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CompuServe could still see spin-off

Though buyout rumors swirl as another executive leaves, analysts say H&R Block is more likely to spin off the online service to shareholders.

Even as buyout rumors engulf CompuServe (CSRV), following yet another executive's departure, analysts say it is more likely that H&R Block will go back to its original plan and complete a spin-off of the online service.

A spin-off of H&R Block's 80 percent of the company might flood the market, pushing the stock, languishing at 10 to 12 a share, even lower. That move could lead to a shareholder suit against H&R Block, analysts said.

In a spin-off, H&R Block shareholders would be issued the 80 percent of CompuServe shares H&R Block owns. There could be a sudden liberation of a large amount of shares should those individuals decide to sell.

"A spin-off would put a lot of the shares into the public hands, putting more selling pressure on the stock. H&R Block shareholders would be tempted to sell and that would create more pressure," said Anthony Blenk, an analyst at Everen Securities, noting that a shareholder lawsuit could result as the stock's downward movement would be "depressed by an action of management."

H&R Block, who originally planned to rid itself of the remaining portion of the company last September, said it delayed the spin-off due to poor financial results for the first and second quarter. The company said it is looking for overall improvement in financial performance before making any decision; if the companies' fundamentals improve, the spin-off becomes a viable option.

"We have never withdrawn spinning off CompuServe as an option," said H&R Block spokeswoman Linda McDougall. "We continue to believe separating it is in the best interest of the shareholders."

Brian Oakes, an analyst at Lehman Brothers also said a spin-off, rather than a buyout, is a more likely ending to this story.

Oakes added that CompuServe's move out of the consumer business and toward business users is a good move for a company that has watched its revenue shrink over the past three quarters. "They are competing in a new market, and there will always be room for aggregators," Oakes said, noting that CompuServe has always offered content that users can't get elsewhere.

The next quarterly earnings announcement is due on August 20, and analysts are expecting the company to report losses of 7 cents a share, according to First Call, compared to losses of 32 cents a share for the same quarter last year.

Today's departure of another high-ranking executive caused buyout rumors to surge and the company's stock to spike.

The stock gained about 6 percent today in early active trading, up from yesterday's close of 11-7/8. Over half a million shares traded hands.

Bruce McNaughton, chief architect and the second vice president in a month to leave CompuServe, told fellow employees yesterday that he will be leaving. CompuServe spokesman Steve Conway confirmed McNaughton's departure but declined to say where he was heading, saying only: "He went because he had a great opportunity."

McNaughton's departure has caused rumors of a possible buyout of the company to go into overdrive, not the first time that merger rumors have yanked CompuServe's share price around.

But analysts said the rumors are unfounded and that the executive turnover is just the natural procession of a company in transition.

"What do you expect to happen when a company's market value gets cut by 70 percent?" Oakes asked. "They leave."

In July CompuServe stock jumped 12 percent on speculation that online giant America Online (AOL) had renewed its buyout bid.

Earlier this year, AOL and CompuServe were close to striking a $1 billion stock deal that fell through when a tax policy change was on the table in Congress, a source close to the deal told CNET's NEWS.COM in an earlier interview. The policy would have increased the cost of the deal by hundreds of millions of dollars.

Welsh Carson Anderson & Stowe, a New York-based venture capital firm previously mentioned as a possible buyer, is again being considered a contender.

In April, CompuServe's stock jumped 38, after majority shareholder H&R Block confirmed that the online service is in merger discussions.

Earlier this month, Scott Kauffman, vice president of interactive services, announced that he, too, was leaving for a better opportunity. Kauffman, who was in charge of CompuServe's failed attempt to launch a family-oriented online service called Wow, took a job as president and chief executive of ClickOver, which develops and markets software and services for electronic advertising.

Oakes said that Kaufman's departure should come as no surprise, considering the service he was brought in to lead was less successful than anticipated. Anytime a project fails in any company, some people are bound to leave for other opportunities, Oakes pointed out.

It has only been six months since CompuServe's chief executive quit, amid poor earnings reports. (See related story)

This month's departures again have workers and others convinced that H&R Block, which owns 80 percent of CompuServe, finally has a buyer.

Neither Conway nor H&R Block would comment about this or any other speculation.