ScanSoft and Nuance to merge

ScanSoft will acquire the outstanding stock of Nuance

Telephone Strategy News has previously discussed how Nuance and ScanSoft strategies were diverging (TSN, March 2005, p. 4): Nuance has been increasing its sales force to sell its Nuance Voice Platform (NVP) directly and de-emphasizing sales of technology licenses to all but its most important partners, while ScanSoft has emphasized that it will not offer a platform solution, emphasizing that it is “partner-friendly.” These differences will have to be resolved, given that the companies announced on May 9 a definitive agreement whereby ScanSoft will acquire all of the outstanding common stock of Nuance, merging the two organizations into a single company. (On May 16, ScanSoft made a smaller acquisition of a company supplying heathcare reporting solutions, synergistic with the company’s Dragon NaturallySpeaking speech-to-text software, see p. 34.)

In a public teleconference, Paul Ricci, ScanSoft chairman and CEO, indicated that Nuance’s existing NVP customers would be supported, and that ScanSoft’s partner-friendly approach would continue. The press release announcing the merger said, “The combined company will build upon the strong relationships that have been developed with industry leaders, such as Avaya, Cisco, Genesys, and Nortel, to further promote the innovation and adoption of speech.”

Companies that offer voice-hosting services have speculated that Nuance might compete in this arena as well. In the teleconference, Chuck Berger, president and CEO of Nuance, indicated in response to a question that the merged companies might consider that possibility. (As part of the agreement, two of Nuance’s board members, including Berger, will join the ScanSoft board of directors when the transaction closes.) Peter Mahoney, ScanSoft vice president of worldwide marketing, said in a separate conversation that the company had no current plans for a hosting operation.

The new company will adopt the Nuance name, since, according to Ricci, ScanSoft was already considering a change of name to be less suggestive of the imaging part of the companies business. (Even the imaging business is less about scanning, given the company’s PDF creation products, Ricci noted.)

Nuance and ScanSoft have a commanding share of existing deployments that use speech technology. Berger, however, indicated that Nuance and ScanSoft are seeing increased competition from Microsoft and IBM, noting in particular the recent IBM-Cisco announcement of the integration of IBM’s WebSphere Voice Server with Cisco’s call-center offering (TSN, May 2005, p. 1). ScanSoft indicated that the integration team will be evaluating the combined organization’s product portfolio and, over time, will utilize techniques and technologies from each company to improve the performance of its products. A company statement said, “Customers can be assured that we are committed to not only deliver the best new products but also to protect their significant investment in technology and applications…All existing, currently supported ScanSoft and Nuance products will continue to receive support to protect customers’ significant investment and to maintain companies’ commitments to customer success.” 

Under the terms of the agreement, 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 that they own.  Additionally, each Nuance shareholder will receive $2.20 of cash per share of Nuance common stock owned.  The transaction was valued at approximately $221 million based on the closing price of ScanSoft common stock of $4.46 per share on May 6, 2005, or $122 million net of Nuance’s cash and equivalents of $98.7 million on March 31, 2005, which includes $11.1 million of restricted cash. Pending regulatory and shareholder approvals, the companies expect the transaction to close in September 2005.

Upon closing, ScanSoft expects to have approximately $80 million in cash and marketable securities.  The transaction is expected to generate cost savings of $25-$30 million per year through personnel reductions, office-site consolidations, and elimination of duplicate operating expenses.  (Personnel reductions will come from both companies.) In ScanSoft’s fiscal year 2006, the company expects combined revenue to exceed $315 million, according to Ricci.

Prior to the announcement, Nuance stock (Nasdaq: NUAN) closed on May 9 at $3.10 and ScanSoft (Nasdaq: SSFT) at $4.53. At that price, each share of Nuance stock would be equivalent to $2.20 in cash and $3.49 in stock value—a total of $5.69, an 84% premium on the last closing value. As previously noted in this newsletter, however, Nuance’s stock price was not much above its cash on hand, so the premium is not surprising. The day after the announcement, Nuance closed at $4.31, up 1.21, and ScanSoft closed at $3.77, down $0.76. On May 27, Nuance closed at $4.62 and ScanSoft at $3.94.

Both ScanSoft and Nuance announced their financial results for the quarter ended March 31 (Nuance’s first fiscal quarter and ScanSoft’s second fiscal quarter). Nuance revenues were $11.8 million, down 7.1% compared to the first quarter of 2004. ScanSoft revenues were $53.1 million, a 24% increase over the comparable 2004 quarter. ScanSoft network speech revenues—most closely comparable with Nuance revenues—were $21 million, a 35% increase. Berger said in the teleconference that he was disappointed in the revenues and attributed the revenue decline to the reorganization of the sales staff in mid-2004 (which resulted in turnover of about half the sales staff); he indicated that, because of the long sales cycle for their products, the re-built sales effort was just resulting in increased backlog. (For additional details of the companies’ financial reports, see p. 33.)

Combined, ScanSoft and Nuance have deployed more than 3,000 speech applications that automate approximately seven billion phone conversations annually.  Together, ScanSoft and Nuance maintain speech-focused professional service organizations with a combined team of approximately 250 speech and voice user interface experts. As of March 31, 2005, ScanSoft had approximately 900 employees and Nuance approximately 290.

Upon the deal closing, the company will be headquartered in Burlington, Massachusetts, a suburb of Boston.  ScanSoft expects to move its corporate headquarters into the new Burlington facility in June.  The company will maintain a significant presence in the current Nuance offices in Menlo Park and Montreal.

Both companies have strongly supported VoiceXML, and both companies were founding drafters of the MRCP specification. The standards should ease the eventual integration of the companies’ speech technologies.

ScanSoft was supported in the acquisition by Warburg Pincus, the global private equity firm, through an agreement to purchase ScanSoft common stock in separate transactions as follows:

·      3.54 million shares at a purchase price of $4.24 per share, the closing bid price on Thursday, May 5, 2005, for an aggregate investment of $15.0 million.  This transaction closed May 9 and is independent of the Nuance transaction.

·      14.2 million shares at a purchase price of $4.24 per share, for an aggregate investment of $60.0 million. This transaction will close concurrent with, and is contingent upon, the closing of the Nuance transaction.

·      As part of the transaction, Warburg Pincus has acquired a warrant to purchase 0.86 million shares of ScanSoft common stock along with the first investment, and will acquire a warrant to purchase 3.18 million shares of ScanSoft common stock upon the closing of the second investment, both at an exercise price of $5.00 per share and with a four-year term. 

Paul Ricci, Steve Chambers (head of the SpeechWorks division), and John Shagoury (head of productivity software) will remain in their current positions at ScanSoft.  Decisions regarding management and structure will be made as the companies near the closing date. 

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