Transforming a Company Through Strategic Acquisitions

Business transformation through acquisition

In one of my deals, M&A transformed the company from a small entity into a major player in several market segments through consolidation. The more interesting part of this transformation was recognizing opportunities to add technology, distribution, and capabilities. 

In some cases, adding raw capability changed the company's trajectory, moving it from a voice recognition-centric focus to a broader range of services for both radiology and general clinical use.

We aimed to increase what our users could do and accomplish simultaneously. We pivoted more towards natural language understanding, processing, and AI, which was transformative. This led to Nuance and Microsoft becoming leaders in clinical ambient intelligence. 

The seeds of this transformation were collected and germinated through strategic acquisitions, which catalyzed our growth and innovation.

Before this transformation, Dragon dictation was our main flagship product. Most of the revenue has always been B2B. The outside world might see a box product at Staples and think of Dragon, but our enterprise division served airlines, banks, and other businesses. 

When you call in and get forced into the voice recognition loop, that's our technology, which added significant value by avoiding agent interactions, providing high value to those companies.

Healthcare was just emerging as a significant sector. When I joined, the Dictaphone acquisition was behind us, and Dragon was starting to be used in healthcare, building out the vocabulary and accuracy. Voice recognition has changed significantly over the years, enhanced early on by pre-programming complicated medical vocabulary.

Doctors, with their speed and accuracy requirements, benefited greatly from this. Nuance developed the ability for the software to understand a fast-talking doctor using jargon, even if English was their second language. In the early days, doctors would speak into a microphone without seeing the words, relying on transcriptionists to finalize the drafts. 

As Dragon Medical became more accurate, doctors were satisfied seeing the words appear on the screen in real-time.

Strategy behind the transformation

The strategy had two or three significant components that the transcription acquisitions addressed for us. Firstly, we needed as many users as possible speaking into our systems to keep training our technology with more data, which is crucial for AI development. 

We focused on acquiring customers willing to allow their data to be used for AI training, adhering to privacy concerns and HIPAA requirements by de-identifying the data.

Secondly, expanding market reach was essential. More hospitals wanted a one-stop shop, transitioning from in-house transcriptionists to outsourcing. Nuance supplied software to some outsourced firms but decided to become a service provider to leverage our technology directly and increase revenue. 

Transcription software might cost a penny or two per line, but the full transcription service could fetch nine to fifteen cents per line, significantly boosting revenue.

Managing many people became necessary, with an offshoring play to reduce labor costs while passing some savings to customers. Over time, the transcription services business became commoditized, leading us to divest that side once we had sufficient data and were shifting towards a software-only approach. Our focus then moved to natural language processing, marking our new direction.

Some cost synergies were certainly part of it, but frankly, size was a significant factor. Our CEO, Paul Ritchie, wanted to expand the company continually. We were rewarded for this growth in the market, and growing our top-line revenue was a key part of our strategy.

Doing transformative deals as a public company

It was not overlooked at all. It was something everyone tracked, including analysts, and was part of every earnings call. We discussed the division between the business and technology sides very visibly. Analysts valued it differently, but the strategy justified itself.

When I joined the company in 2006, this journey was just beginning. From 2006 to around 2012 or 2013, in healthcare, we focused on transcription technologies and services, as well as diagnostic transcription technology for radiologists. We explored other acquisitions that could bring additional value, like information services for radiologists, beyond recognition-based services.

We acquired technologies that improved our understanding of clinical terms and body parts to enhance software accuracy and intelligent features. These acquisitions allowed us to better understand what clinicians and radiologists were saying and to feed this information back into their workflows to add more value. 

We also moved into areas like automated coding and quality measures, emphasizing the importance of clinical language understanding and intelligence in healthcare information management.

It’s like improving the existing business lines to keep them relevant and adding new business lines. We focused on close adjacencies. Our strategy wasn't about finding a distant opportunity and using it to go elsewhere. We aimed for near adjacencies, often involving the same buyers, users, or workflows that were upstream and downstream.

The intelligence and advantages added in one step of the workflow benefited other parts of the workflow. We had a value chain, workflow chain perspective of our users and decision makers, and we built with that in mind.

Changes in market position

It's a pretty amazing transformation, and I feel fortunate to have been part of the team that achieved this. In 2006, we started with Peter Durlock and shortly after Joe Petro, both of whom had extensive experience in healthcare IT. 

For Nuance, expanding our reach, technology, and depth was crucial. We were one of the main players in medical transcription services and technology at that time and became the number one player in certain tools for radiologists.

In the last five years, we pivoted hard towards large language models and machine learning to add ambient intelligence. Nuance, with Microsoft's assistance and reach, has catapulted to industry leadership with the DAX product. 

