Kofax CEO Reynolds Bish has overseen several acquisitions in his time, but this is the biggest one to date. In November, it was announced that Kofax, a $375 million leader in the document capture and information automation space, has entered into an agreement to acquire Nuance Document Imaging (DI) for $400 million. The original foundation of $2 billion Nuance Communications, DI generates approximately $200 million in annual sales through a combination of MFP capture, print management, and OCR-based software.
“As Nuance’s voice recognition business grew rapidly, Document Imaging became a poor stepchild, generating only about 11% of the company’s revenue,” Bish told DIR. “I had conversations with [former Nuance CEO] Paul Ricci off and on for years about acquiring the division, but they never went anywhere. When Ricci retired in March and a new CEO, Mark Benjamin, took over, he took a strategic look at the business and decided it made sense to revisit those talks. That opened the door for us. We certainly had competition. Nuance hired an investment bank and ran a formal sales process. We are very happy that our bid was successful. We think the two businesses are very complementary and synergistic. There is not a lot of overlap.”
Like Kofax, Nuance has a long history in the document imaging market. The business was founded as ScanSoft, a subsidiary of Xerox, and launched as a publicly traded entity through a reverse merger with Visioneer’s software business in 1998 [see DIR 12/18/98]. In 2000, ScanSoft approximately doubled its revenue with the acquisition of OCR software competitor Caere. Then, in 2001, ScanSoft changed the course of its company when it acquired the assets of bankrupt Belgian speech technology developer Lernout and Hauspie. After that, it began to roll-up more speech recognition technology, including a 2005 acquisition of Nuance that led to the name change.
Over the years, there has been talk about potential synergies between text and speech recognition, but little has come of it. Instead, Nuance DI continued to operate fairly autonomously, generating impressive margins, including a reported $67 million in non-GAAP profits for fiscal its 2018 [ended Sept. 30] in what was relatively a down year, and making acquisitions to fuel growth. These acquisitions included market leaders like eCopy and NSi in the MFP capture space and Equitrac in print management.
Last year, it was announced the Mike Rich, who joined Nuance through its 2011 acquisition of Equitrac, would be stepping down as general manager of Document Imaging. He was replaced at the beginning of this year by Al Monserrat, who was brought in from outside the industry. “I was recruited and hired by Paul Ricci, and during our conversations, we certainly talked about selling the division as an option, but I wasn’t hired to come in and sell it,” Monserrat told DIR. “I was brought in to optimize the business—assess it and figure out how we could grow faster and be better. Part of that optimization discussion included figuring out our next best step.”
That turned out to be the sale to Kofax. “We went through a diligent and extensive process to find the best outcome for the division,” said Monserrat. “We looked at various destinations we felt would provide the best outcome for the people and the technology. If you look at the synergies and the complementary nature of what we do, Kofax was the best fit.
“A couple years ago, when Kofax was for sale, Nuance thought it would be a great potential acquisition target—so there is obviously a good fit. It’s a combination of two strong companies that don’t really compete, so there is not a lot of overlap. We are in the same industry and the same space, but it’s an opportunity to create something additive, not something where one company is overtaking the other.”
The immediate plans are for the Nuance DI management team to remain intact. “This is the largest acquisition I have ever done in terms of revenue of the acquired company,” said Bish. “I never thought I’d be writing a check for $400 million, and we want to be very thoughtful about how we integrate Nuance into Kofax. Historically, when we’ve done acquisitions, we have rapidly integrated the acquired businesses and their functionality into our structure. But, they have all been relatively small, maybe $30 million on the high end. At that size, there are less risks involved. With something the size of Nuance, we are going to keep everybody in place.
“Al will continue to serve as GM, and we will be putting in place a matrix where his management will continue to report to him but also report to their managers at Kofax. For example, Nuance’s head of software development will report to Al and also to Jim Nicol, our VP of products and R&D. We will operate similarly across other functions, as we get a better understanding of the business. Then, we will gradually integrate everything into Kofax so we can better realize some of the synergies.”
One of the most obvious areas of synergy to us seemed the potential use of Nuance’s OCR within Kofax’s capture applications, but Bish dismissed this as relatively minor. “In the long-term, it might make sense to incur the development costs to transition to Nuance’s OCR, but that’s not near the top of our list of things we are going to focus on initially,” he said. “There are better returns in other areas.
“When you look across Nuance’s product lines, there is immediate opportunity for a lot of synergy. For example, Kofax has historically had a product for MFP-based capture, but we have not sold a lot of it. That product will be put into maintenance mode, and we will focus on the Nuance MFP capture products. They will give us a much stronger offering for both our direct and indirect sales channels.
“We also hope to benefit from the way Nuance goes to market. They resell almost everything through MFP manufacturers. For years, Kofax has had a number of partners like Ricoh, Canon, and Konica Minolta, and while those relationships are strategic to both sides, Nuance generates significantly more revenue through MFP partnerships than we have. The acquisition will greatly strengthen our relationships and should open up more opportunities for us.
“In addition, there are a lot of MFP manufacturers that are not Kofax resellers. Some, like Xerox, have been in the past, but when we were acquired by Lexmark, they ran away as fast as they could. We think the acquisition of Nuance will help open some doors for us to extend their partnerships to include Kofax software.”
Monserrat is excited about the new life that Kofax will be able to pump into Nuance DI. “It was just not a priority business for Nuance,” he told DIR. “One of the technologies that really attracted me to Nuance was its OCR, but we just couldn’t get funding to invest and build out the technology the way we needed to, given the way the market is moving. Given the focus Kofax has on imaging and capture, as well as its broader portfolio, including technology like RPA, we see a great opportunity for further enrichment of our integrated print and capture solution.
“We also see some go-to-market synergies. For example, Kofax has a great direct enterprise sales team, while we have mostly channel driven sales to mid-sized businesses. We think we have a whole slew of channel partners and customers that we can open up to Kofax technology. And we think we can benefit immediately from their direct model with our PDF product.”
The acquisition is expected to close by end of Q2 2019. “I have been part of M&A on both sides,” Monserrat told DIR. “You always celebrate once a deal is closed, but that’s when the real work begins. We want to make sure this is successful, and there are some added complexities due to our already being part of another company that needs to be carved out. Kofax has hired a third-party that specializes in this type of integration, and they are the best I have ever seen at this stage.”
According to Bish, the acquisition price was based on eight times Nuance’s annual EBITDA of $50 million. “But once we close the transaction, there will be cost savings we can affect by eliminating overlap in areas like G&A,” said Bish. “That will improve the EBITDA, and we believe, based on projected earnings a year from now, we will have bought it for less than eight times EBITDA, which is a very good buy in today’s market.”
Kofax recently went through an acquisition itself, when the investment capital firm Thoma Bravo bought the Enterprise Software division of Lexmark and spun off the Kofax and ReadSoft businesses as Kofax, while folding the rest of the entity, under the Perceptive Software flag, into Hyland Software [see DIR 5/12/17]. Bish noted that he has very much enjoyed working with Thoma Bravo, which provided funding for the Nuance acquisition, and that Kofax is now establishing itself as a leader in the intelligent automation space, which incorporates traditional document capture, as well as Kofax’s growing robotics process automation (RPA) business.
For more information: http://bit.ly/KofaxNuanceDIPR