H&R Block has signed an agreement with 2SS Holdings to acquire 2nd Story Software’s TaxAct tax preparation technology business for $287.5 million in cash.

Block plans to combine its H&R Block At Home digital business and the acquired TaxAct business into a single unit led by the TaxAct management team, but continue to offer both brands in the marketplace.

“This transaction is a significant step for H&R Block in a segment that is strategically important,” said H&R Block president and CEO Alan Bennett in a statement. “This will provide us with innovative growth-oriented leadership to accelerate our digital tax offerings and results. I am looking forward to working with the TaxAct management team on developing our multi-brand digital strategy for the future.”

TaxAct has approximately 70 full-time associates and is headquartered in Cedar Rapids, Iowa. More than 5 million tax filers used TaxAct last season through online, desktop download and professional software, with the vast majority of those clients filing online.

“The entire team is excited by the opportunity to partner with H&R Block,” said TaxAct president Lance Dunn in a statement. “We are committed to providing a tremendous value for customers by continuing to offer the TaxAct Free Federal Edition.”

The combination of Block’s At Home software, formerly known as TaxCut, and TaxAct is expected to give Intuit’s TurboTax increased competition in the consumer tax prep software market. TaxCut and TaxAct have traditionally trailed TurboTax as the No. 2 and No. 3 most popular consumer tax prep packages, with TurboTax out in front. TaxAct has won many customers by offering free federal tax preparation, printing and e-filing, while selling extra features and state tax prep software. However, the IRS has also been expanding its own free tax preparation services via its FreeFile program, which is operated in partnership with vendors like Block, Intuit and 2nd Story Software.

Block has been facing challenges in recent years as more consumers migrate to preparing their own taxes online instead of visiting its offices. The company sold 127 offices last quarter and plans to sell another 150 by the end of the year (see H&R Block to Sell 150 More Tax Offices). Block CEO Russ Smyth abruptly resigned in July and was replaced by Bennett, who had previously served as an interim CEO in 2007-2008 and remained on the board after Smyth was named CEO in 2008.

The deal to acquire TaxAct was announced after the markets closed on Wednesday. Shares of H&R Block fell $1.01, or 7.38 percent, to $12.68 in mid-morning trading.

H&R Block estimates the transaction would add $0.05 to earnings per share in its fiscal year ending April 30, 2011, assuming the transaction closes by the end of the current calendar year. The purchase will be funded by excess available liquidity from cash-on-hand or short-term borrowings. Completion of the transaction is subject to the satisfaction of customary closing conditions, including the expiration of the applicable waiting period under the Hart-Scott-Rodino Act.

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