It listens to conversations between clinicians and patients, captures the notes, structures them, and provides a structured note back for approval. This innovation is life-changing for clinicians, reducing what used to be a tedious and time-consuming task to near real-time documentation.

Previously, there could be a three-day delay between when a clinician spoke into a phone and received a draft to approve and edit. Now, this happens almost instantly, filtering out extraneous information and focusing on the meaningful parts of the interaction. The capabilities of this technology are a significant leap forward for the industry, positioning Nuance and Microsoft as leaders in this new world.

Dictation used to be about accuracy, ensuring that what the doctor said was captured correctly and conformed to hospital policies. For example, converting "blood pressure" to "BP" as per hospital norms. Today, it's about understanding the meaning of a discussion between a doctor and a patient and creating a coherent note from it. It's a whole different situation.

Earlier, we were a supplier to Apple for their voice recognition software used on iPhones. This was good business for several years until Apple improved its own recognition capabilities and no longer needed our services. Once voice recognition became freely available on every phone, our consumer product lost much of its market.

Despite this, our software remained more accurate and useful for many professional and advanced prosumer users. These users appreciated that our software could control the entire PC using voice commands, which was especially beneficial for people with disabilities. 

While the consumer base decreased, there remained niches, such as law enforcement and legal professionals, who valued the higher accuracy, voice training, specialized vocabularies, and workflow integration of our software.

We recognized the shift away from the broad consumer market, which was inevitable. Fortunately, we experienced significant growth on the professional, healthcare, and enterprise sides. We also had a period of success in mobile before spinning off that segment some years later.

Divestitures

The divestitures we carried out over the last six years were for different reasons. Although I didn't have a boardroom seat for any of them, I was involved in several, particularly in the mobile space. Nuance supplied voice recognition software for the head units in cars, such as those in Toyota vehicles, which provided basic voice recognition capabilities. 

However, this business, characterized by long lead times, long production runs, and a royalty-based model, differed significantly from the rest of Nuance. Consequently, we spun it out as Cerence, which has since been a public company.

We also divested the document imaging business, which I had helped grow. It was a legacy non-speech business that, despite adding value, didn't quite fit with the rest of Nuance. Our new CEO, Mark Benjamin, recognized this, and it was past time to divest. 

Similarly, we divested the transcription services business to focus on technology. As Dragon made it easier for doctors to speak and see their words appear on the screen, the need for traditional transcription services diminished.

Divestitures are a challenging but valuable part of M&A experience. It's always more fun to be the buyer, asking questions, rather than the one answering them. Being on the other side of the desk was a revelatory experience.

M&A experience

It would be fun and horrifying for you to ask my bosses over the years. I really enjoyed the interaction with CEO founders; that was the best part of doing M&A deals. The relationship added value for the seller, making the process more enjoyable and sometimes helping get deals done, possibly saving us money. 

These relationships, especially with smaller firms under $10 million in revenue, often involve an owner-operator founder, providing a chance to use your personality.

The other enjoyable part for me is the interaction with our internal team, not just the M&A team but the virtual team involved in an acquisition. At Nuance, we did enough acquisitions that people knew their roles, even those in finance or HR had M&A on their business cards. 

Working with them, technology people, and coordinating all of that was satisfying. Sometimes, you had to pull to get commitments for meetings, notes, slides, and reviews, but being the coordinator was rewarding.

A key role in M&A, especially in a deal lead position like mine, is triage. You have to listen to everything said by the counterparty and be in every meeting, not just relying on specialists. You listen for standard triage stuff, things that are concerning, and potential showstoppers. 

It's crucial to be the voice of the company, embedded in the acquisition, thinking in these three buckets in every meeting, and ensuring proper communication across all specialties.

You also have to manage your team, calming them about concerns that aren't showstoppers but need to be covered in reps, warranties, or escrow. Some information might be vital for other diligence groups to know, like HR details affecting R&D. 

You need to be the integrating mind, interpreting, prioritizing, and spreading information across all specialties, reflected in reps, warranties, disclosure schedules, and the model.

Knowledge vs Intuition 

When I think back on that first year or two, I didn't come from an M&A background. I was involved in one acquisition at Xerox as a strategy guy, not as the M&A guy. The leaders at Nuance had faith in me based on my background, believing I would learn the new skills required to succeed in M&A. They later said they would have gotten rid of me if I hadn't.

Those first couple of years, I was learning on the job, relying heavily on internal diligence partners to help detect troubling issues. Over the years, I got better at hearing what they heard and figuring out how to prioritize it. 

My first deal was an Indian-based transcription company with a complicated corporate structure involving the Bahamas and other jurisdictions. It was definitely a trial by fire with international issues and corporate governance challenges. That's how you learn.

