Microsoft Corp. will purchase Nuance Communications Inc. for $19.7 billion in cash in a move that demonstrates a massive commitment to building out the Microsoft Cloud for Healthcare reported in late 2020. The acquisition, which is expected to close by the end of 2021, doubles the Redmond, Wash.-based company’s total addressable market in the health care provider space, bringing it to nearly $500 billion. The size of the transaction is notable even for a company with the active acquisition history of Microsoft, representing its second largest deal ever and the largest since the 2016 purchase of Linkedin for $26.2 billion.

The deal values Burlington, Mass.-based Nuance (NASDAQ:NUAN) at $56 per share, a 23% premium on the stock's closing price of $45.58 on Friday April 9, and more than three times the stock’s price one year ago. The $19.7 billion price includes assumption of Nuance’s net debt.

Nuance’s conversational artificial intelligence (AI) and cloud-based ambient clinical intelligence products are used by 10,000 health care organizations around the world and 77% of U.S. hospitals. U.S. radiologists have particularly gravitated to the company’s speech recognition and transcription technology, with more than 75% of them using Nuance. The company’s products include Dragon Ambient Experience (Dax), Dragon Medical One and Powerscribe One, all built on Microsoft Azure.

Why Nuance?

"Nuance provides the AI layer at the health care point of delivery and is a pioneer in the real-world application of enterprise AI," said Microsoft CEO Satya Nadella. "AI is technology's most important priority, and health care is its most urgent application. Together, with our partner ecosystem, we will put advanced AI solutions into the hands of professionals everywhere to drive better decision-making and create more meaningful connections, as we accelerate growth of Microsoft Cloud for Healthcare and Nuance."

With the pandemic driving rapid digital transformation of many industries, “It's now very clear that health care organizations that accelerate their digital investments can improve patient outcomes and reduce costs at scale. Advances such as AI will have an enormous impact on augmenting human capability in health care,” Nadella said on an investor call discussing the acquisition.

Nuance’s dominance in three areas made the deal particularly appealing to Microsoft. “Nuance's Dragon ambient experience solution has completely redefined clinical documentation by capturing and contextualizing every word of the physician/patient encounter and automatically documenting it into EHR” using deep learning, Nadella noted. In addition, the products’ integration with health care systems shifts workflows to the cloud, reducing clinician time, and improves both clinical and financial performance by integrating continuous AI learning loops.

Lastly, Nuance offers “cross-industry enterprise AI, specifically customer engagement and biometric security,” Nadella added, with eight billion authentications enabled by the company’s biometric services and 31 billion customer interactions using its solutions each year. Nuance products are used by 85% of the Fortune 100, according to the company.

The range of applications available to Nuance’s interactive voice response, virtual assistants and digital and biometric solutions, “will have a broader benefit across the Microsoft product suite, including Azure, Teams, and Dynamics 365,” said Jefferies Research Services LLC Analyst Brent Thill, and could boost Microsoft’s position in the security sector.

“Beyond health care and across a range of industries, enterprises are consistently looking for omnichannel intelligent engagement technologies to address the current challenges around customer experience. Technologies like advanced voice-enabled solutions can help them facilitate more personal, affordable and effective connections,” said Nuance CEO Mark Benjamin on the investor call. Nuance and Microsoft have partnered to develop and launch these solutions since 2019, using both Microsoft Azure and Microsoft Teams. Nuance has substantial expertise in the financial, telecom, retail and government domains, among others.

While the cross-industry applications provide a significant bonus, the primary appeal of the deal lies in the access to the health care industry. With the purchase, Microsoft stakes a claim for the physician side of the market. “Nuance and Microsoft complete the end-to-end patient provider workflow, capturing the patient interaction, converting into clinical documentation and conducting follow-up actions,” Nadella said.

“Targeting the end user doctor, which we believe is unique,” differentiates Microsoft from Amazon and Google which have also expanded into health care, noted Thill.

Nuance financial performance

“Based on consensus FY22 (September 2022 year-end) revenue of $1,472M, the $19.7B transaction price implies a 13.4x multiple which is rich for a business that the Street is expecting to deliver top line growth of 7% in FY22,” Thill said. He noted that Nuance is transitioning to more cloud-based revenue model and away from the perpetual and term-based licensing the company has used historically.

Nuance’s health care cloud revenue grew 37% year-over-year in fiscal 2020 and posted a 28% year-over-year improvement in the first quarter of 2021, ended Dec. 31, 2020. “In particular, we benefited from strong performance in Dragon Medical and DAX Cloud revenue, which grew 22% year-over-year driven by the ongoing transition of our installed base to Dragon Medical One, as well as traction in international, ambulatory and community hospital markets,” Nuance CEO Mark Benjamin said in announcing the quarterly results.

As part of a strategic plan to streamline the company’s portfolio and focus on higher growth products, Nuance agreed to sell the medical transcription and electronic health care record go-live business in November to Deliverhealth Solutions LLC, a new company created by Assured Healthcare Partners and Aeries Technology Group. Nuance continued as a minority shareholder of Deliverhealth.

Nuance announced the acquisition of Seattle-based Saykara Inc., a competitor in the conversational AI for health care market, for an undisclosed amount in February 2021.

Next steps

The boards of directors of Nuance and Microsoft have already unanimously approved the transaction, though it remains subject to the approval of Microsoft’s shareholders and certain regulatory approvals. Benjamin will remain CEO of Nuance and will report to Scott Guthrie, Microsoft’s executive vice president of Cloud and AI.

Nuance’s financials will be reported as part of Microsoft’s Intelligent Cloud segment once the transaction closes. Microsoft expects the acquisition to be minimally dilutive (less than 1%) in fiscal year 2022 and to be accretive in fiscal year 2023 to non-GAAP earnings per share.

Other companies interested in expanding into conversational AI might consider one of the smaller companies offering AI-powered voice solutions in the field such as Suki AI, Greenway Health, Mobius MD, Voiceboxmd, or Fusion Speech EMR. Two major industry players already have entries in the market ‒ Amazon.com Inc. has both Transcribe Medical and Alexa, which now has HIPAA-compliant medical skills, and 3M Co. offers M*Modal.