Microsoft to Acquire Nuance for $19.6 Billion in Health-Care AI Bet

Dina Bass and Liana Baker (Bloomberg) -- Microsoft Corp. is buying speech-recognition pioneer Nuance Communications Inc. in an all-cash deal valued at $19.6 billion, gaining artificial-intelligence technology aimed at helping doctors predict patients’ needs and upgrading hospitals’ digital record-keeping.

The software giant is offering to purchase Nuance at $56 a share, a 23% premium to Friday’s close, according to a statement Monday, which confirmed an earlier Bloomberg report. The deal marks Microsoft’s largest acquisition since LinkedIn Corp.

The transaction value is derived by the $56 a share multiplied by about 350 million fully diluted shares of Nuance, including stock options and stock awards. The acquisition will decrease earnings by less than 1% in the year that begins July 1 and start to add to profit the following year, Microsoft said.

Microsoft is tapping the company tied to the Siri voice technology to develop solutions that free doctors from note-taking and better determine health-care needs. It has been working with Nuance for two years on AI software that helps clinicians capture patient discussions and integrate them into electronic health records, and combining the speech technology company’s products into its Teams chat app for telehealth appointments.

The “Nuance deal would be a trophy for Redmond,” Wedbush analyst Dan Ives, referring to Redmond, Washington-based Microsoft, said before the deal was officially announced. “Nuance is in the midst of an unprecedented strategic turnaround the last few years under the leadership of CEO Mark Benjamin and we believe the company represents a unique asset on the health care front for Microsoft.”

Under Benjamin, Nuance has narrowed its focus and separated peripheral businesses, such as Cerence Inc., the automotive AI unit that was spun off two years ago. It also sold its imaging division to Thoma Bravo’s Kofax for $400 million, and zoomed in instead on partnerships with health-care providers and the biggest electronic medical records companies.

Although the companies have partnered for two years, “together we can really bend the curve around health care – really improve the health outcomes and reduce costs,” Microsoft Chief Executive Officer Satya Nadella said in an interview. “Every provider, that’s what they want coming out of this pandemic, they want to look for a trusted partner, in this case the combination of Nuance and Microsoft, to help them.”

Microsoft has been trying to make inroads into the health-care sector, selling more cloud software to hospitals and doctors. As AI software gets better at parsing language and predicting medical needs, Nuance and Microsoft may be able to develop technology that searches for certain words in health records to make better suggestions to doctors for patient care. The acquisition is likely to deepen competition between Microsoft and Amazon.com Inc. The retail giant in recent years has pushed to sell its cloud-computing services and Alexa voice software to health-care companies. And Amazon and Alphabet Inc.’s Google are both also investing heavily in the field of artificial intelligence.

As of Friday, Nuance’s shares had climbed 3.4% this year, giving the company that laid the groundwork for the technology used in Apple Inc.’s Siri a market value of almost $13 billion. The gain still trailed the 9.9% jump in the S&P 500 Index, while Microsoft added 15%. Microsoft shares were little changed Monday in New York, and Nuance rose 17%.

Microsoft expects the deal to close this calendar year, and Nuance’s Benjamin will join Microsoft, retaining the CEO title and reporting to Microsoft cloud chief Scott Guthrie. Nuance’s financial results will be included as part of Microsoft’s intelligent cloud unit.

Nuance, whose products include Dragon speech-recognition software, had net income of $91 million on revenue of $1.48 billion for its fiscal year ending Sept. 30., after losing $217 million the previous year.

Nuance already has partnerships with large electronic medical records companies like Epic Systems Corp. and Cerner Corp., and Microsoft plans to continue those, Nadella said. The goal is “absolutely not” to try to replace those companies, he said. “If anything we want to double down on our partnership with Epic and Cerner.”

Nuance and Microsoft also plan to offer the Dragon Ambient Experience software, used to ease how clinicians document patient care, in other industries where AI tools to turn speech into records can be useful, Benjamin said.

Microsoft has also been increasingly focused on health care. In May, the software maker unveiled a package of industry-specific cloud software, and has also hired executives with medical backgrounds and researching machine learning and AI tools for areas including clinical trials.

“The more we worked together, the more we realized that we’re solving some of the greatest, most challenging and complex scenarios and speed matters,” Benjamin said in an interview.

Coincidentally, one of Microsoft’s Boston-area offices is located right next to Nuance’s headquarters.

Still Active

With a market value of $1.93 trillion, the most in the world after Apple, Microsoft remains active on the deals front.

Last month, Bloomberg News reported that the software giant was in talks to acquire Discord Inc., a video-game chat community, for more than $10 billion. It also bought video-game maker Zenimax Media Inc. for $7.5 billion in cash in a deal that closed this year.

The Nuance deal would rank as Microsoft’s second-largest acquisition, behind the 2016 LinkedIn purchase at an equity value of more than $26 billion, according to data compiled by Bloomberg. The company, which had more than $130 billion in cash and short-term investments at the close of last year, said it will continue its stock buyback program, despite spending cash on Nuance.

Microsoft entered the artificial intelligence space decades ago with research projects and an early focus by co-founder Bill Gates on finding ways to make it easier for people to speak to computers using plain English.

The Nuance purchase will complement efforts in recent years, where Microsoft has assigned thousands of employees to its AI work and released tools customers can use to build applications that understand and translate speech, recognize images and detect anomalies. The company views AI as a key driver of future sales of cloud services.