ScanSoft Is Set to Buy Nuance

ScanSoft has announced plans to acquire its chief speech recognition competitor, Nuance Communications, in a deal valued at about $221 million, pending regulatory and shareholder approval. The price tag is based on the closing price of ScanSoft common stock, $4.46 per share, on May 6, 2005. Under the stock-and-cash deal, ScanSoft will issue approximately 28 million shares of its common stock to Nuance shareholders, who will receive 0.77 shares of ScanSoft common stock for each share of Nuance common stock they own. Nuance shareholders also will receive $2.20 of cash per share of Nuance common stock owned. ScanSoft expects the transaction to close in September 2005. Global private equity firm Warburg Pincus has agreed to purchase 17.74 million shares of ScanSoft common stock at $4.24 per share, the closing bid price on May 5, 2005, for an aggregate investment of $75 million. Additionally, Warburg Pincus has acquired a warrant to purchase another 0.86 million shares of ScanSoft common stock, and will acquire a warrant to purchase 3.18 million shares of ScanSoft common stock. ScanSoft also has reported its second fiscal quarter 2005 results, announcing revenue of $53.1 million for the quarter ending March 31, 2005, a 24 percent increase from its second quarter 2004 revenue of $42.8 million. On a GAAP basis, the company experienced a net loss of $1 million, or 1 cent per share, in the second quarter of fiscal 2005, in comparison to its second quarter 2004 net loss of $2.8 million, or 3 cents per share. Although ScanSoft is the company that plans to make the purchase, the combined company will operate under the name Nuance. Paul Ricci, chairman and CEO of ScanSoft, will continue his dual roles at the merged company. Chuck Berger, president and CEO of Nuance, will join ScanSoft's board of directors. "As businesses increasingly turn to speech solutions to manage and improve customer interactions, combining our organizations creates a trusted provider of industry-defining technologies and applications," Ricci said in a statement. "Together we are better positioned to accelerate the development and adoption of innovative speech-enabled applications and services worldwide." ScanSoft's planned merger with Nuance is the provider's latest play to bulk up its speech portfolio via acquisition. In January 2004 the company acquired LocusDialog, a provider of speech-enabled autoattendant applications. In November 2004 ScanSoft announced a series of acquisitions including agreements with Phonetic Systems, a provider of automated directory assistance and operator services applications; ART Advanced Recognition Technology, a developer specializing in speech interfaces for mass-market wireless mobile devices; and Rhetorical Systems, a provider of text-to-speech solutions. Although there is sometimes a technology lag when one organization tries to integrate into another, says Elizabeth Ussher, industry analyst, "ScanSoft has made a number of acquisitions in the speech area, so they won't have any trouble integrating this new business into their current business." Although the evolution of the speech recognition market has been anything but rapid, ScanSoft and Nuance have emerged as two of the top players. From a competitive standpoint they "are the two leaders, so it generally [has been] a decision between one or the other," Ussher says. With the acquisition, "it's going to be tough, because the competitors that they do have are relatively small." She adds that the standard will become "making the purchase be just a speech application, rather than having to decide between one and the other." Ultimately, "it will be the best technology fitting the best application, rather than a brand sale." Related articles: ScanSoft Acquires LocusDialog Nuance's Speech Splash