Don't Beat Your Competitors, Buy Them

Last Updated Apr 6, 2009 2:15 PM EDT

Want to know how to beat your competitors? Buy them -- buy all of them, if you can pull it off without overleveraging, that is. That's been the strategy of Nuance Communications for more than a decade, and it's worked brilliantly.

Courtesy of dozens of mergers and acquisitions over the past 14 years, Nuance now owns much of the planet's speech technology. The company boasts a $3.2 billion market cap on annual sales of $868 million. It's never been profitable, but that appears to be by design. Its strategy is rapid growth through M&A, and the Nuance's history demonstrates nearly flawless execution:

In 1980, Xerox (so many of these stories begin with Xerox) bought inventor Raymond Kurzweil's optical character recognition (OCR) company and ultimately renamed it ScanSoft. In 1999, a scanner software company called Visioneer bought ScanSoft and adopted the name. That seems to be about when current Nuance chairman and CEO Paul Ricci entered the picture. That's when all the fun began.

In late 2001, ScanSoft bought Lernout & Hauspie, a Belgian company that had previously acquired a host of other companies including Berkeley Speech Technologies and Dragon Systems. Amazingly, L&H - the leader in the speech technology field - was bankrupt so ScanSoft got it for a song: $39.5 million.

ScanSoft went on to acquire about a dozen other companies, including some that were themselves composed of acquired companies.

While all this was happening on the East Coast, Nuance spun off from Stanford Research Institute (SRI) in 1994. In 1996, the Menlo Park company deployed its first large-scale, call-center-based commercial speech application. In 2005, ScanSoft merged with Nuance and the combined company adopted the Nuance Communications name. Since then, Nuance has gobbled up another dozen companies, the largest of which being Dictaphone for $357 million and eScription for $400 million.

According to my math, the current incarnation of Nuance Communications is actually made up of about 43 companies.
Nuance lists its competitors as AT&T, IBM, and Microsoft, which sounds formidable, but each of these giants competes with Nuance in specific, limited markets. Nuance is far and away the 800-pound gorilla of speech technology.

As for its business strategy, Nuance seems to have done a good job of focusing its limited resources on the largest vertical markets where it can optimize profit margins. That means avoiding the highly fragmented consumer electronics market with its thin margins and high support costs.

I applaud CEO Ricci's focused strategy and methodical execution, to date. So far, so good.