Nuance Makes Strategic Acquisition, Partly With O.P.M. (NUAN)

Nuance Communications, Inc. (NASDAQ: NUAN) has announced a dual-pronged deal this morning.  It has signed an agreement to acquire eScription, a provider of computer aided medical transcription technology.

The total consideration for this transaction is approximately $363 million, which is broken down as $340 million in cash and $23 million in Nuance common stock.  It will also include the assumption of vested employee options with a value of roughly $37 million.

With an estimated $7 billion spent on medical transcription in North America annually, this acquisition of eScription is intended to accelerate Nuance’s ability to effectively serve the medical transcription industry.  Nuance expects that its combined revenues for on-demand medical transcription and clinical documentation solutions will be between $175 million and $200 million in fiscal 2009.  As far as a direct add, it expects the deal to add $16 million to $18 million in non-GAAP revenue in fiscal 2008 and $63 million and $68 million in fiscal 2009.  This acquisition is expected to be accretive to 2008 non-GAAP EPS by $0.00 to $0.01 and $0.06 to $0.08 non-GAAP EPS in fiscal 2009.

But here is where this gets interesting.  Private equity firm Warburg Pincus will purchase Nuance shares in connection with the transaction.  Warburg Pincus will purchase 5,760,369 shares of Nuance at a price of $17.36 per share for $100 million. It will also purchase a warrant for 3.7 million shares of Nuance with an exercise price of $20.00 per share and a four-year term.

Nuance had $323.7 million cash on its books as of December 31, 2007.  Not including what it would have earned this last quarter yet to be reported, the Warburg Pincus capital infusion will provide enough cushion for the company to continue smooth operations without having to depend on its credit lines or any debt.  It already has almost $1.3 Billion in total liabilities, so this will allow this slight "other people’s money" acquisition to not be a burden on its books.

As Nuance is the leader in speech-to-text software solutions, this one has been under review before for our Special Situation Investing Newsletter.

Shares of Nuance are trading up nearly 3% pre-market at $17.96 this morning, and its 52-week trading range is $12.45 to $22.56.

Jon C. Ogg
April 8, 2008

Jon Ogg produces the Special Situation Investing Newsletter.  He can be reached at [email protected] and he does not own securities in the companies he covers.