Nuance Plays Hardball in Voice Recognition

By Peter Burrows

When rumors swirled on May 7 that Apple (AAPL) might acquire Nuance Communications (NUAN), shares of the software company rose 10 percent to $22, within pennies of an all-time high. The assumption was that Steve Jobs gets what Steve Jobs wants.

A safe bet—unless you know Nuance Chief Executive Officer Paul Ricci. In speech-recognition technology, which Nuance dominates, the soft-spoken Ricci is considered every bit as powerful as Jobs. Since leaving Xerox (XRX) to join the company in 2000, Ricci has bought 43 companies to build the largest independent maker of software that lets devices understand you as you dictate a memo to your laptop, say, or tell your smartphone to find the nearest sushi bar. "People had been knocking away at speech recognition since the 1960s," says Bill Janeway, a partner at Warburg Pincus, Nuance's largest shareholder. "Paul turned it into a billion-plus business that makes technology used by hundreds of millions of people."

Ricci's critics say he's lawsuit happy and uses strong-arm tactics to weaken innovative rivals so he can buy them on the cheap or put them out of business. Over the past decade, Nuance, based in Burlington, Mass., has sued eight companies over alleged patent infringements. It hasn't won any judgments and lost one. On at least four occasions, it purchased smaller companies it had sued. "Competing with Nuance is like having a venereal disease that's in remission," says Dave Grannan, CEO of Vlingo, a speech-recognition startup that's involved in five Ricci-related lawsuits. (Nuance has four suits against Vlingo; Vlingo has one against Nuance.) "We crush them whenever we go head-to-head with them. But just when you're thinking life is great—boom, there's a sore on your lip."

Vlingo's adventures with Ricci began in 2008, soon after Yahoo! (YHOO) chose Vlingo software over Nuance. Three months later, Grannan learned from a Boston Globe reporter that Nuance had filed a patent suit—without contacting the company to discuss royalties. "It was clearly an effort to hurt our business," says Grannan, who expects to spend $15 million on legal fees. Nuance spokesperson Rebecca Paquette said neither Ricci nor the company would comment on specific lawsuits against Vlingo or others. "In these highly technical fields, many companies attempt to gain advantage by simply using Nuance's inventions rather than developing their own," she wrote in an e-mail. "We have a duty to our stockholders to preserve the value of the company and its assets."

By summer 2009, with Vlingo running out of cash, according to Grannan, Ricci approached him about an acquisition. On Sept. 21, they met in San Francisco for a 14-hour negotiation. No agreement. Two days later, Ricci surprised Grannan and Vlingo co-founder Mike Phillips by calling to offer two more alternatives. First, Ricci promised to pay them and co-founder John Nguyen $5 million each if they could persuade their board to sell at his price. If that failed, and the three execs agreed to jump ship to Nuance, he'd pay them the amount they would have received in an acquisition—plus another $5 million if they stayed with the company for two years. As Ricci talked over speakerphone, Grannan says he looked at Phillips, mouthed "What the f---?", and asked Ricci to repeat. Ricci, who speaks in the measured tones of an academic, obliged. After notifying Vlingo's board of the offer, Grannan called Ricci back to express the board's displeasure. "I was flabbergasted," says Vlingo board member Bob Davoli. "I've been on 55 boards in my career and been a CEO twice—but I've never heard of anything like this."

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