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Stock Analyst Update

Microsoft Bolsters Healthcare Offerings With Nuance

We are maintaining our fair value estimate after Microsoft announced the acquisition of Nuance Communications, a leader in conversational artificial intelligence.

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Microsoft (MSFT) announced the acquisition of Nuance Communications, a leader in conversational artificial intelligence (AI), in an all-cash deal for $19.7 billion in enterprise value ($16 billion excluding debt) or $56 per share. We don’t believe this deal transforms Microsoft’s strategic plans, nor does it move the needle financially. Therefore, we are maintaining our fair value estimate for wide-moat Microsoft of $263 per share.

We view the acquisition as strategic in that it adds conversational AI to the portfolio and aligns Microsoft with Nuance’s roster of healthcare solutions and customers. Investors, patients, politicians, care providers, insurance companies, and technology all seem to agree that healthcare is an area where change is needed, but easy solutions have been elusive. Therefore, healthcare is an important vertical for Microsoft to penetrate more deeply. However, we consider this deal as a supplement to Microsoft’s larger AI efforts within Azure and do not view it as transformational. More broadly, Microsoft is clearly ramping its deal-making activities after the recently closed ZeniMax deal, the aborted attempt to acquire TikTok, and the recently rumored Discord acquisition.

Financially, even a $16 billion deal does not move the needle for Microsoft as it represents less than 1% of its $1.9 trillion market cap. Similarly, the deal is immaterial to Microsoft’s $132 billion cash hoard or Microsoft’s future combined financial performance. Nuance has seen its revenue decline in each of the last several years, to $1.48 billion in fiscal 2020, with another decline expected in fiscal 2021 to $1.37 billion, according to FactSet consensus, which we understand has been partly as a result of an ongoing restructuring program. The deal is at a reasonable price at a 23% premium from Nuance’s closing share price on Friday, April 9, and represents a takeout price to sales multiple of 11.7 times, as compared with our estimate of the software group median of 11.9 times. 

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.