3 thoughts on “Speech Therapy”

  1. This deal will likely end up at the DOJ – as in speech recognition Scansoft’s chief rival is Nuance; Gartner estimated that at the end of 2004 the two vendors together controlled 77 percent of the market for speech server systems.

    This is the second nice exit by CEO Chuck Berger – who previously sold Vicinity (VCNT) to Microsoft. I want to be on his next ride. ScanSoft will pay 0.77 shares of ScanSoft stock for each share of Nuance plus $2.20 cash per share. Nuance had a $112 million market capitalization pre-announcement, which given the net loss of $4.6 million on revenue of $11.8 million for the quarter ended 3/31/05, is a nice valuation indeed.

    So Scansoft is paying 4.6x revenues at a 100% premium for a zero growth money-losing company. Good job Chuck!

  2. There’s a bit more to it than Carlo’s analysis above. Nuance still has a fair amount of cash, and a ton of intellectual property (and name recognition) in the space. Combining the two companies helps with a number of challenges both companies face. There still needs to be better market education, and a better model for selling it. While it may look like ScanSoft paid a high premium, from their point of view, it’s probably worth it to get all that intellectual property and intelect in one place. This means, by the way, that ScanSoft has bought pretty much all the big players in the speech space in the last few years: they bought Lernout & Hauspie, then Philips Speech, then SpeechWorks and now Nuance.

    As for the DOJ issue… it all depends on how they define the market. If the execs can make a convincing case (as they should) that the market isn’t speech recognition, but overall IVR/telco servers, than they have a pretty small piece of that market — and the competition is pretty intense.

    Disclaimer: ScanSoft is a client of Techdirt, but we had nothing to do with this merger.

  3. Mike’s points are well taken. Adjusting for NUAN’s $90 million in cash (no debt) gives you a purchase enterprise value of $130 million. Still over 2x revenues for a no growth no profit business (and a 6x to the enterprise value pre-acquisition).

    The antitrust angle was a bit overplayed. The DOJ got bloodied in the Peoplesoft saga, so they might stay away from a narrow market definition. On the other hand, the DOJ might want to take on a smaller target to re-establish its market definition criteria. Will be interesting either way.

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