Icahn’s Nuance Stake Spurs Optimism of Sale: Real M&A
Nuance surged 5.7 percent on April 2 after Icahn’s 9.3 percent stake was revealed, resurrecting a stock that plunged 19 percent on Feb. 8. The slump -- which drove Nuance’s price- earnings ratio to the lowest level since 2009, according to data compiled by Bloomberg -- was prompted by the $6.5 billion company cutting its forecast due to health-care and personal computer-related sales.
Icahn may pressure Nuance to sell its document-imaging division, according to Deutsche Bank AG and Mizuho Financial Group Inc. That would help Nuance reduce its $2.3 billion debt and improve sales growth at the company, Craig-Hallum Capital Group LLC said. Its voice-recognition technology, used on millions of devices, could make Nuance a takeover target for Microsoft Corp. (MSFT), Avondale Partners LLC said, while Deutsche Bank sees International Business Machines Corp. as a suitor.
Icahn “could push for strategic changes,” Joanna Makris, a New York-based analyst at Mizuho, said in a telephone interview. “There’s been a lot of frustration over the balance sheet and performance.”
Richard Mack, a spokesman for Nuance, declined to comment on what Icahn’s intentions might be.
“Nuance will offer Mr. Icahn and his firm the same respect and accord we offer our other investors,” Mack said in an e- mail. “We always seek to maintain an open dialogue with shareholders, yet keep discussions with individual investors private.”
Icahn didn’t respond to a request for comment. John Reilly of Armonk, New York-based IBM and Redmond, Washington-based Microsoft’s Tony Imperati said their companies don’t comment on speculation.
Nuance Chief Executive Officer Paul Ricci has built up the Burlington, Massachusetts-based company through acquisitions, expanding into areas such as medical transcription and software for managing corporate printing costs. From 2006 to 2012, Nuance spent more than $2.5 billion on takeovers, according to data compiled by Bloomberg. In the process, the company’s total debt more than doubled from less than $900 million as recently as 2011.
“There’s been so much M&A, and it hasn’t resulted in meaningful organic growth,” Makris said. “I can see Icahn just being more vocal” about slowing the pace of takeovers.
In February, Nuance reduced its fiscal 2013 forecasts, spurring the stock’s biggest one-day drop in more than six years. The shares kept falling, and Nuance’s price-earnings ratio slipped to 20.5 on March 1, the cheapest level since 2009.
Sales for the year ending in September will be $2.15 billion to $2.2 billion, down from a November projection of $2.17 billion to $2.22 billion, the company said Feb. 7. Nuance also cut its profit forecast to $1.76 to $1.87 a share, from $1.84 to $1.94.
Icahn, known for taking over corporations and pressing companies to change strategy, filed his Nuance stake via a form 13G, not the 13D used for activist investments. There’s precedent for Icahn investing in companies and not requesting any strategy adjustments, including his almost 10 percent stake in online-movie service Netflix Inc. (NFLX) disclosed in October.
Still, after Nuance shares fell 20 percent in the past year, FBR & Co.’s Daniel Ives sees the potential for Icahn to become more active at the company after Nuance failed to capitalize on recent acquisitions.
“Execution has been lackluster over the last six to 12 months,” Ives, a New York-based analyst at FBR, said in a phone interview. “It could translate into potentially more activism.”
Today, shares of Nuance lost 1.2 percent to $20.27.
Icahn could push Nuance to sell its imaging business, which sells products for scanning documents and turning them into digital text, according to Jeff Van Rhee, an analyst at Craig- Hallum in Philadelphia.
Because of its cash generation, the imaging business could appeal to a private-equity buyer and fetch as much as $400 million, Nandan Amladi, an analyst at Deutsche Bank in New York, said in a phone interview. Selling that division could help Nuance pare its debt, helping the rest of the company sell for a higher valuation, Van Rhee said in an interview.
“There’s a lot here that Microsoft or IBM (IBM) might want,” Van Rhee said. Nuance, whose shares closed at $20.52 last week, could command a premium of 30 percent to 40 percent, Amladi said.
IBM already collaborates with Nuance on research projects. IBM is emphasizing mobile technologies -- one of Nuance’s strengths -- with the goal of doubling its investment in that area this year, not including takeovers it could make. Nuance’s health-care technology could also be complementary for IBM, Van Rhee said.
Microsoft is another potential buyer, said John Bright, an analyst at Avondale. Speech recognition technology, for which Nuance holds many patents, is becoming increasingly critical in facilitating user interaction with various computing devices, ranging from PCs to tablets and smartphones.
While Microsoft owns speech-recognition technology from its 2007 acquisition of Tellme Networks Inc., it could use Nuance’s patents and relationships with carriers, handset makers and car companies to gain market share for products like Windows Phone, which is lagging behind devices running Google Inc.’s Android operating system and Apple Inc. (AAPL)’s iPhone, Bright said.
“The problem is, Microsoft probably doesn’t want health care, and they would probably lose Apple as a result,” Nashville-based Bright said in a phone interview. Nuance’s customers include Amazon.com Inc., Apple and Samsung Electronics Co., according to filings from the company.
Given Icahn’s purchase of Nuance shares, investors are expecting him to get more active, according to Tom Roderick, an analyst at Stifel Nicolaus & Co.
“Any time you get an activist shareholder involved, the perception is there’s something within the structure of the company they’d like to change,” the Chicago-based analyst said in a phone interview.
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