Canada’s Zi Corporation Hopes to Fend Off Nuance Takeover; Companies Issue Dueling Statements

Zi Corporation (NASDAQ: ZICA), a struggling Calgary, Alberta-based company whose software is designed to speed text entry on mobile devices, today rejected a takeover offer from Burlington, MA-based speech recognition giant Nuance Communications (NASDAQ: NUAN). Nuance reacted angrily, calling the rejection “perplexing and inappropriate” given Zi’s financial condition.

Last Thursday—the same day Zi announced widening financial losses for the second quarter of 2008—Nuance pounced, saying in a letter to Zi’s board of directors that the time for a sale of the company had come. Nuance noted that Zi was hemorrhaging cash and that low stock trading volumes had put the company in danger of being delisted by the NASDAQ exchange. “We believe that a negotiated transaction with Nuance would be the best way for Zi Corporation to maximize shareholder value, and in particular, to offer substantially superior value…relative to any available alternatives,” Nuance CEO Paul Ricci said in a the letter, which Nuance released to the media.

Nuance said it would offer US $0.80 per share in cash, or approximately $40 million, for Zi, roughly 150 percent above last Wednesday’s closing price of $0.33. After the announcement caused Zi’s stock price to more than double by the close of trading on Friday, however, Nuance’s offer represented a premium of only 20 percent.

This morning Zi turned down that offer. In a release today, the company said that it had concluded in consultation with financial advisors that Nuance’s offer wasn’t high enough. “The Nuance proposal does not recognize the full value of Zi,” the company says.

In another press release issued today just hours after Zi’s announcement, Nuance fired back. Ricci called Zi’s refusal to negotiate “perplexing and inappropriate given the compelling premium our proposal represents to Zi’s market price and the liquidity opportunity it will create, especially in light of the disappointing financial performance and cash outlook Zi reported last week.” He also suggested that the board’s resistance to the Nuance offer is inconsistent with its fiduciary duties to shareholders.

Ricci did not raise Nuance’s offer, saying that Zi’s board had so far failed to provide information that would support an increased bid. “However, Nuance would welcome, and believes it is incumbent upon Zi to provide, any additional information that supports the Zi board’s contention that Nuance’s proposal does not fully value Zi Corporation,” Ricci said.

Zi makes several types of text-entry software for mobile devices, including one program that automatically corrects typos for text entered via keypads, another that offers predicted word completions based on the first few letters, and a third that’s used in pen-based devices to convert letters, shapes, and punctuation into digital characters. Last week the company reported that second-quarter revenues had declined to $2.7 million, compared to $3.5 million for the same period in 2007. Losses for the quarter totaled $1.5 million, or $0.03 per share, compared to $1.2 million for the second quarter of 2007.

Nuance—which is known for its aggressive business tactics—is currently embroiled in a lawsuit with Cambridge, MA-based Vlingo over speech recognition patents that Nuance says Vlingo is infringing.

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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