Why Microsoft Just Paid $20 Billion for Nuance 

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Microsoft Corp. (NASDAQ: MSFT) on Monday announced that it will acquire speech recognition software maker Nuance Communications Inc. (NASDAQ: NUAN) in an all-cash deal valued at $19.7 billion. The deal is second in size only to Microsoft’s $26.2 billion acquisition of LinkedIn in 2016.

According to the announcement, Microsoft will pay $56 per share for Nuance stock, a premium of 23% to Nuance’s closing price on Friday. The acquisition price includes the assumption of Nuance’s net debt of around $1 billion.

The acquisition is aimed at accelerating Microsoft’s cloud offerings, especially the health care cloud the company introduced last year “to address the comprehensive needs of the rapidly transforming and growing healthcare industry.” The acquisition double’s Microsoft’s total addressable market in the health care provider space to nearly $500 million.

Nuance’s health care products include Dragon Ambient eXperience, Dragon Medical One and PowerScribe One for radiology reporting. All are clinical speech recognition software-as-a-service (SaaS) already built on Microsoft Azure. The announcement notes that Nuance health care solutions are already used by 55% of U.S. physicians, 75% of U.S. radiologists and 77% of U.S. hospitals.

Microsoft CEO Satya Nadella said: “Nuance provides the AI layer at the healthcare point of delivery and is a pioneer in the real-world application of enterprise AI. AI is technology’s most important priority, and healthcare is its most urgent application.”

Nuance CEO Mark Benjamin added: “Over the past three years, Nuance has streamlined its portfolio to focus on the healthcare and enterprise AI segments, where there has been accelerated demand for advanced conversational AI and ambient solutions.”

According to a document on the Nuance website, speech recognition was first achieved at AT&T’s Bell Labs in 1952 with a vocabulary of nine words, which IBM extended to 16 words 10 years later. In 1971, the U.S. government’s Defense advanced research agency, DARPA, had increased the vocabulary to 1,000 words.

In 1982, Drs. Jim and Janet Baker founded Dragon Systems and built a voice recognition system based on mathematical models and launched their first product, Dragon Dictate, in 1991. Through many twists and turns over the next couple of decades, Dragon Systems became part of ScanSoft, which, in 2005, acquired Nuance and branded the combined company as Nuance.

Among the customers for Nuance’s Dragon were both Apple, which uses Dragon technology in its Siri voice assistant, and Google, which uses the software in its voice assistant as well. The company’s Pathfinder software is also a building block of the chatbot explosion of the past few years.

Microsoft stock was down about 0.2% to $255.47 on Monday, in a 52-week range of $162.30 to $256.99. The high was set earlier in the morning. The consensus price target on the stock is $272.71.

Nuance shares traded up about 17%, at $53.20 in a 52-week range of $16.45 to $53.93, a high also set Monday morning. More than 49 million shares of Nuance stock had changed hands in just over an hour of trading Monday morning. The acquisition is expected to close by the end of 2021.

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