Business Acquisitions

9 Months Ended

Jun. 30, 2012

Business Acquisitions

4. Business Acquisitions

Fiscal 2012 Acquisitions

On June 1, 2012, we acquired all of the outstanding capital stock of Vlingo Corporation (“Vlingo”) for net cash consideration of $196.3 million, which excludes the amounts we received as a security holder of Vlingo, as described below. At the closing of the merger, $15 million of the merger consideration was deposited into an escrow account that will be held for twelve months after the closing date to satisfy any indemnification claims. Vlingo provides technology that turns spoken words into action by combining speech recognition and natural language processing technology to understand the user’s intent and take the appropriate action. The acquisition is treated as a stock purchase for accounting purposes, and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations for Vlingo are included in our Mobile and Consumer Segment from the acquisition date.

On April 26, 2012, we acquired all of the outstanding capital stock of Transcend Services, Inc. (“Transcend”), a provider of medical transcription and editing services. The aggregate consideration payable to the former stockholders of Transcend was $332.3 million. The acquisition is treated as a stock purchase for accounting purposes, and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations for Transcend are included in our Healthcare segment from the acquisition date.

On October 6, 2011, we acquired all of the outstanding capital stock of Swype, Inc. (“Swype”), a provider of software that allows users to type by sliding a finger or stylus from letter to letter on a touch screen keyboard. Total consideration for the purchase was approximately $102.5 million, of which $77.5 million was paid in cash at the closing and the remaining $25.0 million (the “Contingent Consideration”) is payable on the eighteen-month anniversary of the closing. The Contingent Consideration is subject to certain adjustments and conditions, including the requirement that certain key executives not terminate their employment with Nuance or have their employment terminated for certain reasons (see Note 5). The goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations of Swype are included in our Mobile and Consumer segment from the acquisition date.

A summary of the preliminary allocation of the purchase consideration for Vlingo, Transcend and Swype is as follows (dollars in thousands):

	Vlingo			Transcend			Swype
Total purchase consideration:
Cash	$	196,304		$	332,253		$	77,500
Fair value of contingent consideration		—			—			16,444
Fair value of prior investment (a)		28,696			—			—
Total purchase consideration	$	225,000		$	332,253		$	93,944
Allocation of the purchase consideration:
Cash	$	—		$	6,255		$	6,741
Accounts receivable		5,206			16,517			3,420
Goodwill (b)		192,962			208,867			64,579
Identifiable intangible assets (c)		29,752			142,160			32,300
Other assets		2,884			18,239			264
Total assets acquired		230,804			392,038			107,304
Current liabilities		(5,804	)		(9,933	)		(706	)
Deferred tax liability		—			(47,584	)		(12,654	)
Other long term liabilities		—			(2,268	)		—
Total liabilities assumed		(5,804	)		(59,785	)		(13,360	)
Net assets acquired	$	225,000		$	332,253		$	93,944

(a) In October 2009, we acquired $15 million of convertible preferred securities of Vlingo. We have recognized a gain of $13.7 million included in other income, net, reflecting the fair value adjustment as a result of the conversion of our original investment in the non-controlling interest upon the closing of the Vlingo acquisition.

(b) At the time of the Vlingo acquisition, we ascribed significant value to future new customer relationships, future technologies that could be developed, as well as synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill.

(c) The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on preliminary valuations (dollars in thousands):

	Vlingo				Transcend				Swype
	Amount		Weighted Average Life (Years)		Amount		Weighted Average Life (Years)		Amount		Weighted Average Life (Years)
Core and completed technology	$	5,402		5.4	$	5,410		5.0	$	16,500		7.0
Customer relationships		23,530		14.0		130,260		13.0		10,800		10.0
Trade name		30		3.0		4,480		4.0		4,800		8.0
Non-Compete agreements		790		3.0		2,010		3.0		200		3.0
Total	$	29,752			$	142,160			$	32,300

Fiscal 2011 Acquisitions

On June 16, 2011, we acquired all of the outstanding capital stock of SVOX AG (“SVOX”), a Swiss based seller of speech recognition, dialog, and text-to-speech software products for the automotive, mobile and consumer electronics industries in our Mobile and Consumer segment. Total purchase consideration was €87.0 million which consists of cash consideration of €57.0 million ($80.9 million based on the exchange rate as of the date of acquisition) and aggregate deferred acquisition payments of €30.0 million ($43.0 million based on the exchange rate as of the date of acquisition). The deferred acquisition payment is payable in cash or shares of our common stock, at our option; €8.3 million of the deferred acquisition payment was paid in cash in June 2012 and the remaining €21.7 million is due on December 31, 2012. The acquisition was a stock purchase and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations of SVOX have been included in our results of operations from the acquisition date.

