Nuance Communications Inc. [NUAN] said Tuesday it would purchase medical transcription software maker eScription Inc. for $400 million in what is the largest ever deal for the acquisitive voice technology company.

Terms call for Burlington, Mass.-based Nuance to pay $343 million in cash and $20 million in stock for Needham, Mass.-based eScription and also to assume $37 million in employee stock options. As part of the transaction, private equity firm Warburg Pincus LLC will purchase 5.76 million shares of Nuance common stock at $17.36 a share, which amounts to an investment of $100 million in the company, and also has a warrant to purchase an additional 3.7 million shares at $20 a share.
 
"It's an excellent deal with Warburg, both financially and also in the structure of it--this is a huge vote of confidence from them," said Daniel Ives, an analyst with Friedman, Billings, Ramsey Group Inc. "If you look at the areas that Nuance penetrates, this particular area is probably the most fertile. So the fact that they're doubling their bet on healthcare is a good sign for investors."

Bob Wise, president of the healthcare division at Nuance, said he expects to incorporate elements of eScription's products into the company's own dictation technology. "We know how this business operates, and it de-risks a lot of the integration concerns of the transaction," he said.

EScription, which is self-funded, was founded in 1999 by entrepreneurs Paul Egerman and Ben Chigier, who share chairman and CEO titles at the company. Egerman also founded IDX Systems Corp., a maker of information technology systems for physician offices and hospitals, which was sold to General Electric Co. in 2005 for $1.2 billion.

"EScription was at a certain level of its maturity and was doing extremely well, but we're also a very small player," Egerman said. "We were a company that had a reputation, but we had to figure out how to accelerate our growth."

The healthcare industry is a fast-growing market for speech recognition software, as hospitals shift from traditional dictation systems to advanced technology. Nuance, which estimates that market at $7 billion per year, said demand for its iChart product, acquired in a 2006 purchase of Dictaphone Corp., has grown 30% to 40% in recent years.

Nuance has made 21 acquisitions since 2002, with the eScription deal surpassing the $357 million purchase of Dictaphone. The buyer in 2007 dove into the healthcare sector with a series of acquisitions, rolling up speech recognition editing firm Focus Infomatics Inc. for $58 million; test result software firm Vocada Inc. for $22.1 million; and medical imaging software maker Commissure Inc. for $3.2 million in stock and an additional $24 million in potential earnout payments.

Nuance said it expects the eScription deal to pad its fiscal 2008 revenue by $16 million to $18 million, assuming the transaction closes by June 30, and by $63 million to $68 million in fiscal 2009. The transaction is expected to bolster the company's earnings on a non-GAAP basis in both 2008 and 2009.

In a research note, Citigroup Global Markets Inc. analyst Brent Thill said the deal values eScription at 6.1 times the target's enterprise value relative to its fiscal 2009 revenue, higher than the average software industry multiple of 4 times EV to revenue, but in line with higher growth software companies.
"It's not cheap, but it's not egregious," Ives said. "It's a fair multiple for a 30% to 40% growth business."

Including the 5.76 million shares Warburg Pincus is buying in Nuance, the New York private equity firm has a roughly 23% stake, or 48 million shares, in the company valued at $878 million. Warburg Pincus made an initial $80 million investment in Nuance in 2004, when the company was named Scansoft Inc. The firm injected another $75 million in 2005 to help Scansoft fund a $225 million acquisition of Nuance Communications, a name the company then adopted. Warburg Pincus bought another $15 million in stock on the open market in 2006. 

Nuance shares closed Tuesday up 5.6% to $18.42, giving the company a market capitalization of $3.85 billion.