H & R Block, Incorporated History
Kansas City, Missouri 64111
Telephone: (816) 753-6900
Fax: (816) 753-5346
Sales: $1.3 billion (1998)
Stock Exchanges: New York
Ticker Symbol: HRB
NAIC: 541213 Tax Preparation Services; 51121 Software Publishers; 522292 Real Estate Credit
H & R Block: A diversified company with subsidiaries offering tax preparation services primarily in the United States, Canada, Australia, and the United Kingdom; tax preparation software for personal computers; a full array of home mortgage products; and other financial products and services.
The name of H & R Block, Incorporated has become synonymous with the business of preparing income tax returns, and justifiably so. The company is far and away the largest in this field with more than 10,000 offices in the United States, the United Kingdom, Australia, and Canada. During the 1998 income tax filing season it prepared 14.8 million U.S. tax returns, representing about 13 percent of all U.S. tax returns filed, and 2.4 million international returns. After diversifying in the late 1970s and 1980s into online information services through its acquisition of CompuServe Corporation and into temporary personnel services through its acquisitions of Personnel Pool of America and Interim Services, the company refocused in the 1990s to become a provider of diversified financial services.
Tax Preparation Evolved from Accounting Services Begun in the 1940s
H & R Block was founded in Kansas City, Missouri by Henry and Richard Bloch. The two brothers had followed slightly different paths: Henry Bloch had received his degree in math at the University of Michigan and served as a bomber crewman during World War II, whereas Richard studied economics at the University of Pennsylvania's Wharton School of Finance. In 1946, while still in their early 20s, Henry and Richard teamed up and formed in their hometown a business services company called United Business. They offered bookkeeping, collections, advertising, and other forms of assistance to local businesses. Tax preparation was one of those services, but the Bloch brothers considered it so marginal that they offered it free of charge to their customers. Within eight years, they were running the largest bookkeeping firm in Kansas City. They also made a sideline out of preparing individual tax returns for people who worked in the building in which they were headquartered.
Preparing individual returns might have remained a mere sideline if the Internal Revenue Service (IRS) had not stopped offering such assistance to the public in 1955. Ironically, Henry and Richard Bloch wanted to get out of that line of work at the time, feeling that it was distracting them from their core operations for little profit. But one of their individual clients, an advertising salesman for the Kansas City Star named John White, persuaded them to give tax preparation more of a try--and to take out two advertisements in his newspaper. On the first day that the ads ran, the Blochs found their office flooded with customers.
Thirty-two years later, Henry Bloch would recall: "I can distinctly remember thinking, 'This tax thing is tremendous--it is really going to help our accounting business, what with the advertising and the referrals and all.' But it had the opposite effect. ... Because my brother and I began devoting so much of our time and energies to the tax side, we didn't give our business clients the type of service they wanted. ... We found that they were quitting on us."
Therefore, the Bloch brothers divested their accounting business by selling it to their employees. They reincorporated in 1955, setting up shop under the H & R Block name, and devoted themselves to preparing tax returns for the "little guy" full-time. The Bloch brothers also chose to deliberately misspell their last name in christening their new venture. Two similar, though distinct, reasons for why they did this have been given. According to one story they dropped the "h" in favor of the more phonetic "k" to make sure people would not mispronounce the name; in another, they simply assumed that people would misspell it phonetically anyway.
However they felt about the new company's name, customers were quick to pony up for its services. In its first year H & R Block generated $20,000 in revenues, enough to pique the Blochs' interest in expansion. In 1956 they opened seven storefront offices in New York City to see if they could duplicate their success. These new offices generated $67,000 in revenues in their first year, but the Bloch brothers grew homesick for Kansas City and did not want to stay in the Big Apple or shuttle between the two cities to keep tabs on business in both. Anxious to sell, they agreed to hand over their New York operations to two local accountants for only $10,000 and a percentage of future revenues. For that, H & R Block would be hailed as a pioneer in franchising, even though, as Henry Bloch later admitted, the company more or less backed into it. "When we first franchised," he said, "we didn't even know what the word meant."