On June 15, 2011, we acquired all of the outstanding capital stock of Equitrac Corporation (“Equitrac”), a leading provider of print management solutions, to expand the offerings of our Imaging segment, for cash consideration of approximately $162.0 million. The acquisition is treated as a stock purchase for accounting purposes, and the goodwill resulting from this acquisition is not expected to be deductible for tax purposes. The results of operations of Equitrac have been included in our results of operations from the acquisition date.

A summary of the final allocation of the purchase consideration for Equitrac and SVOX is as follows (in thousands):

	Equitrac			SVOX
Total purchase consideration:
Cash	$	161,950		$	80,919
Deferred acquisition payment, at fair value		—			41,456
Total purchase consideration	$	161,950		$	122,375
Allocation of the purchase consideration:
Cash	$	115		$	—
Accounts receivable(a)		9,931			3,663
Inventory		2,462			—
Goodwill		90,077			86,767
Identifiable intangible assets(b)		91,900			42,165
Other assets		12,144			2,728
Total assets acquired		206,629			135,323
Current liabilities		(6,368	)		(9,663	)
Deferred tax liability		(38,311	)		(3,285	)
Total liabilities assumed		(44,679	)		(12,948	)
Net assets acquired	$	161,950		$	122,375

(a) Accounts receivable have been recorded at their estimated fair values, which consist of the gross accounts receivable assumed of $15.4 million, reduced by a fair value reserve of $1.8 million representing the portion of contractually owed accounts receivable which we do not expect to be collected.

(b) The following are the identifiable intangible assets acquired and their respective weighted average useful lives, as determined based on final valuations (dollars in thousands):

	Equitrac				SVOX
	Amount		Weighted Average Life (Years)		Amount		Weighted Average Life (Years)
Customer relationships	$	55,800		15.0	$	35,612		13.4
Core and completed technology		22,000		7.0		6,268		5.0
Trade name		14,100		10.0		285		3.0
Total	$	91,900			$	42,165

Proforma Results

The following table shows unaudited pro forma results of operations as if we had acquired Equitrac, SVOX, Swype, Transcend, and Vlingo on October 1, 2010 (dollars in thousands, except per share amounts):

	Three Months Ended June 30,					Nine Months Ended June 30,
	2012		2011			2012		2011
Revenue	$	443,581	$	380,513		$	1,264,280	$	1,097,373
Net income (loss)		22,436		(3,140	)		26,829		(19,611	)
Net income (loss) per share	$	0.07	$	(0.01	)	$	0.08	$	(0.07	)

We have not furnished pro forma financial information related to our other fiscal 2011 and 2012 acquisitions because such information is not material, individually or in the aggregate, to our financial results. The unaudited pro forma results of operations are not necessarily indicative of the actual results that would have occurred had the transactions actually taken place at the beginning of the periods indicated.

Acquisition-Related Costs, net

Acquisition-related costs include those costs related to business and other acquisitions, including potential acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments treated as compensation expense, as well as the costs of integration-related services provided by third-parties; (ii) professional service fees, including third party costs related to the acquisition, and legal and other professional service fees associated with disputes and regulatory matters related to acquired entities; and (iii) adjustments to acquisition-related items that are required to be marked to fair value each reporting period, such as contingent consideration, and other items related to acquisitions for which the measurement period has ended.

The components of acquisition-related costs, net are as follows (dollars in thousands):

	Three Months Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Professional service fees	$	14,754	$	7,775	$	37,487	$	11,107
Transition and integration costs		2,001		453		8,214		1,506
Acquisition-related adjustments		20		367		671		1,297
Total	$	16,775	$	8,595	$	46,372	$	13,910