Nuance Communications' Acquisition Of Transcend Is A Stellar Deal

| About: Nuance Communications, (NUAN)

Nuance Communications (NASDAQ:NUAN) the provider of voice and language solutions announced its intention to acquire Transcend Services (TRCR), the medical transcription company. Shares of Transcend close the day up 39%, while Nuance trades 2.5% higher, since the company made a great deal.

The deal: Nuance Communications and Transcend Services announced a definitive agreement for approximately $325 million, all to be paid in cash. Nuance has roughly $900 million in cash, so financing the deal should provide no problems. The cash offer of $29.50 per share represents an almost 41% premium over the closing price the day before. The shares closed at $29.18, leaving another $32 cents to be picked up by investors who expect the deal to go through. With the deal expected to close on or before March the 20th, this leaves a 1.1% return for just a two week period.

Transcend Services: Transcend, a medical transcription company, generated $125 million in revenue for 2011; it net earned $19 million that year. Nuance pays approximately $325 million, which is 2.6 times annual revenues and 17 times earnings, which is a very good price for the fast-growing company. As recent as 2008, Transcend generated $49 million in revenue, on which it earned $6 million.

Nuance Communications: The acquisition of Transcend is a nice addition to the existing businesses of Nuance. Besides the fact that the combined entity had $1.5 billion in revenues in 2011, it also raised the growth profile, as Transcend is growing at a much faster rate than Nuance. Besides growth, Transcend's net margins of 15% beat the mere 2.9% that Nuance generated for 2011. In comparison to Transcend, Nuance itself is valued at $8 billion, which is roughly 6.0 times annual revenues and roughly 200 times annual earnings.

Investment thesis: Nuance made an incredible deal. It bought a much more profitable company, which grows at a much higher pace than its own business. To make it even better, it acquired Transcend at a much lower valuation compared to its own stock. Despite the great deal, Nuance remains rather expensive unless it continues to improve net margins to substantially higher levels. With the stock near the all time high, I am not a buyer, although I applaud the deal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.