Microsoft to buy speech technology company Nuance in $19.7bn all-cash deal

The software giant is offering to buy the company at $56 per share, a 23% premium to Friday’s closing price

Microsoft said on Monday it will acquire artificial intelligence and cloud computing company Nuance for $19.7bn. AFP

Microsoft is buying speech technology company Nuance Communications in an all-cash deal valued at $19.7 billion, including debt, making a massive bet on health care artificial intelligence.

The software giant is offering to purchase Nuance at $56 per share, a 23 per cent premium to Friday’s close, according to a statement on Monday. The deal marks Microsoft’s largest acquisition since LinkedIn. It will “minimally” decrease earnings in the year that begins July 1 and start to add to profit the following year, Microsoft said.

Microsoft is tapping the company tied to the Siri voice technology to develop solutions that free doctors from note-taking and better predict a patient’s needs. It has been working with Nuance for two years on AI software that helps clinicians capture patient discussions and integrate them into electronic health records, and combining the speech technology company’s products into its Teams chat app for telehealth appointments.

The “Nuance deal would be a trophy for Redmond”, Wedbush analyst Dan Ives, referring to Redmond, Washington-based Microsoft, said before the deal was officially announced. “Nuance is in the midst of an unprecedented strategic turnaround the last few years under the leadership of chief executive Mark Benjamin and we believe the company represents a unique asset on the health care front for Microsoft.”

Under Mr Benjamin, Nuance has narrowed its focus and separated peripheral businesses, such as Cerence, the automotive AI unit that was spun off two years ago. It also sold its imaging division to Thoma Bravo’s Kofax for $400 million, and zoomed in instead on partnerships with health-care providers and the biggest electronic medical records companies.

Microsoft has been trying to make inroads into the health care sector, selling more cloud software to hospitals and doctors. As AI software gets better at parsing language and predicting medical needs, Nuance and Microsoft may be able to develop technology that searches for certain words in health records to make better suggestions to doctors for patient care.

As of Friday, Nuance’s shares have climbed 3.4 per cent this year, giving the company that laid the groundwork for the technology used in Apple’s Siri a market value of almost $13bn. The gain still trailed the 9.9 per cent jump in the S&P 500 Index, while Microsoft added 15 per cent. Microsoft shares were little changed in pre-market trading on Monday and Nuance rose 23 per cent.

“This can really help Microsoft accelerate the digitisation of the health care industry, which has lagged other sectors such as retail and banking,” Anurag Rana, a Bloomberg Intelligence senior analyst, said before the announcement. “The biggest near-term benefit that I can see is in the area of telehealth, where Nuance transcription product is currently being used with Microsoft Teams.”

Nuance, whose products include Dragon speech-recognition software, had net income of $91 million on revenue of $1.48bn for its fiscal year ending September 30, after losing $217m during the previous year.

Microsoft has also been increasingly focused on health care. In May, the software maker unveiled a package of industry-specific cloud software, and has also hired executives with medical backgrounds. It has also been researching machine learning and AI tools for areas including clinical trials.

Coincidentally, one of Microsoft’s Boston area offices is located right next to Nuance’s headquarters.

With a market value of $1.93 trillion, the highest in the world after Apple, Microsoft remains active on the deals front.

Last month, Bloomberg reported that the software giant was in talks to acquire Discord, a video game chat community, for more than $10bn. It also bought video game maker Zenimax Media for $7.5bn in cash in a deal that closed this year.

The Nuance purchase would rank as Microsoft’s second-largest acquisition, behind the 2016 LinkedIn purchase at an equity value of more than $26bn, according to data compiled by Bloomberg.

Microsoft entered the artificial intelligence space decades ago with research projects and an early focus by co-founder Bill Gates on finding ways to make it easier for people to speak to computers using plain English.

The Nuance purchase will complement efforts in recent years, where Microsoft has assigned thousands of employees to its AI work and released tools customers can use to build applications that understand and translate speech, recognise images and detect anomalies. The company views AI as a key driver of future sales of cloud services.

The acquisition may also give Microsoft a boost as it faces fierce competition in the AI space, with rivals such as Alphabet's Google and Amazon also investing heavily in the field.