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Are Nuance and Rackspace takeover targets?

By Chris Lau for Kapitall.

After a stock sells off excessively, Whispers and rumors that a company will be taken over start to spread. Low valuations frustrate value investors, and even more so when its shares fail to rebound. Nuance Communications (NUAN) is one example of this phenomenon. Its shares jumped above $19, but are now pulling back.

Nuance is not the only value play in town. Rackspace Hosting (RAX) is another takeover candidate. It, too, is pulling back after rumors circulated that the company does not have an interested buyer.

Both companies have potential upside. Nuance is more fairly valued relative to Rackspace. Nuance has a forward P/E of 28, compared to 48 for Rackspace.

A takeover of Nuance faces complexity challenges. Nuance has a product line that is diversified among many market sectors, from healthcare to enterprise. Investors hoped Samsung might buy Nuance. Apple (AAPL), which uses Nuance technology, might not be receptive to this.

Samsung buyout makes sense

If Samsung bought Nuance, it would leave Apple vulnerable. Apple would need to develop a solution comparable to that offered by Nuance. More importantly, Nuance’s value would go up if Apple decided it could not find a better supplier for voice recognition solutions.

Nuance structure complex

Nuance’s complex structure might not help shareholder’s realize full value as the company reports weak results, but there is tremendous value that has yet to be unlocked by the market. Nuance is in the midst of moving its revenue from software sales to SaaS, or Software as a service.

Bottom line

Investors could see Nuance share dip further as the takeover rumor dissipates. Nuance is still a good takeover candidate, and investors holding the stock will be rewarded. Like Rackspace, its shares are for investors with a multi-year time horizon. As revenue improves over the course of 2014, so, too, will its share price.

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