Please ensure Javascript is enabled for purposes of website accessibility

Will Nuance Benefit From an Icahn Stake?

By Evan Niu, CFA - Apr 2, 2013 at 5:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The famed activist investor discloses that he has taken a hefty stake in the voice recognition specialist.

Shares of voice recognition specialist Nuance Communications (NUAN) are having a good day, with shares gaining upwards of 9% on news that activist investor Carl Icahn has taken a stake in the company. The famed investor disclosed a 9.3% passive stake in Nuance, an indication that he believes shares are currently undervalued.

There are numerous possibilities on how Icahn could seek to restructure Nuance. Some analysts believe that Icahn could push for Nuance to strengthen its balance sheet, since it currently carries a large amount of debt due to its acquisitive nature. At the end of 2012, Nuance was sitting on more than $2.3 billion in long-term debt.

Since Nuance has so many businesses, it's also conceivable that Icahn would be looking to divest some of the less important segments in order to focus on its core licensing businesses in health care, mobile, and enterprise. For example, the imaging sector was just 12% of sales last quarter, and could potentially be divested.

Nuance got crushed two months ago when it reported earnings and issued soft guidance for the full year. That sell-off brought shares to 52-week lows and was likely overdone. CEO Paul Ricci cited macro headwinds in Europe as contributing factors to the conservative outlook.

Meanwhile, Nuance's valuation has always been a tricky topic, since its intangible amortization and other acquisition related costs put a drag on reported earnings and made its trading multiples appear inflated.

The fact that Icahn is buying in may give investors more confidence that Nuance isn't overvalued at 39 times earnings.

Ricci is a notorious hardball, as is Icahn. I'd gladly pay a cover charge just to watch those two duke it out in a boardroom. I also wouldn't be surprised if Ricci acted quickly to institute some anti-Icahn measures like a poison pill, a move other companies have made in the past to fend off Icahn's unsolicited advances.


 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nuance Communications, Inc. Stock Quote
Nuance Communications, Inc.
NUAN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.