Activist investor Carl Icahn announced April 30 after the close of trading that he added another 4.2 million shares of Nuance Communications (Nasdaq:NUAN) since first taking a position in March. He now owns more than 10% of the company.
Icahn upped his stake in Nuance. The question is--should you?
Icahn's Been Busy
Sporting a beard on the front cover of the April 15 issue of Forbes magazine, 77-year-old Carl Icahn was looking pretty contented--and why wouldn't he be? Forbes estimates that Icahn's net worth since March 2009 has more than doubled to $20 billion. In the last year alone he's been an agent of change taking as many as 14 companies to task with his self-styled investor activism. His $882 million (1500%) in unrealized gains from Netflix (Nasdaq:NFLX) over just seven months would have anyone smiling from ear to ear. The fact that he's made a $707 million bet that Nuance can do better must be a relief to long-time shareholders of the speech recognition software maker.
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What Happens Next?
With Icahn's additional purchases in April, he's now the second largest Nuance shareholder behind Warburg Pincus, which owned 14.6% of its outstanding shares at the end of December. Speculation suggests Icahn will force the sale of the company or possibly even buy it for himself. Icahn Enterprises L.P. (Nasdaq:IEP) has a majority interest in nine companies in nine different industries; Nuance would be its 10th majority-owned company in 10 different industries. From that perspective I think Icahn's interest in the company makes a lot of sense. However, IEP hasn't acquired 100% of any business since it paid $335 million for PSC Metals in November 2007. Given this reality, it's more likely that Icahn will ultimately force a sale at a significant premium. (L3)
There's no question it was a dud of a quarter. Year-over-year organic revenue growth across all four segments declined by 5% and non-GAAP operating profits declined 8.1% to $141.1 million. Worse still, its operating margin shrank by 770 basis points to 29.1% due to lower gross margins and higher R&D spending. Stifel Nicolaus & Co. analyst Tom Roderick sees Icahn pushing for the sale of one or more of its segments to unlock value. Its healthcare business, which is the largest of the four, managed to generate 2% organic growth in the second quarter, the only segment to see an increase. If any of the four is salable it would be healthcare followed by its Dragon Dictate consumer and mobile business.
Its net debt over the past six months has more than doubled from $606 million at the end of September to $1.33 billion at the end of March. Most of the increase is due to $445 million in acquisitions in the first quarter. Historically, its debt-to-equity's usually been around 30%, but with the additions has ballooned to 84%. Some analysts rightly worry that the integration of these acquisitions at a time when its margins are softening could put significant downward pressure on its stock price. If so, you can expect Icahn to accumulate a larger position.
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Nuance is best known for providing the software that powers Apple's (Nasdaq:AAPL) Siri voice feature. It would be wishful thinking to believe that the iPhone maker would in any way be interested in bringing Nuance into the fold given all of its cash, but that's not going to happen. With its stock down 15% year-to-date and another 11% in 2012, its share are definitely underperforming.
Icahn usually doesn't make too many mistakes, especially big ones, so I think the fact that the billionaire's gotten involved is a sign that there's some upside in its future. If you have some speculative cash available, I see no problem following on Icahn's coattails.
At the time of writing, Will Ashworth did not own shares of any of the companies mentioned in this article.