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Microsoft's $19.7B Nuance buy a 'strategic no-brainer' – analysts

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Microsoft's $19.7 billion buy of Nuance would be the company's second-largest deal to date.
Source: Nuance Communications

Microsoft Corp. is betting big on voice recognition in a deal that would rank as its second-largest ever.

The company on April 12 agreed to buy artificial intelligence-powered speech technology firm Nuance Communications Inc. in an all-cash transaction valued at $19.7 billion, including debt. The $56-per-share offer represents a 23% premium to Nuance's closing price the day before the deal's announcement. The transaction would be Microsoft's second-biggest, behind only its $26.1 billion purchase of social networking site LinkedIn Corp. in 2016. It would also be the largest transaction in the U.S. application software sector in the past five years.

Analysts expect the deal between Microsoft and Nuance to benefit both companies, providing Nuance with access to Microsoft's vast suite of enterprise software offerings and enabling Microsoft to integrate more speech technology capabilities into its business.

Wedbush Securities analyst Daniel Ives called Microsoft's Nuance buy a "strategic no-brainer" that fits into Microsoft's playbook of bolstering its consumer and enterprise ecosystem through strategic acquisitions.

The analyst in an April 12 report maintained his "outperform" ratings for both Microsoft and Nuance while lowering his price target on Nuance stock to $56 to reflect the price of the deal.

"In our opinion, Microsoft is on the M&A warpath over the next 12 to 18 months and Nuance could be the first step in an increased appetite for deals in 2021 with Discord Inc. (video game chat community) another potential trophy for [Microsoft]," Ives said.

Microsoft is reportedly in talks to buy Discord for about $10 billion, though no deal has been reached and Discord may opt to go public instead. Microsoft last year sought to team up with Walmart Inc. to buy video-sharing app TikTok Inc.'s U.S. operations, but deal talks eventually fell through due to regulatory pressures.

Microsoft has a successful record with other large software acquisitions, including its LinkedIn purchase and its acquisition of online video and voice chat app Skype Software Sarl for $8.5 billion in 2011, which would count as Microsoft's third-largest deal after the Nuance transaction.

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Founded in 1992, Burlington, Mass.-based Nuance has made a name in the healthcare sector where its AI software frees up doctors from note-taking and allows more seamless integration of clinician-patient discussions into electronic health records.

But Nuance's work is not limited to healthcare. The company works with companies worldwide across all industries, providing AI and customer engagement services from interactive voice response to virtual assistants and digital and biometric services. Microsoft and Nuance have been working together since late 2019, when they partnered to develop AI-centric solutions for medical professionals that used Microsoft's Azure cloud computing platform.

In an April 12 LinkedIn post, Nuance CEO Mark Benjamin called Microsoft an "innovation powerhouse" and predicted its focus on developing advanced AI and cloud capabilities would prove crucial to Nuance's future success.

"Together, we will use our combined breadth and depth of knowledge, shared purpose, collective talents, and tight alignment of resources and structure to drive profound and positive difference in the lives of others," Benjamin said.

Likewise, Microsoft CEO Satya Nadella in an April 12 tweet said Nuance's healthcare-centric approach combined with Microsoft's vast suite of products and services will help "drive better decision-making and create more meaningful connections" across multiple industries.

Mike Paxton, an analyst with Kagan, a media market research group within S&P Global Market Intelligence, is particularly optimistic about the possibility of Microsoft integrating Nuance's voice-capturing software into its Teams business collaboration platform, which he said could strengthen the company's enterprise ecosystem and attract new users.

Workplace collaboration tools like Microsoft Teams and Zoom Video Communications Inc. have surged in popularity amid the COVID-19 pandemic as more people rely on those services to work and play from home.

"Nuance has a reputation as ... a leader in speech recognition, so Microsoft buying them is not a huge surprise," Paxton said in an interview. "If they did integrate [Nuance] into Teams, that would be an additional nice-to-have thing that would make Teams stickier for current users or more attractive for non-users."

Microsoft's decision to acquire a leader in voice recognition rather than build its own offering was a smart move that should further streamline the company's efforts to expand its enterprise software and cloud offerings, said Sheryl Kingstone, head of customer experience and commerce research at 451 Research, part of S&P Global Market Intelligence.

"When it comes down to it, Microsoft could either build it themselves, or they could acquire it. Nuance is such a strong provider, it didn't really make sense for them to build it," Kingstone said.

The deal has been unanimously approved by the boards of both companies and is expected to close by the end of this calendar year. It is still subject to approval by Nuance's shareholders, certain regulatory approvals and other customary closing conditions.

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