Nuance Communications, Inc. (NUAN)

[chmcnfunds]

A Seriously Siri-Less Apple

Oct. 1, 2014 7:52 AM ET | 10 comments | About: Apple Inc. (AAPL), Includes: NUAN

Disclosure: The author is short AAPL. Author is long NUAN and has no position in SSNLF (More...)

Siri could soon be lost to Samsung with an impending deal.
Carl Icahn owns 20% of Siri host and seems to want to sell.
If Apple loses its voice, it loses the war of the wearables.
As we enter a seemingly shaky period in the market, and Apple (NASDAQ:AAPL) sits at all-time highs, investors must be wary of any looming risks. While the story of missing Apple-style innovation is well discussed, there is one risk currently that seems to be missing from the discussion and could be a rude awakening.

Unbeknownst to many, Apple does not own the technology behind Siri. The technology is provided by Nuance Communications (NASDAQ:NUAN), also known for Dragon dictation software and Swype keyboard.

Stock in Nuance shot up in June on the announcement that Samsung (OTC:SSNLF) was in talks to buy Nuance. The stock then sold off on the news that the deal had slowed due to "complexities." However, the news was that the deal "slowed," not stalled or fell apart or the like.

NUAN Chart

Nuance went back into a decline as the market forgot about the deal until Tuesday when the stock spiked again on more news that the Samsung deal was in process.

NUAN Price Chart (click link for charts/tables)

NUAN Price data by YCharts

Who, What, Where, When, Why and How

The story begins back in April 2013 when Carl Icahn announced he had taken a 10% stake in Nuance. Over time Icahn gradually built up his stake to just under 20%. Uncharacteristically, a usually vocal Icahn didn't say a word about it. Essentially the only statements made by Carl were two tweets he sent out when he reached a standstill agreement with Nuance wherein he would not be an activist in exchange for placing two of his people on the Nuance board, his son Brett Icahn [whom he credits with his Netflix (NASDAQ:NFLX) success] and another associate Dave Schechter. Tweets here and here.

Rumors swirled regarding the reasons for Icahn's stake in Nuance, but the oddity of Carl Icahn saying virtually nothing while taking a 20% stake in a company leads one to believe that his end game was to put the company up for sale, and to do that he needs to keep the price down to attract suitors, hence the fact the he remained/remains quiet.

Additional evidence that a sale is forthcoming was outlined in a recent SA article in which the author took notice of a quiet statement in the last earnings report that Nuance was redeeming 2027 convertible notes, reasoning as follows:

A buyout offer is on the table, and calling back the debt will save the future acquirer ~$50 million from a debt-to-share convert.

The logic behind the deal makes sense for Samsung and puts Apple in a bind. Not only does the acquisition give their biggest competitor a number of new advantages, but it also places the technology of Siri in their hands. Of course Apple could bid higher and buy Nuance themselves, but that's the real catch. See, Nuance is really four companies leveraging a common technology base. The four companies (healthcare, consumer/mobile, enterprise, imaging) all fit nicely into Samsung's framework. But in the case of an Apple acquisition, they would end up with a number of businesses that they don't need - healthcare, enterprise and imaging. That gives Apple the choice of:

1 - Not bidding and watching Siri disappear into the Samsung ether.

2 - Outbidding and paying for divisions that they will shut down, essentially wasting billions of dollars.

3 - Diluting their focus by becoming involved in call centers, healthcare coding software and document centers. This might sound great, but for a company that is struggling to innovate in their own backyard, the last thing they need to do is branch out into the unknown.

Oppenheimer's Shaul Eyal explains why the Samsung synergies make sense:

…By adding NUAN's healthcare division into Samsung's small healthcare business, Samsung could be gaining access to 450,000 clinicians, 10,000 healthcare institutions, 50% of radiology reports (focus area for Samsung), and 98% of most connected hospitals. In the consumer/mobile segment, Samsung could benefit from NUAN's growing relations with car manufacturers as connected cars are growing in prevalence. Samsung could also become a leading provider of virtual personal assistants and speech recognition software … [and] Samsung would gain access to a customer base of 750,000 voice-enabled televisions, 250M voice-enabled phones, 20M voice-enabled cars, 1M copies of Dragon desktop and 800M mobile keyboards.

Why Siri Matters

While losing Siri to the hands of their competition would be a blow now, it would be catastrophic in the future as it would put Apple far behind their two biggest competitors, Samsung and Google, in the world of voice interfacing. That spells trouble in a big way when seen in the context of the next big development in mobile computing - wearable. The thing about wearable is that it defies the typical interface - no more keyboards, and no more touchscreens (sorry Apple Watch!)

Future interface will be via voice, whether you're talking to your glasses, your thermostat, watch, car, teapot, phone, and on and on. For Apple to stumble in this crucial space would be a tactical blunder, and I think Samsung and Carl Icahn know it.
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http://seekingalpha.com/article/2533545-a-seriously-siri-less-apple

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