Blucora’s strategic transformation announced five years ago has not proceeded according to plan. As the company is doubling down on a failed venture, an activist investor could demand a radically different approach.

In 2015, Blucora sold its digital businesses in search, directory, and online commerce to focus on providing tax solutions to customers. It acquired HD Vest Financial Services for $580 million to expand its tax business into wealth management.

Blucora said at the time the acquisition was synergistic with TaxAct, a do-it-yourself tax preparation software acquired in 2012, and would provide it with cross-selling opportunities. However, the acquisition proved disappointing at best. In five years, HD Vest, now called Avantax, lost more than 500 advisers and now serves under 4,000, although their assets increased from $36 billion to $61 billion. In 2019, Blucora reported an impairment charge of $50.9 million related to the rebranding of HD Vest.

Slow organic revenue growth at HD Vest has been concealed by acquisitions. Between 2016 and 2018, revenue increased by 16% to $373 million, and it jumped to $503 million in 2019 thanks to the acquisition of 1st Global for $180 million. Meanwhile, HD Vest has generated paltry margins of 13%.

As it happens, TaxAct has been growing at a much brisker pace and its margins are much higher, despite largely being ignored by management. TaxAct nearly doubled its revenues to $210 million between 2016 and 2019 with no acquisitions. It has margins of 46%, nearly four times higher than HD Vest. Management does not like TaxAct because it is highly seasonal, with most of the revenues coming in the fourth quarter when customers file their taxes.

The promised synergies have not come to fruition, the company’s new chief executive officer noted in a recent conference call. Part of the problem may be that TaxAct, whose logo tagline is “surprisingly legal,” markets to lower-income customers seeking free, or at least discount services, and may not be ready for wealth advisory services.

As such, the company’s stock performance has suffered. According to Activist Insight Vulnerability, the one-year total shareholder return (TSR) is negative 62% versus negative 16% for the median peer. The company now has a market capitalization of $546 million, lower than the acquisition of HD Vest, an indication that shareholder value has been destroyed.

One of those shareholders is occasional activist Simcoe Capital Management, which holds a 2.3% stake, accounting for a meaningful 5% of its entire portfolio. The firm has run two activist campaigns in recent years, at Donnelley Financial Solutions where it took a board seat in 2019, and in 2017 at semiconductor company Exar, where it gained a seat and prompted a sale of the company. Occasional activists D.E. Shaw Investment Management and Gamco Investors also have stakes in Blucora.

An activist investor could demand the firm to stop the acquisition binge for HD Vest and focus on improving organic revenue. In addition to 1st Global, the firm announced the acquisition of HK Financial Services in 2019, also to add on its HD Vest business. Unluckily for Blucora, the wealth management market is highly competitive, with most competitors much larger and with a more diversified offering, such as Raymond James Financial.

As the two business units have different growth and margin profiles, an activist could ask for a separation. An outright sale could also help create shareholder value.

Governance hooks for a campaign are not many. The company’s board is relatively refreshed, although Chairman Georganne Proctor serves on four other boards. Indeed, Proctor received 7.3% of shares against her re-election at the last annual meeting in 2020. Director Steven Aldrich, former chief product officer at GoDaddy, got most votes against his re-election, 7.5%.

The nomination window for the 2021 annual meeting opens on January 21 and closes on February 20.