The company's first experience in franchising also would turn out to be an unhappy one. Concerned by unscrupulous practices on the part of the New York franchisees, H & R Block would initiate legal action against them in 1964, charging violation of the company's pricing and advertising arrangements. The two parties settled out of court in 1966, and as a result H & R Block bought back the franchises for more than $1 million.
Dazzling Growth in the 1960s
More immediately, however, the New York experiment proved to the Bloch brothers that tax preparation would be a viable business outside of their hometown. In 1957 H & R Block opened offices in Topeka and in Columbia, Missouri. The next year, it added offices in Des Moines, Oklahoma City, and Little Rock to the roster. From there, the company grew at a dazzling rate. It went public in 1962, and by 1967 it could boast of having nearly 1,700 offices in 1,000 cities in 44 states. During the 1967 tax season H & R Block estimated that it would prepare a total of 2.5 million tax returns by the April 15th filing deadline. The company operated only 35 percent of these offices itself; the rest were franchised. At first, franchises were granted for a mere two percent of gross receipts. "We didn't sell franchises; we gave them away," Henry Bloch would later recall. "An employee would come in and ask us to help him open an H & R Block office in Chicago or Detroit or someplace. We gave him a little spending money and loaned him enough to rent a store and buy some desks. These guys were on their own, and in almost every case they have become wealthy men." In the 1960s, however, H & R Block wised up and raised its price to ten percent, then about 30 percent of gross receipts.
Of course, the company needed legions of trained personnel to keep up with such rapid expansion. In many respects, this proved to be a more substantial problem than drawing customers. To cope with it, H & R Block set up its own training program, which operated more or less as a trade school for tax preparers. In exchange for a small fee, trainees would enroll in an eight-week course taught by company managers. At the conclusion of the course, trainees might receive employment with the company, but they were also free to work for competitors or use their expertise on their own returns. In 1967, for instance, more than 10,000 students enrolled in H & R Block's tax school, but less than half of them went to work for the company at the conclusion of the course. Even so, H & R Block gained 5,000 new employees to staff its storefronts that year.
The tax preparers themselves were and still are seasonal employees, the demand for their services being limited to the first four months of the year. Many of them are housewives, retirees, or people with day jobs looking for a second source of income. In recent years, the company has drawn many working mothers, who like the flexible hours that come with the job. Despite the seasonal nature of the job, most of them return the next year for another round of grappling with the IRS. In 1987 Henry Bloch stated that 75 percent of the company's preparers come back the following year, no doubt because the company rewards its veterans with higher commission rates.
With a virtual headlock on its market, no capital costs except for the leases on its storefront offices and a few dollars for furniture and coffee, and labor costs limited to a fixed percentage of revenues, H & R Block proved wildly successful in the 1960s. In an average year, profits increased by 50 percent over the previous year. In 1969 and 1971, however, changes in the federal tax code reduced the overall number of taxpayers, thus shrinking the company's customer base. Even worse, in 1972 the IRS went to war against tax preparation firms. It cracked down on fraudulent preparers, resumed helping taxpayers prepare their returns, and launched a massive advertising campaign encouraging them not to use commercial preparation services. The IRS campaign, aided by the press, succeeded in tarring legitimate preparation services like H & R Block as well as dishonest ones. That year, the company's profits fell for the first time in its history.
Solidified Its Position and Accumulated Cash Reserves in the 1970s
The IRS campaign eventually collapsed after some public relations debacles of its own. After IRS Commissioner Johnnie Walters declared that the 1040 form was so simple a fifth-grader could complete it, his claim was subjected to various acts of scrutiny that proved it was far more complex than that. An experiment conducted by the Wall Street Journal also suggested that the IRS's preparers were no more reliable than most commercial services. H & R Block not only weathered the firestorm but came out of it in better shape than before, because the IRS's crusade had weeded out its weaker competitors. It was, in fact, the only profitable tax preparation firm of consequential size left in the nation. H & R Block solidified its overwhelming position in 1972 when it opened outlets in 147 Sears department stores--an entirely appropriate move for a company that Richard Bloch once had described as "the Sears, Roebuck of taxes."
