Microsoft's $19 Billion Bet on Nuance
Deal Overview
Microsoft announced on Monday that it will purchase speech recognition company Nuance Communications for about $19 billion including debt. Nuance is an American Multinational computer software technology corporation which provides speech recognition and artificial intelligence solutions. It will be aligned with Microsoft’s business that serves businesses and governments. The Nuance acquisition represents Microsoft’s largest acquisition since it bought LinkedIn back in 2016.
Nuance’s main revenue drivers include selling tools for recognising and transcribing speech in healthcare and customer support roles. In the acquisition announcement, Microsoft stated that Nuance’s technology will complement the big tech’s cloud products for health care, which were launched in 2020. The healthcare industry has gone through massive transformation in past few years and its important M&A activity is directed towards tapping into a high growth industry.
Nuance saw its share price rise by over 16% when the acquisition was announced. Investor’s value the deal highly for the synergies it will create for the company. This ranges from removal of debt to market expansion as well as an improved product. On the contrary, Microsoft’s share price rose by over 1% signalling that investors saw the rationale behind the deal and understood how the acquisition will benefit Microsoft’s long-term goals of being the leader in cloud computing.
Benefits of the Deal
Nuance Communications was repaying its long- term debt in the past few years. Microsoft’s acquisition includes paying of all the debt of the firm. This will allow the firm to reinvest more cash into R&D and market expansion as they won’t have to deal with cash outflows from financing activities. Executives of Nuance can now fully focus on working on their product and can afford to burn cash due to the backing they will receive from Microsoft. This synergy alone creates other synergies for the acquisition.
The chart above shows the growth potential of the voice recognition market alone. Microsoft can benefit from this by using Nuance’s technology in different industrial applications. Not only healthcare but government and defence sectors might see use in the AI powered voice recognition software for security reasons. This can provide various revenue synergies in different industries. Microsoft’s vast client portfolio also provides the chance for cross selling which can drive up Nuance’s revenues.
Conclusion
Microsoft acquiring Nuance will provide countless synergies. A bigger client portfolio, removal of debt, market expansion, geographic expansion is all achievable if Nuance is successfully integrated into the structure of Microsoft. The big tech firm’s M&A record has improved under the stewardship of Satya Nadella and can deal with the high transaction and integration costs which will come with the deal. Overall, I believe this deal will increase shareholder value.