Want to sell your tech company? Call ScanSoft (NASDAQ:SSFT), which has been on a mergers-and-acquisitions spending spree lately. Just be prepared to have Wall Street grumble about it.
The company's latest deal was this week's purchase of Nuance (NASDAQ:NUAN) for $221 million. It's a hefty transaction, considering that ScanSoft's market cap is roughly $400 million. Nuance, like ScanSoft, is a provider of speech-recognition software. It has more than 1,000 clients, including Avon, British Airways, Nomura Securities, OnStar, Sprint PCS, United Parcel Service, Vodafone, and Wells Fargo.
The combined company, which will be called Nuance, is expected to wring out cost savings of $20 million to $25 million per year via headcount reductions, office-site consolidations, and the like. The technicalities involved with speech recognition pose difficult challenges, but the new company will have 300 speech scientists on hand, as well as a portfolio of more than 250 patents.
But the story doesn't end there. In an interesting twist, private equity firm Warburg Pincus will purchase $75 million in ScanSoft common stock, with the proceeds helping to finance the merger. Founded in 1971, Warburg Pincus has built a fund of $13 billion and financed such tech-related companies as Avaya (NYSE:AV), BEA Systems (NASDAQ:BEAS), and Veritas Software (NASDAQ:VRTS).
It's not often that you see a private equity firm buying a small-cap company in the tech sector. Early-stage tech firms tend to be light on assets, and cash flows are often erratic. More importantly, as is the case in any emerging market, it is not clear what solutions, if any, will emerge as winners. But Warburg Pincus seems to believe that there is room for growth in speech recognition, especially with the emergence of increasingly sophisticated mobile devices. And its major financial commitment signals that it believes in ScanSoft's ability to capitalize.
Still, integrating the acquisition will take time and poses plenty of challenges. That's the way Wall Street seems to see it: ScanSoft fell by 16% on the news.
ScanSoft and Nuance both released quarterly reports earlier this week. In ScanSoft's second quarter, revenue increased 24% year over year to $53.1 million, while net losses fell to $1 million ($0.01 per share) from $2.8 million ($0.03 per share) over the same period last year. Nuance, meanwhile, reported that its first-quarter revenue fell 7.1% to $11.8 million. The net loss increased from $2.6 million ($0.07 per share) to $4.6 million ($0.13 per share).
Among ScanSoft's products is Dragon Naturally Speaking, a software program that was once part of Lernout & Hauspie -- a company that, somewhat ironically, self-destructed because of a myriad of M&A deals, coupled with a dose of good old-fashioned fraud. Investors -- and the Street -- can only hope that this merger goes much more smoothly.
Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
