There’s nothing subtle about Microsoft’s $19.7 billion, all-cash acquisition of Burlington-based Nuance Communications. It’s a bold statement that Microsoft intends to be the dominant provider of speech-based artificial intelligence systems to the world’s biggest enterprises, particularly in health care.
The Redmond, Wash., software giant will pay $56 a share for Nuance, a 23 percent premium to Friday’s closing price. The acquisition, announced Monday and subject to approval by shareholders and regulators, is Microsoft’s biggest since the company paid $26 billion in 2016 to acquire the business-oriented social network LinkedIn.
The deal is also the consummation of a partnership that began in October 2019, when Nuance integrated its health care software products with Microsoft’s cloud-computing network, called Azure.
Advertisement
From a Massachusetts perspective, the deal’s value is well below Dell’s $67 billion acquisition of Hopkinton-based EMC in 2016, but quite a bit above the price of acquired tech companies such as Acme Packet, Endeca, Kayak, and, most recently, the alcohol-delivery firm Drizly, which was bought by Uber for $1.1 billion in February.
Nuance, which employs around 7,100 people worldwide, is famous for its artificial-intelligence software that enables computers to recognize human speech. These days, plenty of companies make similar software for consumers. In fact, Apple’s Siri voice system was based on Nuance technology.
Amazon, Google, and even Microsoft have all built their own speech software and virtual assistants for mainstream users. Nuance also used to dabble in consumer markets. But in recent years, the company has specialized in enterprise-grade AI software that understands the meanings behind words, with a particular focus on medical applications.
Today, Nuance makes software smart enough to automatically generate medical records, assist doctors in their diagnoses, and refill patients’ prescriptions. And demand for such software is likely to surge, as millions worldwide replace face-to-face doctor visits with online and remote health care — a process accelerated by the COVID-19 pandemic.
Advertisement
“This is projected to be one of the fastest-growing infrastructure software revenue streams in history,” said Microsoft’s chief executive, Satya Nadella, during a Monday conference call. Together with Nuance’s other cloud-based medical services, the acquisition will enable Microsoft to tap a global health care market worth $500 billion per year, Nadella predicted.
And that could be just the beginning. Nuance also makes an array of intelligent programs for customer service and security applications. It makes software that can accurately figure out what a caller wants, even if they don’t use exactly the right words. It even makes a product for financial services companies that can identify fraudulent callers pretending to be someone else. The software can spot crooks not only by analyzing their tone of voice, but by tracking which words they use.
And now Microsoft will be able to market all of these capabilities worldwide.
“Formally joining forces will amplify our ability to deliver products that shape the future of work, help solve health care’s most pressing challenges, and bring compelling value to our customers,” said Mark Benjamin, Nuance’s chief executive, on a call with the media. Benjamin will continue in that role, while reporting to Scott Guthrie, Microsoft’s executive vice president of cloud & AI. (Benjamin succeeded longtime Nuance CEO Paul Ricci in March 2018.)
Peter Mahoney, Nuance’s former chief marketing officer, said that Microsoft needs to keep investors happy by finding a big new market it can dominate. “If you’re that big, it’s very difficult to grow organically, and these companies need to keep growing,” said Mahoney, who is now chief executive of Plannuh, a Newton maker of AI software for marketing.
Advertisement
Nuance began life as a document-imaging company called Visioneer in 1992. Later renamed ScanSoft in a merger with a Xerox spinout, it got into the speech-recognition business in the early 2000s through a complicated series of acquisitions that included the Boston-area tech companies Dragon Systems, Kurzweil AI, and SpeechWorks International. In 2005, ScanSoft acquired California competitor Nuance Communications and adopted the latter’s name for the merged company.
Nuance then grew through dozens of acquisitions of smaller startups. But in recent years, the company has slimmed down, spinning off its automotive business two years ago as a separate company, Cerence, and abandoning the document-imaging business by selling the division to Thoma Bravo’s Kofax for $400 million.
“If you look at what Nuance has really done well over the last several years, it’s to create a focus,” Mahoney said.
Nuance had net income of $28 million on revenue of $1.48 billion for its fiscal year ended Sept. 30, compared to a net loss of $12.2 million for the previous year.
Microsoft’s success with Nuance is by no means assured, said Lian Jye Su, principal analyst at ABI Research. He pointed to IBM’s Watson Health initiative, which has also tried to apply AI technologies to health care. Earlier this year, The Wall Street Journal reported that IBM is considering a sale of the business, which generates annual revenue of $1 billion, but no profits.
Advertisement
Su said that Nuance’s artificial-intelligence products are more advanced than IBM’s. Still, he warned that doctors and hospitals are often slow to embrace new technology, no matter how good it is. “The health care industry itself is a very conservative industry,” Su said.
Meanwhile, Microsoft continues to prowl around for promising acquisitions. Bloomberg News reported last month that the company was in talks to acquire the social network Discord, with a possible price tag of $10 billion.
The Nuance acquisition is expected to close later this year.
Anissa Gardizy of the Globe staff contributed to this report.
Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.