Once the crisis had passed, the company found itself faced with a happy dilemma, one that the Bloch brothers had begun to contemplate in the late 1960s. Because its capital costs were so small for a business of its size, and because most of its revenues came in the form of cash, H & R Block had been able to accumulate vast cash reserves. It also found itself unburdened by long-term debt. Because the tax preparation business seemed ready to mature and slow its rate of growth, it was only logical that the company should diversify through acquisition to keep its revenues pumped up. H & R Block spent most of the 1970s searching for likely acquisition targets, but it was limited by a lack of companies that were both available and potentially profitable as well as by Henry Bloch's reluctance to pull the trigger. "A guy told me that two out of three acquisitions fail," he said in 1974. "I just don't want to make a mistake the first time out."
Diversification and Acquisition in the 1980s
H & R Block finally took its first major plunge in 1978, when it acquired Personnel Pool of America, a temporary personnel agency specializing in health care, for $22.5 million. The move seemed to make sense, as H & R Block already had some expertise regarding temporary personnel; after all, the core of its work force at the time was made up of temps. Indeed, the acquisition worked out well: In two years, Personnel Pool of America jumped from the sixth largest to the third largest company in the temporary help field.
The 1980 acquisition of CompuServe also proved quite successful. H & R Block paid $23 million for the information services company, which provided computer time-sharing for corporations and government agencies. Soon after it was acquired by H & R Block, however, CompuServe entered the burgeoning field of providing information services such as software forums, electronic bulletin boards, electronic mail, and interactive games for personal computer users. In doing so, it made its new parent company look positively brilliant. CompuServe's earnings tripled between 1983 and 1985, and its subscriber base quadrupled. It was growing so fast that CompuServe chairman and cofounder Jeffrey Wilkins resigned in 1985 when H & R Block refused to allow him and some of his managers to purchase CompuServe stock. Wilkins subsequently headed an investor group that offered to buy CompuServe for $72.5 million, but H & R Block refused to sell. Wilkins's departure may have seemed like a setback to H & R Block, which considered it wise to keep its acquisitions' existing management teams intact, but CompuServe continued to grow without him. In the early 1990s it was the largest commercial online service, with one million subscribers.
Also in 1980, the Bloch brothers entered into a joint venture with Ohio attorney and entrepreneur (as well as son-in-law of U.S. Senator Howard Metzenbaum) Joel Hyatt, who wanted to set up his own chain of discount law offices patterned after the Los Angeles-based firm of Jacoby & Myers. Hyatt's idea was to tap into the same middle-income market for basic legal services, but to stake out his own geographic territory before Jacoby & Myers could expand beyond its California base. He had opened nine offices between 1977 and 1980, when H & Block approached him with the idea of partnership. For Hyatt, such a deal would provide him with the capital he needed for rapid and widespread expansion. The two parties set up a separate company called Block Management to operate Hyatt Legal Services to comply with American Bar Association rules forbidding anyone but lawyers to directly own a law firm. H & R Block took an 80 percent stake in the company, with Hyatt and his other partners taking the remaining 20 percent.
Both parties in this deal hoped that H & R Block's marketing resources would boost Hyatt Legal Services past archrival Jacoby & Myers. Before long, however, they realized that the synergies they had expected to create between tax preparation and legal services simply were not happening. In 1987 H & R Block sold its interest in Block Management to Joel Hyatt for $20 million in what was described as a friendly parting of ways.
The 1985 acquisition of Path Management Industries, a business seminar company, also proved that, for all of Henry Bloch's prudence, H & R Block's touch was not always golden when it came to acquisitions. The 1988 postal rate increase hurt Path Management by hiking the cost of its direct mail advertising, and the recession of the late 1980s depressed sales. Having paid $35 million for the company, H & R Block sold it to the American Management Association in 1990 for $20 million.
