From World Class To World Class Disaster

Software hotshot L&H may be headed for a breakup

Just last spring, Belgium's Lernout & Hauspie Speech Products appeared on the brink of greatness. Its appeal was natural-language software, which would permit users to surf the Web simply by talking, and eventually even translate both spoken words and text. Microsoft Corp. and Intel Corp. had snatched up stakes in the company, and retail investors followed. By last March, with a market cap topping $8 billion, L&H was snapping up U.S. companies Dragon Systems Inc. of Newton, Mass., and Dictaphone Corp. of Stratford, Conn. This Belgian company was world-class.

It still is world-class--a world-class disaster, that is. L&H has admitted to "errors and irregularities" in its revenue reports and has postponed a Nov. 14 deadline for publishing an independent audit. It acknowledges that third-quarter revenues will be at least 24% below forecasts. Co-founders Jo Lernout and Pol Hauspie have stepped down as co-chairmen, the stock has fallen from more than $70 in March to $3.75, and the company faces a Securities & Exchange Commission investigation and a debt crunch. Now the company's best bet may be to auction off its best parts.

What happened? L&H tried to build a giant on a technology that was ready to take only baby steps in the marketplace. The impact on L&H's reputation is ruinous. "No one will buy a piece of software with the Lernout brand name again," says Patrick Miechelsen of Fortis Bank in Brussels.

An L&H spokesman admitted that the company will have to restate earnings but said it's an issue of interpreting accounting rules, not fraud.

No matter. L&H's new chairman, Roel Pieper, a former Tandem Computer and Philips Electronics executive, faces pressure from investors to sell off the company's assets. L&H boasts an inventory of software that translates simple commands in 20 languages along with a traditional, human translation business that the company says will pull in about $100 million in revenue this year. This should be easy to sell, perhaps to rival Berlitz International Inc.

The other software divisions could be sold in a big chunk to a competitor such as Philips or IBM Corp. But analysts think the company first would try to lop off specific divisions, such as one that automates medical dictation and another that operates corporate call centers. There's value here, especially in speech-recognition technology.

"HEMORRHAGING." "They got a good patent portfolio from Dragon," says Ozzie Osborne, general manager of IBM Voice Systems. "The question is how many Dragon people are still there." Good point: Software businesses are only as valuable as their programmers, and no one expects key employees to hang around L&H. A spokesperson says L&H still has 5,400 employees, though he admits "attrition is above average."

L&H must pay back about $230 million in debt by the end of March, but has only $150 million to $200 million in cash, and it is draining funds as customers flee. "They have to stop the hemorrhaging," warns analyst Pierre-Paul Verelst of ING Barings in Brussels. Analysts predict a bankruptcy, though an L&H spokesman sees "no immediate" danger of that.

The worst consequence of the meltdown is its effect on the technology's development. Speech recognition could now be relegated to the research departments of giants such as IBM and Philips. "I think the growth potential is tremendous, but this technology needs time to develop," says Alex Waibl, a professor at The Robotics Institute at Carnegie Mellon University in Pittsburgh. Time is just what L&H lacks.

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