On May 23, 2011, the Department of Justice (“DOJ”) filed a civil antitrust lawsuit to block H&R Block Inc.'s (“H&R”) proposed acquisition of TaxAct, a digital do-it-yourself tax preparation software provider. The DOJ's Antitrust Division filed its lawsuit in U.S. District Court in Washington, D.C., to prevent H&R Block from acquiring 2SS Holdings Inc., an entity within TA IX L.P. and the maker of TaxACT. The DOJ's complaint details H&R's motive to eliminate competition.
On Oct. 13, 2010, H&R Block agreed to purchase 2SS Holdings in a transaction valued at $287.5 million. After a seven month review, the DOJ filed a complaint alleging that the proposed deal would substantially lessen competition in the growing U.S. digital do-it-yourself tax preparation software market resulting in higher prices and reduced innovation and quality for products that are used annually by millions of American taxpayers.
Last year, between 35 and 40 million taxpayers used digital software products to prepare and file their federal and state income taxes. Currently, three companies account for 90 percent of all sales of digital do-it-yourself tax preparation software products, and the acquisition would combine H&R Block and TaxACT, respectively the second- and third-largest providers of digital do-it-yourself tax preparation software products. The largest seller of these products is Intuit's Turbo Tax with approximately 62.2% of the market. H&R Block has approximately 15.6% and TaxACT has about 12.8% of the market. All three firms sell their products through three channels: online, downloadable from website, and disks sold through retailers. No one else sells their products through all three channels. While the combination results in a firm with only 28.4% of the market, the DOJ alleges that this combination will create a duopoly in the U.S. Digital DIY Tax Preparation Market.
According to the DOJ's complaint, H&R Block's acquisition of TaxACT would eliminate a company that has aggressively competed with H&R Block and disrupted the U.S. digital do-it-yourself tax preparation market through low pricing and product innovation. Thus, the DOJ is characterizing TaxACT as the maverick in the industry. By ending the head-to-head competition between TaxACT and H&R Block, American taxpayers would be left with only two major digital do-it-yourself tax preparation providers.
The DOJ alleges that the acquisition would lead to increased cooperation and coordination between H&R Block and the remaining rival Intuit Inc's Turbo Tax. H&R internal emails discuss the rationale for acquiring TaxACT in the context of how the market structure would help pricing in the future. H&R Block executives explain that Intuit has the economic incentive to keep prices high after H&R Block eliminates TaxACT through the acquisition.
The DOJ cites H&R Block's internal documents and emails as further evidence that the transaction is anticompetitive. H&R Block's internal documents state that the acquisition of Tax ACT would result in the “elimination of a competitor” and would allow it to “regain control of industry pricing and avoid further price erosion.” TaxACT's documents describe itself as an industry maverick changing the industry. H&R Block's internal documents support the maverick theory as at least one document states that TaxACT disrupted the entire industry with its entry in 2005. Indeed, TaxACT was the first vendor to provide free efile capabilities. H&R Block's documents state that it had to offer an online product to match its competitors' offerings including Intuit and TaxACT offerings. Other internal documents indicate that H&R Block was shocked at TaxACT's pricing and that H&R Block had lowered its prices of its premium product by 30% to meet some of TaxACT's online offerings. From DOJ's complaint, it appears that TaxACT's prices are below both H&R Block and Intuit. It also appears that TaxACT does not attempt to sell additional features to customers after purchase or does not charge additional amount to customers who efile state returns. Therefore, TaxACT appears to be the maverick as opposed to H&R Block and Intuit.
This challenge is noteworthy because of a number of reasons. First, it offers a lesson to all corporate executives of what types of documents that should not be written in the evaluation of an acquisition. These internal documents, presentations, and emails detail the anticompetitive intent of the acquisition. Undoubtedly, these internally generated documents provide great evidence for the DOJ. Second, this challenge is further evidence that the DOJ is becoming more aggressive in terms of blocking mergers. Third, the DOJ is actually willing to challenge a software merger. In recent years, there have been numerous software deals that resulted in 3-2 situations, however, the DOJ has approved all of them.