Icahn takes Nuance Communications stake

While drama still enfolds Carl Icahn's participation in the bidding for Dell Inc., the investor has sparked intrigue in shares of Nuance Communications Inc. by purchasing a substantial position in the voice recognition technology company.

Nuance gained $1.15 per share, or about 6%, on Tuesday, April 2, to $21.33. The prior evening Icahn Associates LP disclosed in a Securities and Exchange Commission filing that it had taken a 9.3 percent position in the company.

"Its probably a passive investment," said John Bright of Avondale Partners LLC, comparing the move to Icahn's October 2012 investment in Netflix Inc.

"Icahn might be looking to see if there is someone who is interested in buying the company," Bright added. Candidates would be Microsoft Corp., Google Inc. and Apple Inc., "in order of probability," the analyst said.

The Burlington, Mass., company's market capitalization rose to nearly $6.8 billion on Tuesday. It has more than $2.3 billion of long term debt, and close to $1 billion in cash.

Nuance provides voice recognition technology for a range of applications and industries. The company also offers character recognition technology that is used to scan and store documents. In 2011 it bought Swype Inc., which developed on-screen keyboard technology for mobile phones.

Nuance recently announced a foray into mobile advertising product that will allow phone subscribers to "have a two-way conversation with the brands they love."

While it provides voice technology to Apple, Nuance will not say whether it is behind the iPhone's Siri voice recognition.

Icahn filed a form 13G, for a passive investment, rather than a 13D, which would reflect an intention to influence control of the company. Were he to plan a bold move, Icahn would likely have to sway large investors such as Warburg Pincus LLC, with close to 15% of the equity, and Fidelity Management & Research Co., which holds about 7.5% of Nuance.

Shares of Nuance have been depressed since February, when Nuance reported earnings slightly below forecast for its first fiscal quarter and warned of difficulty in the second quarter. From a close of $24.55 on Feb. 7, the stock dropped into the teens. It traded for much of February and March.

Moody's Investors Service has cited Nuance's "aggressive acquisition appetite." The company has used deleverage to expand its operations, acquiring businesses that generate substantial cash.

In late 2012, Moody's projected that debt offerings and acquisitions would push Nuance's leverage above 5 times Ebitda, but suggested that the company would reduce debt to 3.5 to 4 times Ebitda by the close of 2013.

Gray Powell of Wells Fargo Securities LLC suggested that "investors will now expect Mr. Icahn to push [Nuance] management towards better transparency and higher returns from both acquired business and the current business segments," in a Tuesday note.

Regarding the options, Avondale's Bright considered a breakup to be "highly improbable," because the company's patents for speech recognition are used across its business lines.

Moreover, Nuance's leverage profile may not suit a leveraged buyout.

Of course, Icahn is known for bold confrontations of management of Dell and Time Warner Inc. The investor could just hope to ride out a quick dip in the stock. When he purchased Netflex options last fall, the stock was near the bottom of a trough. Shares of the movie service made a large improvement within months.

Icahn could not be reached on Tuesday regarding his intentions for Nuance.

A spokesman for Nuance said that the company "will treat Mr. Icahn and his firm with the same respect and accord as we would any other investor that is supportive of our business."