Stock Market, Analysts, Observers React to Microsoft’s Acquisition of Nuance
The day after the announcement by executives of the Redmond, Wash.-based Microsoft Corporation that Microsoft will buy the Burlington, Mass.-based Nuance Communications in an all-cash deal worth $19.7 billion, the financial markets and industry observers reacted to news of the deal. Microsoft will pay $56 a share for Nuance in a transaction it expects to close this calendar year. The purchase price is a 23% premium to Nuance's closing price on Friday. “Microsoft stock was flat on Monday while Nuance stock rocketed on the news,” Investor’s Business Daily’s Patrick Seitz reported on Monday afternoon, April 12, at the time of the close of business on the day on which the announcement was made.
“The deal would give Microsoft more heft in the health-care sector, where Nuance has a strong presence,” Seitz wrote, quoting Wedbush Securities analyst Daniel Ives, who told Seitz that the acquisition was a “no brainer” move for Microsoft. At the end of the day on Monday, Microsoft stock had risen 6 cents to $255.91, while “Nuance stock blasted 16 percent higher to $52.85,” Seitz reported. At close of business on Tuesday, April 13, Microsoft stock had risen to $258.49, while Nuance stock had dipped just a few cents to $52.24.
According to Seitz’s report, “Nuance ‘represents a unique asset on the health-care front,’ Ives said in a note to clients. ‘We also believe Microsoft can further integrate Nuance's advanced speech technology throughout its consumer and enterprise ecosystem over the coming years to leverage this potential M&A move.’ About 77 percent of U.S. hospitals use Nuance technology. Plus, more than 55 percent of physicians and 75 percent of radiologists in the U.S. use Nuance products. Doctors use its software to transcribe their spoken notes into patient records. Burlington, Mass.-based Nuance is at the forefront of digitizing the health-care industry,” Seitz wrote. He added that “Microsoft said the acquisition will accelerate its efforts to provide cloud computing services for health-care companies. Last year, Microsoft launched its Microsoft Cloud for Healthcare offering,” he wrote; and he quoted Microsoft CEO Satya Nadella as stating in the press release announcing the deal, as stating that “Nuance provides the AI layer at the health care point of delivery and is a pioneer in the real-world application of enterprise AI.”
In a report published on Sunday afternoon, hours before the official announcement was made, CNBC’s Alex Sherman and Jordan Novet wrote, speaking of the merger, that “The plans illustrate Microsoft’s recent efforts to expand through deals. Microsoft considered buying the U.S. operations of video-sharing app TikTok last year, and last month it completed the $7.5 billion acquisition of video game maker Zenimax. Nuance would be more aligned with the part of Microsoft’s business that serves businesses and governments. Nuance derives revenue by selling tools for recognizing and transcribing speech in doctor’s visits, customer-service calls and voicemails. The company reported $7 million in net income on about $346 million in revenue in the fourth quarter, with revenue declining 4 percent on an annualized basis. Nuance was founded in 1992, with 7,100 employees as of September.”
Sherman and Novet also reported that “Microsoft first approached Nuance in December, the person said, and is willing to pay about $56 per share for Nuance,” a person familiar with the merger talks told them. “That would give Nuance an equity value of about $16 billion, representing a 23% premium over the stock’s Friday closing price of $45.58 per share.” What’s more, they noted, “At $16 billion, Nuance would be Microsoft’s second largest acquisition, after the $27 billion purchase of LinkedIn in 2016.
Buying Nuance could expand Microsoft’s capabilities in voice software. Microsoft already has tools that developers can use to enable applications to transcribe speech into written words, and it incorporates speech recognition into its own products, such as the Bing search engine and the Teams communication app,” they wrote.
Analysts, observers, react
Industry analysts and observers shared a range of reactions to the business move. “I think this is one of many steps that Microsoft needs to take to solidify their business in the health care market,” Jefferies analyst Brent Thill told Yahoo Finance’s Daniel Howley on Monday after the announcement had been made public. “Obviously, Amazon is making a push into the industry as well, and I think everyone is going after the golden ticket of health care,” Thill told Howley.
Howley also wrote that “Microsoft, Google, Amazon, and even Apple (AAPL) have been working in the health care space for years, but the coronavirus pandemic supercharged the need for health providers to gain access to everything from improved video conferencing capabilities to better electronic health records (EHR) access for patients. With Nuance, Microsoft will further build out its Microsoft Cloud for Healthcare service, which it launched in November and serves as a one-stop shop for health care providers and patients alike. And there’s plenty of market up for grabs.”
