April 2000, Vol. 17, No. 4 Speech Giant Gets Dragon L&H signs agreement to acquire Dragon Systems Okay, so the REALLY big, high-tech business news for April centered around the possible outcomes of a certain trial involving a certain OS and application developer, and how said possibilities triggered a lot of panic in a certain stock exchange or two. But where this will all lead is anyones's guess. Having said this, ISR's really big April news is the announcement that Lernout & Hauspie (Burlington, Mass. and Ieper, Belgium; www.lhs.com) (L&H) has signed a definitive agreement to acquire Dragon Systems Inc. (Newton, Mass.; www.dragonsys.com). The acquisition comes as big feather in L&H's, already, huge speech recognition hat. Founded in 1982 by Drs. Janet and James Baker, Dragon Systems has been a seminal player in speech technology development. Their 1997 product, Dragon NaturallySpeaking, was one of the first continuous speech dictation programs available for the desktop. The company's offerings include: continuous and discrete dictation products for consumer, business and professional markets; command and control programs; vertical market add-on vocabularies for specialized applications, such as legal and medical; customized telephony solutions; and developers' tools. Over the years, Dragon has grown into an international company with several subsidiaries in Europe and Japan. It also developed a large customer base, which includes companies such as Bank America, Boeing, Citibank, Compaq, Corel, Dell, Deutsche Bank, Fujitsu, Kaiser Permanente, Peugeot, Seiko, Sony, Toshiba, Wells Fargo and many others. L&H feels that combined the two companies' existing resources will create a "brain trust" that is expected to use the best of the both company's technologies to accelerate the use of speech and language in emerging and mainstream consumer markets. The acquisition will provide L&H with approximately 350 additional employees, 170 of whom are research scientists and development engineers. The addition of these engineers and scientists will allow L&H to accelerate its pursuit of new strategic market opportunities in areas such as handheld and mobile devices, automotive, WAP, data mining and others. It will also help the company meet the growing demand for speech and language applications in key markets such as telephony and healthcare. The increased R&D resources and the combined intellectual properties should also help L&H create speech solutions that are even more intuitive and user friendly, helping to make speech more appealing to an even broader group of general consumers. Combining forces to broaden markets In the near term, L&H expects to apply the acquired resources to accelerate its time-to-market for NAK (code-named), a patent-pending, prototype handheld device that utilizes a large vocabulary, continuous speech dictation engine, as well as its L&H RealSpeak text-to-speech to easily send and receive e-mail, surf the Web and conduct e-commerce transactions. L&H also expects to leverage Dragon Systems' existing resources in the telephony, medical, legal and healthcare applications, allowing L&H to expand its existing offerings to meet the rapidly growing demand for speech applications in those arenas. Also, the many languages that Dragon Systems supports in its continuous speech dictation engine will give L&H immediate access to additional foreign markets for speech, including those in Japan, Italy and Spain. The "b" word: "branding" Aside from it large customer base, Dragon Systems also carries a strong brand recognition factor in the United States that will be complemented by L&H's strengths here and abroad, particularly in the Pacific Rim and Europe. Dragon Systems will not only bring additional R&D staff to L&H but will augment L&H's existing lab facilities with research laboratories in the U.S. and Cheltenham, England. Since NaturallySpeaking's introduction the product has claimed well over 100 major industry awards worldwide. Dragon holds 23 patents for its speech and language technologies, many of them for technology employed in its Naturally Speaking product family. L&H will continue to market and support Dragon NaturallySpeaking as well as other products in the Dragon Systems family, providing continuity and support for Dragon Systems customers and strategic partners and allowing the company to focus on a smooth integration of resources and strategies. Over time L&H expects that it will combine the best technologies from each product to create next generation products for consumers. How it all works out Following the acquisition, Dr. Janet M. Baker, Dragon Systems' chairman and cofounder, will be nominated to have a seat on L&H's Board of Directors and become Chairman of L&H's Technology Advisory Board. L&H plans to retain other key members of the Dragon Systems management team. The transaction calls for L&H to acquire all of the outstanding stock of Dragon Systems for approximately 5.45 million shares of L&H Common Stock. L&H expects the acquisition to be slightly accretive to its EPS (excluding goodwill) during the second half of 2000 and much stronger beyond 2000. The company expects the acquisition to close in the next few months. Dragon Systems had revenues of approximately $60 million and a net loss of approximately $22 million for its fiscal year 1999. L&H intends to use the purchase accounting method for this acquisition. 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