In the meantime, Richard Bloch had become less involved with the running of the company after he was diagnosed with lung cancer in 1978. Bloch battled his illness successfully, but after his recovery he devoted much of his time to sponsoring cancer research and treatment. He retired in the early 1980s. At about the same time, Henry's son Thomas M. Bloch began to work his way up through the ranks. Thomas M. Bloch became president and COO in 1988, and in 1992 he succeeded his father as CEO. Henry Bloch remained as chairman.
Of course, the business of preparing tax returns remained profitable for the company. Tax preparation did in fact represent a mature line of business for H & R Block in the 1980s, and the company's rapid diversification reduced its contribution to the overall bottom line to just more than half of total earnings by the decade's end. But when the IRS began allowing electronic filing of tax returns in 1986, it opened up a brand new opportunity for H & R Block. The opportunity to receive an early refund inspired many who prepared their own returns to come to H & R Block to file electronically. Providing the service was relatively easy for the company, because it used CompuServe's existing communications links to transmit the returns through cyberspace. H & R Block also began offering advances on refunds, or refund anticipation loans (RALs), through agreements with several different banks. In return for a service charge, a participating bank would loan the amount of the refund to an H & R Block client, accepting direct deposit of the refund check as repayment. Electronic filing gave the company's core business a needed boost; within five years it was handling an annual volume of 4.3 million electronic returns--nearly two-thirds of all returns filed electronically.
More Acquisitions, Divestitures, and Refocusing in the 1990s
For all the adventures that it encountered in the 1980s, H & R Block entered the 1990s still in the market for acquisitions. In 1991 it purchased Interim Systems, a temporary personnel agency, for $49.5 million and merged its assets with those of Personnel Pool of America. The resulting merged subsidiary then was renamed Interim Services. Interim Services was spun off in January 1994 through an initial public offering (IPO). Net proceeds to H & R Block were $200 million, with an additional $28 million going to Interim. Block sold its interest in the temporary staffing firm to focus on its tax preparation and computer information service businesses.
With $400 million earmarked for further acquisitions, the company had three main businesses. For 1991 its tax preparation service accounted for $700 million in revenue, its temporary personnel company Interim Services had $385 million in revenue, and CompuServe brought in another $280 million. H & R Block entered the personal financial software market in late 1993 with the purchase of MECA Software, which was best known for its "Managing Your Money" program. Block decided, however, to sell MECA in March 1995 for $35,000, while retaining the right to publish tax preparation software under the name TaxCut. By 1998 its subsidiary, Block Financial Corporation, was the second largest publisher of personal financial software, with record sales of Kiplinger TaxCut, as more people were using their computer and the Internet to prepare their own tax returns.
In April 1994 Thomas M. Bloch resigned as CEO of H & R Block. He wanted to spend more time with his family and teach at an inner city school. In September 1995 Richard H. Brown, former vice-chairman of telecommunications company Ameritech, was named president and CEO of H & R Block to succeed Thomas M. Bloch. He became the first nonfamily member to head the firm. Brown, with his high-tech background and interest in investing more in CompuServe, lasted less than a year. In April 1996 H & R Block spun off CompuServe with an IPO of 18.4 million shares that raised barely more than $500,000 and reduced H & R Block's ownership to 80 percent.
Series of Strategic Acquisitions in the Late 1990s
In June 1996 Frank Salizzoni, formerly president and chief operating officer of USAir Group, Inc., was named CEO and president of H & R Block. Salizzoni's plan was to transform the company into an integrated financial services business offering not only tax preparation help, but also such services as mortgage loans, financial planning, and investment advisory services. Over the next two and one-half years Block acquired two of its franchises and 251 independent tax preparation firms as well as mortgage businesses and a string of accounting firms. As a result of acquisitions, the company's total assets increased from $1.7 billion in 1997 to $2.9 billion in 1998.
