Guggenheim analyst said the purchase price for Nuance seems low given the opportunities for the business.
Microsoft Corp. is making a big healthcare push with its purchase of speech-recognition software maker Nuance Communications -- and the company could be getting a bargain.
The tech giant confirmed Monday that it plans to purchase Nuance $(NUAN)$ for $56 a share in cash, with the deal valued at $19.7 billion, including Nuance's net debt. The proposed acquisition, expected to close later this calendar year, will give Microsoft $(MSFT)$ access to Nuance's tools for conversational artificial intelligence $(AI)$ and other intelligence products for the healthcare industry.
Nuance shares were up 17% to $53.32 in recent Monday morning trading, while Microsoft shares were little changed. The deal, which valued Nuance's stock at a roughly 23% premium to the Friday closing price, would be the largest for Microsoft since its purchase of LinkedIn for more than $26 billion in 2016.
Microsoft's plans to purchase Nuance had been reported by several outlets over the weekend ahead of Monday's official deal announcement. Guggenheim analyst Glen Santangelo commented in a Sunday note to clients that Microsoft's interest in the company was "not overly surprising" given that the companies had worked together on developing "ambient intelligence" products, though he was surprised about the deal price.
A purchase price for Nuance of $56 a share seemed "relatively low given all the opportunities that we believe are ahead of [Nuance's] business," Santangelo wrote Sunday. He highlighted Nuance's Dragon Ambient eXperience $(DAX)$ offering, which uses artificial intelligence to collect information about patients' health issues during visits.
"While we appreciate that this is generally close to our [price target] of $58, we would remind investors that our [price target] is on a one-year basis -- and in the context of an acquisition, we would expect the company to generate a more substantial premium," he wrote prior to the official announcement. Santangelo added then that he "would not rule out the possibility a competitive bidding situation."
Wedbush analyst Daniel Ives called the Nuance deal a "trophy" for Microsoft's management team that could signal a greater interest in mergers over the coming months, given the company's reported interest in purchasing chat platform Discord for upwards of $10 billion.
"The Nuance deal is a strategic no brainer in our opinion for Microsoft and fits like a glove into its healthcare endeavors at a time in which hospitals and doctors are embracing next generation AI capabilities," Ives wrote in a note to clients after the deal announcement, while reiterating an outperform rating and a $300 target price.
Beyond healthcare, Ives sees room for Microsoft, which already partners with Nuance, to integrate the company's advanced speech tools "throughout its consumer and enterprise ecosystem."
Microsoft and Nuance said in a release announcing their deal that Nuance's "expertise will come together with the breadth and depth of Microsoft's cloud, including Azure, Teams, and Dynamics 365, to deliver next-generation customer engagement and security solutions."
Microsoft shares have gained 19.4% over the past three months as the Dow Jones Industrial Average has risen 8.6%.