Done Deal: Nuance Buying Swype for Around $100M in Cash

10/6/11Follow @curtwoodward

[Updated 10/7/11, 8 am Pacific] There’s a Tegic Communications reunion shaping up in Seattle. Documents filed with the SEC show that Nuance Communications is buying mobile software startup Swype for $102.5 million. As we reported last night, based on a source with knowledge of the deal, about three-quarters of the cash is paid up-front with the balance coming in 18 months—provided Swype’s top executives are still around.

The deal was first reported Thursday night by VC and blogger Michael Arrington. My source also said the two companies haven’t yet figured out how many people from the Swype team will eventually join Nuance, which actually has its Seattle offices in the same neighborhood.

It’s an interesting tie-up for Burlington, MA-based Nuance (NASDAQ: NUAN), which actually acquired the forerunner of Swype when it snapped up Tegic from AOL for $265 million in 2007.

Tegic produced the widely used T9 predictive-text software, which allows mobile phones with traditional keypads to predict which words users are trying to string together. The next-generation version of that software is called Xt9, and Nuance has used it to grow its mobile interface footprint.

But there was some more T9 DNA out there. Cliff Kushler, an inventor of T9, has been working with CEO Mike McSherry on building the company’s next-generation predictive-text software, which interprets the words touchscreen users are trying to spell when they slide their finger through a set of letters.

Kushler, McSherry, and operations chief Aaron Sheedy are the key executives in the deal—this SEC filing shows they all had to sign employment agreements, and it looks like they’re the ones sticking around to guarantee the final payout in 18 months.

I wonder why Nuance felt it had to grab Swype—after all, Nuance had developed its own version, called Trace, that did the same thing. And since Nuance has the guts to the Dragon speech-recognition software, it’s been able to package Trace with voice-recognition and old-school text tapping into a pretty robust interface product.

But Nuance has been aggressively strengthening its position in this arena for a while now. Last June, it acquired Silicon Valley’s ShapeWriter, a Swype competitor—a deal that Xconomy’s Greg Huang thought would put more pressure on Swype itself.

I know the Swype and Nuance guys had a pretty healthy little rivalry going on. When I interviewed former Tegic guy Brad Bargen earlier this year at the Nuance offices, he said he reminds people that not everyone from Tegic is at the startup—and he even got in a nice little dig about the finger-sliding motion just being “an input-output filter.”

Just guessing at reasons: It could be related to customer footprint, or clearing out a competitor, or some new intellectual property. And mobile is intensely competitive these days, with Google, Apple, Microsoft, Amazon and a myriad of other companies flooding the sector.

Swype announced in July that it added $2.5 million to a Series C round, led by existing investors Samsung Ventures, Nokia Growth Partners, Benaroya Capital, DOCOMO Capital, and Ignition Partners. That brought the startup’s total fundraising to about $14 million. Adrian Smith of Ignition served as the shareholders’ representative on the Nuance merger deal.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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