In June 1997 H & R Block acquired the California-based firm Option One Mortgage Corporation, which controlled more than 5,000 mortgage brokers in 46 states. During 1997 H & R Block launched its mortgage service, H & R Block Mortgage Company, on a trial basis in 31 offices in four states. The mortgage service began by selling only second mortgage loans, then it introduced new mortgage products at offices in 15 states. As a result, H & R Block Mortgage Company accounted for $135.8 million of the company's 1998 revenues of $1.307 billion, or slightly more than ten percent. In February 1999 the company acquired Assurance Mortgage Corp. of America to further enhance its mortgage-related product offerings.
During the 1997--98 tax season H & R Block experimented with offering a wider range of financial services, including auto insurance, mortgages, and investment advice. It had 14 "premium" offices that featured enclosed offices rather than cubicles and sold mutual funds, annuities, stocks, and bonds. Some 30 offices also sold mortgages. Throughout 1998 and early 1999 the company opened prototype financial planning centers on a trial basis. These centers included investment advisors and mortgage representatives in addition to tax preparers. The company also tested a telemarketing approach to sell other financial products to its tax service customers though telemarketing call centers located in Florida and California.
In January 1998 the company divested CompuServe, selling its 80 percent interest to Internet access provider WorldCom Inc. in a stock-for-stock transaction valued at about $1.3 billion. Following the transaction, WorldCom sold CompuServe's online service and 2.6 million subscriber base to America Online (AOL) in exchange for AOL's ANS Communication division, which provided Internet access mainly for large businesses. AOL also committed to make WorldCom its largest network access provider.
As part of its strategy to provide a fuller range of financial services, H & R Block launched HRB Business Services, a national accounting and consulting business, in 1998. It had acquired several CPA firms during the year, including the Kansas City-based Donnelly Meiners Jordan Kline, Chicago-based Friedman Eisenstein Raemer & Schwartz and three of its affiliates, and Katz Sapper & Miller of Indianapolis. A fourth firm, Sigman Page & Curry, merged with Donnelly Meiners in September 1998, and two more firms were acquired by the end of the year. HRB Business Services was headed by Terrence E. Putney, the former president of Donnelly Meiners.
Block's strategy was to acquire CPA firms to strengthen its position in the tax preparation market. The addition of CPA firms was intended to attract more high-income individuals who would normally seek out their own CPA firm. One analyst estimated in 1998 that CPA firms controlled about one-fourth of the tax preparation market. H & R Block's share of the tax preparation market at the end of 1998 was 13 percent, and it could increase its share by acquiring CPA firms. By mid-1999, H & R Block was in the process of acquiring Olde Discount.
Without a doubt, the business odyssey of the Bloch brothers has been an astoundingly successful one. Richard Bloch once compared his company to Sears, and a journalist once called it "the McDonald's of tax preparation"; the fact that neither analogy seems absurd is a testament to H & R Block's standing in its part of the service economy. All three of these companies have dominated their respective markets so thoroughly that they have not only become synonymous in the public mind with what they sell, but their names have entered the annals of American popular culture.
It is also impressive that the company has managed to maintain a steep earnings curve. A $10,000 investment in H & R Block stock when the company went public in 1962 would have been worth $12.3 million in 1992. In 30 years the stock had split 120:1, dividends and revenues had increased every year, and earnings rose every year except one. With the company focused on becoming a provider of diversified financial services for an expanding market, the odyssey of H & R Block should continue to be successful.
Principal Subsidiaries: H & R Block Tax Services, Inc.; Block Financial Corp.; Option One Mortgage Corp.; HRB Investments, Inc.; HRB Business Services, Inc.; Franchise Partner, Inc.; H & R Block Canada Ltd.; H & R Block Ltd. (Australia); H & R Block Tax and Financial Services Ltd. (United Kingdom).
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Source: International Directory of Company Histories, Vol. 29. St. James Press, 1999.comments powered by Disqus