Microsoft to Buy Artificial Intelligence Provider for $16 Billion

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Microsoft said on Monday that it would buy Nuance Communications, a provider of artificial-intelligence and speech-recognition software, for about $16 billion, as it pushes to expand its health care technology services.

In acquiring Nuance, whose products include the transcription tool Dragon, Microsoft is hoping to bolster its offerings for the fast-growing field of medical computing. Nuance has an established set of customers as well as a wide array of speech and text data related to health care, which is often a vital part of building new systems.

Microsoft and Nuance have been working together since 2019, but the acquisition signals that Microsoft has bigger ambitions for Nuance’s technology. Microsoft has been making large investments in industry-specific cloud technology, including health care, finance and retail.

Microsoft said the acquisition would double the size of the health care market where it competed, to almost $500 billion.

The deal is Microsoft’s biggest takeover since its 2015 acquisition of LinkedIn for $26.2 billion.

“Nuance provides the A.I. layer at the health care point of delivery and is a pioneer in the real-world application of enterprise A.I.,” Satya Nadella, Microsoft’s chief executive, said in a statement.

When Microsoft buys a company, its executives typically believe they can do more with the technology than the company it is buying can, a model that fits the Nuance deal, said Brad Reback, an analyst at the investment bank Stifel. That Nuance has proved itself in health care, with its technical and complex vocabulary, means Microsoft could introduce other types of businesses.

“Being able to solve that problem makes it that much easier to handle other industries’ terminology,” Mr. Reback said.

Nuance’s tools are also used mostly in the United States, so selling to a global powerhouse like Microsoft will let the company much more quickly sell internationally. “We saw the opportunity to superscale how we change an industry,” Mark Benjamin, Nuance’s chief executive, said in an interview.

Microsoft’s profitable business means it has money to spend. It ended 2020 with $132 billion in cash and has been looking for big deals to put that money to use. It announced a deal in September to spend $7.5 billion on ZeniMax Media, the parent company of gaming studios that make major titles like Doom and Quake.

But other potential acquisitions have not always panned out. Last year, a blockbuster bid to buy TikTok, the viral social network, turned into a political soap opera and fell apart. Microsoft has also looked at buying Discord, a live chat community largely used by gamers, though the status of those talks is unclear.

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April 12, 2021, 7:19 p.m. ET

Under the terms of the deal, Microsoft will pay $56 a share in cash, up 23 percent from Nuance’s closing price on Friday — a total of about $16 billion. Including assumed debt, the transaction values Nuance at about $19.7 billion.

Nuance was a pioneer in speech recognition. It led the market in the 1990s and 2000s and provided part of the underlying technology for Siri, the talking digital assistant that made its debut on the Apple iPhone in 2011. Licensing technology to Apple and other companies was a key part of its business.

Li Deng, who helped lead speech recognition research at Microsoft for nearly two decades, said in an email interview that he urged his bosses to acquire Nuance in 1999 but that Microsoft balked, feeling the price was too high.

Speech recognition underwent a sea change in 2010, when a team of researchers at a Microsoft research lab outside Seattle built a new kind of speech recognition system using a method called “deep learning.” This method — which was far more effective than earlier technologies — rapidly spread across the industry, with companies like Microsoft, Google and IBM rising to the fore.

This is the technology that now allows Siri, the Google Assistant and other digital assistants to recognize spoken words with near-human-level accuracy. Companies like Microsoft and Google also sell the technology to other companies through what are called cloud computing services.

After this shift, Nuance revamped its own business, offering speech recognition and other technologies for specific markets, most notably health care.

During a conference call with investors, Mr. Benjamin, the Nuance chief executive, who will remain in the role after the acquisition, said that his company’s health care business had grown 37 percent over the past year and that he anticipated additional growth. Microsoft said Nuance technology was used by more than 55 percent of physicians and 75 percent of radiologists in the United States and in 77 percent of hospitals in the country.

“The deal gives Microsoft access to half a million doctors and some of the largest hospitals around the world,” said Dan Ives, managing director of equity research with Wedbush Securities.