OVERVIEW OF THE DEAL
On April 12th 2021, Microsoft and Nuance Communications announced that they had entered into an agreement under which Microsoft will acquire Nuance at an implied equity value of $15.9bn. It implies a premium of 22.8% when the price per share is compared to the $45.58 closing price of Nuance on April 9th, just before the announcement. This deal is expected to be Microsoft's second-largest acquisition ever, just after the acquisition of LinkedIn for $26.2bn in 2016.
In 2019, the two companies had already partnered during a project that aimed at easing communication between patients and clinics using AI. Nuance had also adopted several of Microsoft’s solutions such as Azure.
As Microsoft announced a “Cloud for Healthcare” initiative six months ago to improve the healthcare industry, this acquisition is expected to double Nuance’s addressable market.
Company Details: Acquirer – Microsoft
Founded: 1975
Headquarters: Redmond, Washington
CEO: Satya Nadella
Status: Public
Number of Employees: 166,000
Market Cap: $1,930 billion
Revenue: $143 billion
EBITDA: $68,248 million
Microsoft is one of the world’s leading tech companies which main products are the Windows OS and the Office productivity applications.
Microsoft also entered the cloud services industry in 2010 by creating Microsoft Azure, that aims at building, testing, deploying, and managing applications and services through Microsoft-managed data centres. The sales are evenly split between 3 main activities namely “Productivity and Business Processes” (Office, LinkedIn), “Intelligent Cloud” (Azure) and “More Personal Computing” (Windows, devices and gaming).
The majority of sales are recorded in the US, which represents a total of 51%, and the remaining 49% is evenly split in other countries as no sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2020, 2019, or 2018. The main shareholders are The Vanguard Group (7.7%) and Capital Research & Management (7.4%).
Company Details: Target – Nuance
Founded: 1992
Headquarters: Burlington, Massachusetts
CEO: Joseph J. DeAngelo
Status: Public - Listed
Number of Employees: 11,500
Market cap: $8.7bn
Revenue: $6.1bn
EBITDA: $836m
Nuance is a technology pioneer that provides conversational AI innovations. More specifically, it delivers intuitive solutions that understand, analyse, respond to people and amplify their ability to help others with increased productivity and security. Its main customers are in the healthcare industry, but they also operate with companies across financial services, telecommunications, government, and retail. The vast majority of sales are done within the United States as it represents 80% of the total revenue. We believe that Nuance operates in a very promising market. Moreover, the addressable market outside the US definitely represents a great opportunity for Nuance to expand within the next few years.
SYNERGIES
1. Targeted synergies
This deal is expected to enhance the cooperation between Nuance and Microsoft. This cooperation has existed since 2019, when Nuance chose to use the Microsoft Azure solution for its cloud needs, and Microsoft offered its AI expertise to Nuance. The acquisition of Nuance will take this cooperation to the next step: with Nuance having total access to Microsoft’s technology, it will be able to grow faster, enabling the two companies to fulfil their goal, bringing the best of technology (AI), to where it is most needed (healthcare), says Satya Nadella, Microsoft’s CEO.
2. Synergies analysis
This deal is the second biggest in Microsoft history, after LinkedIn’s acquisition for $26.2 billion in 2016. Therefore, both Microsoft and Nuance expect a lot from this deal.
The importance of Nuance, a company working with 85% of the Fortune 100, will be an asset in Microsoft’s battle in the cloud computing industry with Amazon Web Service (AWS) and Google Cloud Platform. AWS and Microsoft Azure (the cloud computing solution from Microsoft, used by Nuance) have been competing for years and AWS still has the first place with $25.7 billion turnover in 2018, and Microsoft comes second with a $23.2 billion turnover. Google Cloud Platform, arrived later in the competition, is third with a $6.8 billion turnover. In this intense competition, Nuance’s client base and expertise will come as an important asset which might give Microsoft the leading place in the industry.
Also, Nuance’s expertise in the field of natural language processing with its vocal assistant Nuance Dragon will help Microsoft to improve its own vocal assistant Cortana, currently competing with the vocal assistants of Google (Google Assistant), Amazon (Alexa) and Apple (Siri).
Finally, the synergies between the technologies of the two companies will enable them to better answer the needs of the health industry specifically. Indeed, the health industry is the core of Nuance’s mission, and Microsoft is also trying to be the preferred tool of doctors and surgeons. This acquisition is the epitome of Microsoft's strategy to achieve this goal, one year after the creation of “Microsoft Cloud for Healthcare”, a Microsoft firm dedicated to the health industry. By combining their expertise, the two companies will develop more accurate tools to help the professionals of health and will better be able to conquer this market, which represents a total addressable market of $500 billion.
RISKS AND UNCERTAINTIES
The major uncertainty in this deal lies in the fact that the health industry is still late in its digitalization. While tools that assist surgeons during surgeries or help doctors make diagnoses with AI are becoming more common, it's not clear that patients are ready to have surgery only by robots or cared for only by computer doctors. Microsoft and Nuance tools will have to take into account both the expectations of the physicians and the patients. However, this uncertainty should not be really dangerous for this deal, since these questions will only appear in the long term of the development of healthcare technology.
FINANCIAL CONSEQUENCES
This deal will be financed 100 percent by cash & therefore the new group will be fully owned by existing shareholders of Microsoft. Microsoft had rich reserves of cash on their hand due to which this acquisition will not have much change on the debt levels of Microsoft or change the shareholding structure by any means. Also, the acquisition is not expected to disrupt the existing share repurchase authorization which is valued at $21 billion. Although Microsoft expects the acquisition to be slightly dilutive (less than 1%) in FY 2022 & to be accretive in FY 2023, we expect this deal to be accretive & resulting in an increase of EPS by 5 percentage points.
IS THIS DEAL FAIRLY PRICED?
Microsoft is going to acquire Nuance for a share price of $56 which represents a premium of 23 percent over its closing share price on the day of the announcement. The overall value of the deal is estimated to be around 19.7 billion (inclusive of debt). Based on this EV and the LTM EBITDA of Nuance of 254 million, the EV/EBIDTA multiple comes to be 77 which is significantly higher than the comparable transactions media of 45. The biggest reason for such a high multiple is the vast potential of AI in healthcare & Nuance’s leading position in that market. Nuance has outperformed S&P 500 by 215% after its spinoff from Cerence & this clearly shows the kind of trajectory it is on.
It is tough to estimate the value of synergies which are going to arise from this deal due to the sector it operates in & the kind of intangible assets on the balance sheet of Nuance. Although the transaction multiples are on the higher side, the deal makes sense from the perspective of Microsoft when we look at the bigger picture of Microsoft’s efforts to provide industry- specific cloud offerings to support customers & partners.
CONCLUSION
This deal is another example of the big tech companies for the pure players, i.e., companies that have an online activity on a specific field. These companies are a tool for the big tech companies to acquire a strong expertise in a domain quickly in order to compete with other big companies. For example, in 2012, Amazon acquired Kiva Systems, a company specialized in robotics, for $775 millions; in 2014, Google acquired Nest for $3.2 billion to gain an expertise in the field of house automation. These acquisitions help these companies to grow faster through the technologies they obtain, or to compete with other big companies in some new fields. This important deal is the latest step in Microsoft’s global ambitions. The market had a good reaction to the announcement of the acquisition, with the shares of Nuance increasing by 16% the same day, up to $52.85, slightly below the $56 offered by Microsoft to Nuance’s shareholders, showing a strong trust from the market.