Microsoft makes its second-biggest acquisition, buys Nuance for $19.6 Billion in Healthcare bet

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Microsoft Corp. is buying speech-recognition pioneer Nuance Communications Inc. at $56 a share, a 23% premium to Friday’s close, in an all-cash total deal valued at $19.6 billion, gaining artificial-intelligence technology aimed at upgrading hospitals’ digital record-keeping and helping doctors predict patients’ needs, according to a statement made on Monday. The deal marks Microsoft’s largest acquisition since LinkedIn Corp. in 2016 that was purchased at an equity value of more than $26 billion.

The transaction value is derived by about 350 million fully diluted shares of Nuance multiplied by the $56 a share value, including stock options and stock awards. The acquisition will decrease earnings by less than 1% in the year that begins July 1, Microsoft informed, and start to add to profit the following year.

The software giant is acquiring Nuance to develop solutions that free doctors from note-taking and better determine healthcare needs. It has been working with the company tied to the Siri voice technology for two years on AI software that aids clinicians to get a hold of patient discussions and integrate them into electronic health records, and combining Nuance’s products into its Teams chat app for telehealth appointments.

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“The Nuance deal is a strategic no-brainer,” Wedbush Securities analyst Dan Ives wrote in a note Monday, according to Bloomberg. It “fits like a glove into its health-care endeavors at a time in which hospitals and doctors are embracing next-generation AI capabilities,” Ives said, also praising Nuance Chief Executive Officer Mark Benjamin for leading a turnaround that has made his company a “unique asset” for Microsoft.

Under CEO Benjamin, the speech technology company has narrowed its focus and separated peripheral businesses, such as the automotive AI unit, Cerence Inc., which was spun off two years ago. Thoma Bravo’s Kofax bought Nuance’s imaging division for $400 million.

Although the companies have partnered for two years, “together we can really bend the curve around health care – really improve the health outcomes and reduce costs,” Microsoft CEO Satya Nadella said in an interview. “Every provider, that’s what they want coming out of this pandemic, they want to look for a trusted partner, in this case, the combination of Nuance and Microsoft, to help them.”

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By selling more cloud software to hospitals and doctors, Microsoft has been trying to make inroads into the healthcare sector. As AI software develops and sees better days at parsing language and predicting medical needs, both Microsoft and Nuance may be able to develop technology that searches for certain words in health records to make better suggestions to doctors for patient care. The acquisition is likely to deepen Amazons’ competition with Microsoft. Amazon has pushed to sell its cloud-computing services and Alexa voice software to healthcare companies, in recent years. Both Amazon and Google are also investing heavily in the AI field.

As of Friday, according to data compiled by Bloomberg, Nuance’s shares had climbed 3.4% this year, giving the company a market value of almost $13 billion. The gain still trailed the 9.9% jump in the S&P 500 Index, while Microsoft added 15%. Microsoft shares were a little changed Monday in New York, and Nuance rose 17%.

“We believe the valuation is sensible, given Nuance’s leadership in conversational AI and what Microsoft could do with its software assets. We also don’t see any other strategic acquirers, based on the size of the transaction.”

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— Anurag Rana, Bloomberg Intelligence software analyst.

Nuance’s Benjamin will join Microsoft, after the deal expectedly closes this calendar year, retaining the CEO title and reporting to Microsoft cloud chief Scott Guthrie. Nuance’s financial results will be included as part of Microsoft’s intelligent cloud unit.

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Nuance, the company that laid the groundwork for the technology used in Apple Inc.’s Siri, had a net income of $91 million on revenue of $1.48 billion for its fiscal year ending September 30, after losing $217 million the previous year.

Nuance, whose products include Dragon speech-recognition software, already has partnerships with large electronic medical records companies like Cerner Corp. and Epic Systems Corp., and Microsoft plans to continue those, Nadella said. The goal is “absolutely not” to try to replace those companies, he said. “If anything we want to double down on our partnership with Epic and Cerner.”

The Dragon Ambient Experience software, used to ease how clinicians document patient care, is expected to be offered in other industries where AI tools to turn speech into records can be useful, Benjamin said.

Microsoft has also been increasingly focused on health care. Coincidentally, one of Microsoft’s Boston-area offices is located right next to Nuance’s headquarters.

“The more we worked together, the more we realized that we’re solving some of the greatest, most challenging, and complex scenarios and speed matters,” Benjamin said in an interview.

Still Active

With a market value of over $1.9 trillion, the most in the world after Cupertino-based tech giant, Apple, Microsoft remains active on the deals front.

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

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

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