Microsoft’s $20bn Acquisition of Nuance

By Nathan Walemba (University of Oxford), Anthony Borgese, Susan Xiao, Claire Zhong, Jessica Pei, Zen Suzuki and Mustafa Bayramli (Wharton)

Overview of the deal


Acquirer: Microsoft

Target: Nuance Communications

Total Transaction Size: $19.7B

Closing date: Q3 2021

Acquirer advisor: Goldman Sachs

Target advisor: Evercore


Nuance Communications, a computer software company focusing on speech recognition and artificial intelligence, has entered a definitive agreement to be acquired by Microsoft for $56 a share in an all-cash transaction of $19.7B (including the company’s debt). This marks Microsoft’s second-largest purchase, following its $24B acquisition of Linkedin in 2016. Having developed the Microsoft Cloud for Healthcare, it seeks to utilise this within Nuance’s product and service offering. The acquirer will also gain access to the relationships held by Nuance, to gain market share within the healthcare sector. The proprietary technology held by Nuance will be applied within the cloud offering, implying a quicker entry-to-market. The current CEO of Nuance, Mark Benjamin, will remain in the role and report to Microsoft’s lead for Cloud & AI.


“To seize this opportunity, we need the right platform to bring focus and global scale to our customers and partners to enable more personal, affordable and effective connections to people and care. The path forward is clearly with Microsoft — who brings intelligent cloud-based services at scale and who shares our passion for the ways technology can make a difference. At the same time, this combination offers a critical opportunity to deliver meaningful and certain value to our shareholders who have driven and supported us on this journey.” - Mark Benjamin, CEO (Nuance Communications)

Company Details: (Acquirer - Microsoft)


Founded in 1975, Microsoft is a multinational technology company that develops, licences, manufactures as well supports computer services such as software and consumer electronics. Renowned for its software product, Microsoft Windows as well as its Xbox gaming station, Microsoft employs over 150,000 people worldwide as is one of the most valued companies in the world.


Founded in 1975, headquartered in Redmond, WA (USA)

CEO: Satya Nadella

Number of employees: 163,000

Market Cap: $1.97T (as of 04/19/2021)

EV: $1.92T

LTM Revenue: $153B

LTM EBITDA: $74B

LTM EV/Revenue: 12.51x

LTM EV/EBITDA: 25.75x


Company Details: (Target - Nuance Communications)


Nuance is a multinational technology company that has pioneered speech recognition and has been a large force behind the ever-popular Siri function found in Apple products. However, Nuance’s main business is in conversational AI within the Healthcare space, which is used by 85% of Fortune 100 companies worldwide and trusted by over three-quarters of US hospitals.


Founded in 1992, headquartered in Burlington, MA (USA)

CEO: Mark D. Benjamin

Number of employees: 7,100

Market Cap: $15.23B (as of 04/19/2021)

EV: $16.5B

LTM Revenue: $1.4B

LTM EBITDA: $254M

LTM EV/Revenue: 11.74x

LTM EV/EBITDA: 64.99x


Projections and Assumptions

Short-term consequences


The announcement of Microsoft’s second-biggest acquisition in its corporate history is poised to have a major impact on both the target and acquirer in the short run. Although Microsoft agreed to pay a 23% premium to the closing price of Nuance Communication, Inc. for $56 per share, the deal received largely a positive reaction from investors. Indeed, Nuance’s share price jumped by $8.18, almost an 18% increase, following the announcement of the deal. On top of that, Microsoft forecasts the transaction, which is expected to close this year, to be initially dilutive by less than 1% and then accretive by the fiscal year 2023 to non-GAAP earnings per share.


By channeling Nuance’s 10,000 existing customers to Microsoft, including some of the biggest healthcare organizations in the world, the deal will allow the acquirer to double its total addressable market (TAM) in the healthcare sector to nearly $500 billion. Besides, Microsoft will get the chance to leverage Nuance’s expertise and relationships with EHR systems providers to streamline its cloud service and empower healthcare clients through the power of ambient clinical intelligence and other cloud services. Despite the steep price tag, the acquisition makes good business sense for Microsoft in the short term.


Long-term Upsides


The acquisition serves as a clear pathway to being the obvious cloud provider for any company in the healthcare space. Through gaining the technology developed by Nuance, it will continue to improve the experience of patients, providers, and management alike. As Microsoft has done across industries such as telecommunications, retail, and financial services, the company is taking an engineered decision to lead this marketplace.


With global healthcare spending expected to remain at a share of 10.3% of global GDP, innovation has been highlighted as a ‘top issue’ for the sector in a recent report by Deloitte. The acquisition positions Microsoft’s Cloud for Healthcare in a sector that has experienced a paradigm shift over the COVID-19 pandemic, with non-emergency appointments being made virtual or cancelled altogether. Similarly, healthcare is growing beyond hospitals and clinics, to a day-to-day practice through well-being applications and services. Microsoft serves as a crucial tool for the innovation of its clients into new business practices.


Risks and Uncertainties


With several analysts calling the deal a ‘no-brainer’, the main risks to this deal come from how fast the deal can complete and macro trends that could affect the underlying business model as well as the synergies of the deal. The deal is expected to close sometime this year however further delays could hamper belief if the deal is as good as both companies say it is. This could lead to shareholders becoming more uneasy and possibly a decrease in share price in Nuance, which was bought at a 23% premium to market prices at the time. Another risk could come from antitrust laws which Microsoft has been facing for a long time with regards to them having a large monopoly over the market and possibly regulators could be averse to the deal going through.


Finally, whilst there are clear synergies between both companies, the ability for Microsoft to fully integrate all of Nuance’s operations, products, and various technologies without any significant issues. These issues could come from differences in company executives in implementing the merger or external factors such as the expected rate of economic recovery in the US.


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