Importance of relationships in M&A

Every deal has its own personality. Some sellers, especially those with financial sponsors, pursue every penny. One PE guy said to me during the final days of a definitive agreement, "Fred, I know we're arguing about pennies here, but it's my penny." 

That mindset contrasts with others who prioritize getting the deal done. These sellers, often founders, recognize they and their team will become fabulously rich and are more willing to compromise.

Negotiation varies with each situation and personality, as many books on the subject discuss. It's not just about the headline number, whether it's $20 million or $400 million, but also about the terms and conditions, retention packages, and other crucial details. 

As an M&A person, you must be involved in every comma and line of the definitive agreement and disclosure schedules. You are the fiduciary, responsible for the company's and board's interests, ensuring everything is properly reflected. The price is just one piece of the important value.

Saving money on deals

You have to look at every decision as a source of value creation and risk division. If you take this to an extreme, you never get a deal done because you're holding everything close to your chest, trying to win every battle.

Most people, as they progress in a deal, move from the LOI phase to negotiating terms and conditions. As you get closer to signing a definitive agreement, the list of outstanding issues gets smaller, with the remaining ones being those people care about most. You won't win all of these, so you start putting together packages: "We're willing to give on this if you give on that."

There's a risk the counterparty will cherry-pick, taking what you offer without giving in return. You have to navigate these situations to achieve balance in negotiations. A significant part of the value is determined in these final, crucial negotiations.

If you find leverage, tools will make those pretty visible. And so you move from trading red lines, constantly changing everything back to the way you want it, to creating a tracking list of key issues. This becomes a separate document, like a term sheet, detailing what is open and what is not. 

This is usually the time to prepare for in-person discussions, moving away from remote negotiations, and engage in face-to-face meetings, using whiteboards and circling key points with the counterparty.

This is the scary and gut-wrenching part of getting a deal done. Your CEO and everyone else might be saying, "Just get it done," or "Don't give up on this." You and your tight deal team are deeply involved in trying to placate both internal and external participants to finalize the deal without giving away too much. This is the most tense part of any deal.

Hardest thing to negotiate

Certainly, some of these tax-related reps and warranties, especially around earnouts, get very emotional. Protections, retention agreements, and terms around what constitutes constructive dismissal, which would still allow them to get their payout, become very challenging.

In my first deal, we had a situation involving a multinational company with Bermuda and Bahama entities. They needed to unwrap their ownership structure but didn't have the money before close. On paper, it looked fine, but they couldn't clear the loans between corporate entities pre-close. 

We had to get creative and provide a little money for them to clear the ownership structure as required to close the deal. This involved coordinating international tax experts, legal teams, treasury people, and ensuring everyone agreed on the approach.

Navigating this with help from my boss and mentor, Rich Palmer, was crucial. Each deal has its own stories. In one public deal, after clearing HSR and just 48 hours from closing, the operations head of the counterparty informed me that their Indian facility employees had taken over and locked out the managers, or in some cases, kept them inside. 

This is the phone call i get. So now you have to decide which alarm bells to ring, who to involve, and how to keep people focused on solutions. We decided not to close the deal until the situation was resolved. The counterparty understood, and within a couple of days, the employees left.

We needed proof, so they took pictures of the empty office with that day's newspaper in each shot. It was a tense moment, but it was resolved. This company was reducing its footprint, encouraging remote work, which some employees resisted, leading to the takeover. We managed the situation post-close without taking on an occupied building.

We were aggressive in getting deals done, even under difficult terms, but always operated within our guidelines and with board approval. I recall negotiating an LOI in New York while trying to catch a flight to Boston. The other party chose someone else, which my boss did not want to hear. 

Due to bad weather, I ended up sharing a car to Boston with strangers while managing the situation over the phone.

In the front seat, with my laptop and headset, I was dealing with my CEO and others, trying to salvage the deal. Eventually, we increased our bid and got the deal. Sometimes you have to snatch victory from the jaws of defeat.

Bad M&A story

We had a deal involving our acquisition of Philips' speech recognition systems in Vienna, which was under HSR review. HSR, or Hart-Scott-Rodino, is part of the commercial code related to anti-competition. 

If an acquisition is of a certain size, it must be filed, and the DOJ has 30 days to review it. They can either allow the deal to proceed or issue a second request for more information, indicating a deeper investigation.

During the document discovery process, every email and PowerPoint related to the deal is scrutinized. This process is laborious and exhaustive, and it can reveal other planned acquisitions that need similar reviews. 

The DOJ can enforce conditions through a formal consent decree, requiring divestitures or other actions to proceed with the deal. There's also a less formal process where future acquisitions are agreed to be avoided, which can be disappointing if they were part of strategic plans.