Meanwhile, MarketWatch’s Emily Bary, in a report published on Monday afternoon, wrote that “Guggenheim analyst Glen Santangelo commented in a Sunday note to clients that Microsoft’s interest in the company was ‘not overly surprising’ given that the companies had worked together on developing ‘ambient intelligence’ products, though he was surprised about the deal price. A purchase price for Nuance of $56 a share seemed ‘relatively low given all the opportunities that we believe are ahead of [Nuance’s] business,’ Santangelo wrote Sunday. He highlighted Nuance’s Dragon Ambient eXperience (DAX) offering, which uses artificial intelligence to collect information about patients’ health issues during visits.”
Bary also quoted Wedbush Securities’ Ives in her article, noting that he told investors on Monday that Ives wrote in a note to clients after the deal announcement that “The Nuance deal is a strategic no brainer in our opinion for Microsoft and fits like a glove into its healthcare endeavors at a time in which hospitals and doctors are embracing next generation AI capabilities.” And, she wrote that, “Beyond healthcare, Ives sees room for Microsoft, which already partners with Nuance, to integrate the company’s advanced speech tools ‘throughout its consumer and enterprise ecosystem.’”
Meanwhile, Ben Rooks, founder and managing principal of the Sonoma, Calif.-based ST Advisors, told Healthcare Innovation Editor-in-Chief Mark Hagland on Tuesday that “It seems to me—Microsoft has said they want to get more aggressive, from an M&A perspective. And probably more than half of Nuance’s business is healthcare. And I look at Microsoft’s track record of successful M&A in healthcare, which is to say, nonexistent, and to me, it seems like they’re making a very big bet on what is admittedly a promising industry. At the same time,” Rooks said, “one should also consider Microsoft’s past stumbles in healthcare. In particular, he cited Microsoft’s February 2010 acquisition of the Andover, Mass.-based Sentillion, an identity management solutions vendor, and its challenges with Caradigm, a population health management vendor.
Per those references, Signify Research’s Alex Green wrote on June 21, 2018, referencing both Microsoft and GE Healthcare, that “GE’s strategy in relation to population health management (PHM) has been somewhat confusing and disjointed at times and its exit has looked increasingly likely for the last six months. Its original entry to the market via the formation of Caradigm, a joint venture with Microsoft, was made in 2012. However, the strategy for Caradigm changed after just a few years, with Microsoft quietly pulling out of the venture in April 2016 and GE taking sole ownership. Despite the change,” Green wrote in that 2018 analysis that “Caradigm did go on to develop a well-regarded PHM portfolio during this period (and one that it has continued to enhance) and it gained a sizable business in solutions focused on the enterprise market. In Signify Research’s latest market report covering the North American PHM market, Caradigm ranks in the top 10 vendors serving the enterprise provider market in terms of revenue share in 2017, a considerable achievement bearing in mind the highly competitive and fragmented nature of the PHM market.”
More broadly, Rooks told Hagland, “There’s a lot of VC [venture capital] money being spent now on the holy trinity of AI, ML, and NLP [artificial intelligence, machine learning, and natural language processing] in healthcare. And that level of investment does have the potential to be, if not transformational, evolutionarily important. The ability to parse medical records and data-mine from them, is it significant? Yes.”
As to how this acquisition might produce a different result from some of Microsoft’s past investments in healthcare, Rooks said, “I can’t predict the future. If I were on Microsoft’s board, I’d be asking the deal’s champions and the CEO, why we might be successful at this, when to date, none of Microsoft’s acquisitions were successful? Maybe they learned a lot from Sentillion and Caradigm? Thomas Alva Edison once said something like, I haven’t failed 100 times, I’ve found 100 ways not to succeed.” Meanwhile, “When Caradigm was founded,” he said, “I commented in your magazine that those who forget the past are condemned to repeat it. So this is definitely a ‘prove-it-to-me’ kind of story.”
Might other large corporations follow suit and make large investments in AI through acquisitions such as the Microsoft-Nuance acquisition? “There’s already been some of that happening, and some of these AI- and NLP-focused companies are being bid up to high multiples,” Rooks said. “And this is the hottest M&A [merger and acquisition] market for these kinds of acquisitions in history. I’d also point to Olive, as their valuation is a head-scratcher to me. As you look at Olive and Apixio and some of the other valuations we’ve seen in the marketplace, there’s a lot of excitement here. And if you’re Microsoft, conceivably, you can easily spend a couple of hundred million dollars” in investing in such ventures.”
