flag,” Briggs said. “I would be surprised if the deal is still alive in five days.”
The Justice Department has blocked several transactions it viewed as anticompetitive in the past month. On May 12, it sued to block VeriFone Systems Inc. (PAY) from buying Hypercom Corp. (HYC) saying the proposed deal would hurt competition in the market for point-of-sale terminals. Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) on May 16 abandoned their plan to buy NYSE Euronext after the department said it would challenge the deal in court. Had the transaction been completed, Nasdaq OMX would have gained a monopoly on stock listings in the U.S.
The H&R Block case is another example of the Antitrust Division suing over anticompetitive concerns rather than negotiating a remedy with companies, said David Balto, an antitrust lawyer and senior fellow at the Center for American Progress, a Washington research group that favors Democratic policies.
“Christine Varney has turned into General Patton,” Balto said in a phone interview. The department increasingly “looks at litigation as a critical element to helping consumers.”
Varney has been better-known for approving transactions with conditions, such as the April 8 decision to allow Google Inc.’s $700 million purchase of ITA Software Inc., a maker of travel information software.
Other deals forged with constraints by Varney include the settlement for Comcast Corp. (CMCSA)’s purchase of NBC Universal in January and the department’s approval of Ticketmaster Entertainment Inc.’s merger with Live Nation Inc. in January 2010.
As many as 40 million taxpayers use digital software products to prepare and file federal and state income taxes, the department said in the statement e-mailed today. Three companies account for 90 percent of all sales of digital, do-it-yourself tax preparation products, the department said.
The purchase of TaxAct by H&R Block would combine the second and third-largest providers of these products, according to the department’s complaint.
Julie Miller, a spokeswoman for Intuit Inc. (INTU), whose TurboTax product is the most widely used digital and online software for tax preparation, declined to comment.
The case is U.S. v. H&R Block, 1:11-cv-00948, U.S. District Court for the District of Columbia (Washington).