Tag: NUAN

Nuance adds to a shrinking business

Brenon Daly

Contact: Brenon Daly

The latest acquisition by serial shopper Nuance Communications is a bit of a blast from the past. On Monday, Nuance said it will hand over $54m in equity for eCopy in a move that bolsters its imaging business unit. (Revolution Partners banked eCopy while Needham & Co advised Nuance, as it did in the company’s purchase of SNAPin Software a year ago.) The pickup of eCopy, however, snaps a string of deals that Nuance has used to build out its mobile and healthcare business lines.

If you didn’t realize that Nuance had an imagining unit, you could be forgiven. Although the company has its roots in that technology, it has largely left that market behind. (The current Nuance is actually the product of a mid-2005 marriage of Nuance Communications and ScanSoft, the name of which should give you some idea of its business.) In fact, through the first three quarters of the current fiscal year, the imaging unit represents just 7% of Nuance’s total revenue.

And that slice is only getting smaller. So far this fiscal year, sales in the imaging unit shrank a staggering 20%, while the vendor’s other two divisions (mobile and healthcare) both grew and overall revenue rose 12%. Since the imaging business appears to be little more than an afterthought inside Nuance, we’re surprised to see the company double down on the unit with the eCopy acquisition. That’s actually a reversal of the direction of deal flow at the division that we would have suspected. We could certainly see a situation where Nuance divests its imaging business, ditching its past and focusing on mobile and healthcare for future growth.

‘Lighter’ M&A at Nuance

Brenon Daly

Since former rivals Nuance Communications and Scansoft welded themselves together three years ago, the combined company has been shopping at a furious rate. In 2007, the speech-recognition vendor inked seven acquisitions. So far this year, it has spent some $640m on three acquisitions. (That doesn’t count an unsolicited offer for Zi Corp.) The company has used its purchases to focus on specific products for the healthcare market, bolster its mobile offering and expand into Europe.

However, don’t expect Nuance to continue shopping. The company told Wall Street on Monday that its current fiscal year will be ‘lighter’ in terms of M&A, with small deals serving narrow focuses. Cash will be currency for any purchase, since Nuance said it is ‘unlikely’ to use equity in a deal and the debt market is currently closed.

Nuance generated some $196m in cash from operations in the just-completed fiscal year, and had $262m in cash and equivalents at the end of September. However, it also carts around $895m in long-term debt going back to its earlier shopping spree, which has attracted a number of bears to Nuance. At various points over the past year, investors have sold as many as 35 million shares of Nuance short. That’s roughly equivalent to the amount of Nuance shares that typically change hands in more than 10 days of trading, although the number of shares sold short has been declining in recent months.

Signing off on a deal

Brenon Daly

The bear just keeps grumbling – and we don’t mean the bear market. Instead, we’re talking about the all-the-rage bear hugs that companies are giving each other. The latest: Nuance Communications’ $40m unsolicited offer for Zi Corp. (Incidentally, the new hostilities come as a pair of previous unsolicited deals – Cadence Design Systems’ run at Mentor Graphics and Electronic Arts’ move on Take-Two Interactive – head toward largely civil conclusions.)

Nuance’s offer is a classic opportunistic squeeze play, right down to the timing. The acquisition-hungry company launched the bid just hours after Zi reported second-quarter results that did nothing to shore up its already weak standing on Wall Street. (Among the lowlights for Zi: Sales in the second quarter fell by one-third, and it burned through half its cash, which fell to just $2.6m from $5m at the beginning of the year.)

Still, Nuance sees some value in Zi, and Chris Hazelton, who heads up The 451 Group’s Mobile Practice, agrees. He notes that Zi’s handwriting-recognition technology would complement Nuance’s existing mobile offering. Handwriting recognition is particularly important in Asia, where symbols rather than letters are used in many writing systems. Of course, Asia is also a booming market for mobile products.

Nuance has already shown that it’s ready to go shopping in the mobile market. About a year ago, it spent $265m for Tegic Communications to get a keypad technology platform. And make no mistake, mobile is becoming an increasingly important slice of business for Nuance, which was formerly known for basic speech recognition on PCs. In Nuance’s most-recent quarter, revenue in its mobile business grew more than twice as fast as overall revenue, and the company projected that the division would account for 20% of total sales in the current fiscal year, up from just 13% last year.

We wouldn’t be surprised in the least if Nuance ended up ahead of its projection for its mobile business. The reason: We fully expect it to acquire Zi, which would add about $15m to the top line. Zi doesn’t want to sell – and told Nuance as much in an SEC filing – but we wonder how long the money-burning company can fend off Nuance. We’re guessing most Zi shareholders, who saw the stock sink to just 30 cents earlier this month, would like Zi to use its handwriting technology product to sign off on Nuance’s bid of 80 cents per share.

Selected unsolicited tech deals

Date launched Bidder Target Status
Aug. 2008 Nuance Zi Corp Zi has declined to negotiate
June 2008 Cadence Design Mentor Graphics Cadence dropped bid last week
May 2008 Barracuda Networks Sourcefire Sourcefire has declined to negotiate
March 2008 EMC Iomega EMC closed acquisition a month later
Feb. 2008 Electronic Arts Take-Two Interactive EA dropped tender offer, but talks continue
Feb. 2008 Microsoft Yahoo Microsoft dropped bid after three months

Source: The 451 M&A KnowledgeBase