Activists Knocking at Blucora (again)

by | Feb 15, 2022

Blucora (NASDAQ:BCOR) is back in play as Engine Capital pushes for board change. In a letter to BCOR, activist investor Engine Capital (not to be confused with activist Engine 1 of ExxonMobil fame), announced it will seek election of three members to the company’s Board of Directors. 

The firm owns approximately 3.7% of BCOR shares. Founded as a provider of tax planning software for professional accountants, Blucora pivoted to wealth management in 2015 with its $580 million acquisition of HD Vest, an independent broker-dealer aimed at advisors who are also accountants. In 2019, Blucora purchased 1st Global, another tax advisory firm, and combined it with HD Vest to form Avantax Wealth Management. The company currently operates two segments: 1) wealth management, through  Avantax; and 2) TaxAct, the legacy business, which is online tax software.

Walters Took Over from Clendening in January ’20 and the Slide Continued

Expected M&A synergies between two very different businesses haven’t panned out. Investors aren’t convinced that combining a wealth management and tax software business makes sense. Blucora has said it expects synergies between its wealth management business and TaxAct to deliver $2 billion in net new assets by 2024. But, thus far, the company hasn’t delivered on its promises. In particular, Blucora has struggled to create a single seamless business model out of Advantax, and has experienced a steady earnings decline. At the same time, the company has suffered from increased attrition of tax advisors, who fled after declining service levels and payout fees. BCOR shares have dropped ~55% from a 5-year peak of ~$40 in September 2018.

C-suite turnover at BCOR is nothing new. Not surprisingly, given the disparity between its two businesses, Blucora has had an unfortunate history of dramatic management changes. In January 2020, former CEO John Clendening, who also served as an executive vice president at Schwab (SCHW), left the company in a sudden move which became a sore point of dissident shareholders. The board claimed it was dissatisfied with Clendening’s performance in an 8-K filing. Clendening later disputed the board’s reasoning publicly.  Clendening was replaced by Chris Walters, a former digital media executive and Blucora board director since 2014. In another management shakeup, retail brokerage veteran Bob Oros, who joined to run HD Vest in 2017, left two years later for a top post at Hightower Advisors.

BCOR staved off activists once. Clendening’s public accusations set the stage for more volatility at BCOR. In March of last year, investment advisory firm Ancora Holdings waged a proxy battle with the company for board seats. The firm charged the board with mismanagement when it appointed Chris Walters as CEO, claiming he had ‘no experience’ and that he was hired without a significant executive search. Ancora argued that Blucora should sell TaxAct. In April, after smelling blood in the water, private equity firm Golden Gate Capital reportedly submitted a proposal to acquire Avantax. That same month, Ancora’s proxy battle failed, with shareholders voting to re-elect all 10 of the company’s existing directors by a wide margin.

Current Board Has Strong Gender Diversity, but Missing Performance Track Record

Director Performance at Blucora and Outside Lends Weight to Engine’s Push

Shareholder repurchase fails to bolster confidence. Engine revs up, pushing for divestiture of tax software business. In December, BCOR increased its share repurchase authorization by $28.3 million, bringing the total repurchase program up to $100 million. But, with BCOR’s stock languishing, Engine has entered the fray, arguing– much like Ancora did before it– that Blucora should divest its tax software business and focus it on wealth management.

In a list of grievances, Engine points out,

  • BCOR shares have underperformed peers and relevant indices over the multi-year tenure of CEO Chris Walters (also the Company’s longest serving director)
  • BCOR’s share price has declined over 20% since Walters became CEO in January 2020
  • Shares trade at a steep discount to relevant tax and wealth management peers
  • Corporate overhead remains high

History of board turnover; Engine’s proposed directors lack substantial C-suite expertise. Blucora’s board has experienced considerable turnover in recent years in conjunction with the share price decline. Composition is still very light on proven public company C-level expertise. For its part, Engine is nominating the following three members to the board:

  • J. Andrew Kalbaugh (wealth management background)
  • Elizbeth DeMarse (technology/e-commerce background)
  • Chris X Moloney (primarily a tax/wealth management CMO background)

Notably, the proposed nominees largely lack public company expertise—with the exception of DeMarse. DeMarse was formerly CEO and President of financial news website TheStreet, Inc. (NASDAQ:TST) and consumer finance and rate publisher Bankrate, Inc. (NASDAQ:RATE).

Other red flags; say-on-pay failure. Notably, the company failed a say-on-pay vote in April 2021 (only 20% support). CEO Walters earned $8 million in 2020 even while BCOR stock dropped precipitously during this period.

Activist activity on the rise.  2021 saw lower levels of public shareholder earnings campaigns relative to the pre-COVID period, as investors were more forgiving around supply chain issues and rising operating costs. But a strong recent downdraft in the markets has increased investor scrutiny around relative return and company operations. In recent months, we have seen a steady uptick in activist activity, with names such as Peloton (PTON) and ZENdesk (ZEN) (read our write-up here) in the spotlight.  Thus far, many campaigns have been settled before coming to a proxy vote. For example, in December, Centene (CNC) reached an agreement with Politan Capital Management after CEO Michael Neidorff agreed to step down.

Board diversification may be a good protection strategy. One notable complication for activists is that companies are reconstituting their boards to be more diverse, making it more difficult for activists to unseat qualified, newly appointed directors.Expect resistance; value-unlocking could take time. Blucora’s lack of expertise in the wealth management business has clearly caused operational disruption while depressing the company’s stock price. While it’s possible BCOR could see a value-unlocking through divestiture of its legacy tax software business, we expect this to be a bloody battle based on historical events. At the same time, with BCOR shares up over 20% since the end of January, we think much of the upside is priced in at these levels.

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