These reviews can stretch out for a year, as seen with deals like the Microsoft-Nuance acquisition, which faced scrutiny from multiple competition authorities. Sometimes, despite all efforts, you lose deals competitively or get preempted by others. It's a challenging aspect of the M&A landscape.

There’s another story from my DOJ interactions that stands out. During these interactions, several people, including myself, are asked to testify. They’ve reviewed all your emails and presentations, and you have to answer questions about off-the-cuff emails, including those you sent and received. It’s very nerve-wracking.

We had a deal that fell apart initially but resurrected a few months later when it was more convenient for the seller. The DOJ agent told me, "Fred, this is my favorite email I’ve ever seen." It was an email sent to me at 11:30 p.m. on December 24th, a withering dressing down of me and anyone involved in the deal, criticizing us as it seemed the deal wouldn’t get done. 

It eventually did get done, but the agent found the email amusing. He asked why it was written, trying to understand more about the situation. It was nice to at least make his day with that scathing email directed at me.

Microsoft deal

My job was to get our transcription business divested. Microsoft reached out, their executives were involved, making it a big deal. They worked through our executives, and the boards approved it as a board-level decision. We needed to divest this chunk of business.

We had already started the divestiture process. Getting it closed was critical because it involved setting up new systems and being ready to accept the business. It was a nail-biter for everyone because we knew that until it was done, no one would feel comfortable moving forward. 

The deal had been signed but not closed during discussions. I was brought in about six months before signing, focusing on the last month of pre-signing diligence.

All of Nuance Corp Dev was involved, responding to key requests from Microsoft executives and the diligence team. I was a diligence facilitator and, after signing, became the point person for Nuance for the integration effort.

Integration has been a big part of my role, especially when Nuance was doing many acquisitions. From 2007 to 2012, we did about six acquisitions a year with a small team. We had a separate integration team, taking over after we completed the deal. As Nuance did fewer deals, we reduced the integration team, leading our own integrations as the deal activity decreased.

Microsoft integration

Microsoft has a very formal practice and a dedicated team for integrations, and they do a great job. This deal was larger than most, involving the enterprise division with its B2B business serving financial institutions, airlines, and insurance companies. 

This division had fewer large customers with a consulting paradigm involved. Meanwhile, the healthcare business was larger but very different, requiring almost two separate integrations.

To Microsoft's credit, they approached it collaboratively, recognizing the need to figure it out together rather than following a rigid script. The priority was on not breaking business growth, enabling AI businesses to flourish, and achieving top-line synergies, including R&D collaboration. They slowed down certain aspects of the integration to avoid distracting from high-growth areas.

In the midst of this, ChatGPT emerged. Microsoft, already involved, and Nuance, which had a relationship with NVIDIA for radiology imaging technology, had to retool and reprioritize efforts to make the most impact in healthcare with these new tools.

Transformative AI acquisitions 

iScribes was a services company with very little technology. They used remote workers to take recordings from doctors, similar to how medical students are hired to be scribes. We’ve all been in the room with a doctor and a scribe, and sometimes the scribe mumbles things to the doctor. 

iScribes took this concept to a remote capability but remained a services business with light technology, primarily involving a recording device, workflow management, and some tools to assist with translating recordings into doctor's notes.

It was a small company, sub $10 million in revenue. Pete Durlock, our head strategy guy in healthcare, wanted to go in this direction for intelligent understanding of doctor-patient interactions. 

Initially, it seemed unappealing as it was a labor-intensive business with a poor P&L, especially as we were moving away from transcription. However, Pete insisted it was essential for gathering data to train models for what would become DAX.

Despite skepticism, our CEO, Paul, approved the deal. The technology was light, ensuring HIPAA compliance and workflow, but the data was invaluable. With this data, the Nuance Technology Group trained models to develop DAX, which listens to doctor-patient conversations, understands who is saying what, and generates accurate notes. 

This capability transformed the interaction, allowing doctors to focus on patients without being distracted by screens.

We also integrated technology from SAKERA, which had expertise in generative AI. These relatively small acquisitions provided the data, technology, and know-how to position us as industry leaders in this breakthrough capability. This transformation stemmed from recognizing the potential in these small, strategic acquisitions.

Challenges during transformation period

Right now, there's a guy I'm mentoring who is somewhat new to his position in M&A. He has some experience, and during our coaching sessions, my wife sometimes overhears. She has observed that the benefit of experience is being able to catch your breath.

In M&A, you deal with high-stress situations and have many stakeholders expecting miracles. Counterparties often expect that as a big company, you can do anything. You must simplify these competing demands, find peace in taking a position, and perform your fiduciary duty while being the voice of reason through the storms.

That's what's both fun and challenging about the job. There are moments when it seems overwhelming, but coming through the other side of these experiences is incredibly rewarding.

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