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Leading speech recognition software firms merge
By Bloomberg News
March 28, 2000, 4:25 a.m. PT
IEPER, Belgium--Lernout & Hauspie Speech Products agreed to buy Dragon Systems, its leading U.S. competitor, for about $593 million in stock to form the biggest maker of speech recognition software for consumers.
The Belgian company will pay about 5.45 million of its shares, which closed yesterday on Nasdaq at $108.75. Both Lernout and privately held Dragon are makers of speech recognition software. Lernout's shares rose as much as 18 percent in European trading.
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"It's a very good move--Dragon was a pioneer in speech technology," said Johan van Geeteruyen, who manages about 100 million euros ($96 million) in Belgian stocks at Petercam in Brussels. The takeover will prevent Lernout's competitors, which include IBM and Royal Philips Electronics, from buying Dragon, he said.
Demand for electronic speech recognition is exploding, Lernout said, partly because of the growing use of mobile phones to access the Internet. The acquisition allows it to combine the best technologies and research efforts of both companies to produce systems that are increasingly effective and easy to use.
The current markets for voice recognition on personal computers and for telephone software total more than $2 billion per year, Lernout said. The company gained access to the $6 billion business of transcribing medical reports earlier this month when it agreed to buy Dictaphone for about $936 million.
Newton, Mass.-based Dragon will add 35 patents and 170 scientists and engineers to Lernout's 1,400 research and development staff. Dragon also was ahead in developing speech recognition for Italian, Spanish and Japanese, and the acquisition will boost Lernout's sales in these markets, the company said.
"There are not enough talented, experienced people in this field; today we can safely say that we have most of them with us," said Jozef Lernout, one of the company's founders and chairmen. "With the acquisition, we will definitely be No. 1 in number of customers, number of dollars generated, and number of scientists and engineers."
Lernout will use about 8 percent of its total market value to acquire Dragon, chief financial officer Carl Dammekens said in a statement. The shares rose as much as 19.5 euros ($18.81) to 129 euros ($124.45) and recently traded at 127 euros ($122.52) on Easdaq.
The worldwide use of mobile phones is expected to increase to more than 500 million devices in five years, and most of them will be "a combination of phone and pocket computer," Lernout said. The company's software would allow the devices to find text information on the Net and then read out summaries of that information, he said.
"Mobile phones are such tiny little things, it's difficult to enter text through their keyboard. Speech recognition technology will be a way to do that," said Petercam's van Geeteruyen, who plans to hold the Lernout shares he bought about a month ago.
Lernout recently demonstrated a prototype handheld device with a dictation system to send and receive email, surf the Web, and conduct online commerce. It's in talks to form alliances with device manufacturers toward producing the first such devices by the end of the year, although it's too early to give details, said Pol Hauspie, the other founder and chairman.
Dragon also was working on software for mobile devices, and its engineers should help speed up and improve development of the new device, Lernout said.
Lernout also plans to offer complementary products to Dragon's customers, which include major companies such as Boeing, Citibank and Dell Computer.
Dragon reported a loss of about $22 million in 1999, down from a profit of $10.3 million in 1998. Revenue fell to $60 million in 1999 from about $71.4 million. The company announced plans for an initial share sale in December 1998, but dropped the plan last April.
Dragon has focused on one market--software for dictation--while Lernout & Hauspie developed software for producing speech and for a variety of markets, the company said.
As a "one-stop shopping place," the Belgian company was able to win some contracts away from Dragon, Lernout said.
"Dragon was head-on in competing with us and other companies," he said. "Our philosophy is to spread risk and be involved in everything that has to do with linguistics."
The U.S. company designed its NaturallySpeaking dictation software to run on Microsoft's Windows operating system, which is developing speech recognition software of its own. In October, Microsoft bought Entropic, a Washington-based speech recognition software company, for an undisclosed price.
Microsoft has invested $60 million in Lernout & Hauspie, and the companies cooperate on some products and compete on others, Hauspie said.
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