Companies lining up to buy Lernout & Hauspie assets

Fonix Corp., a Salt Lake City-based voice technology company, is planning a US$55 million capital increase, in part to buy assets of its Belgian rival Lernout & Hauspie Speech Products NV (L&H), a Fonix lawyer confirmed Friday. The company is among a growing list of those seeking to obtain the assets of L&H, which was declared bankrupt Wednesday.

Fonix is bidding for L&H’s core speech and language technologies, which include Dragon Systems Inc., a Newton, Massachusetts-based speech technology firm bought by L&H a few months before a fraud scandal inside L&H was exposed in The Wall Street Journal last year.

Fonix is one of several companies lining up to buy parts of L&H, which only 19 months ago was worth almost US$10 billion – a giant in the fledgling speech recognition software business.

Fonix lawyers made an offer to L&H’s general counsel Thomas Denys in New York the day before the commercial court in Lernout’s hometown of Ieper declared the firm insolvent. Fonix offered US$15 million in cash plus 10 per cent of its own shares. The remaining US$40 million of the capital increase is designated for “the consolidation of its business operations,” Fonix’s lawyer Jeffrey M. Jones of the Salt Lake City law firm Durham, Jones & Pinegar said in a letter detailing the offer. The letter did not say where the US$55 million in financing would come from.

Jones confirmed Friday that the offer has been resubmitted to the liquidators put in charge of selling the L&H assets by the Belgian court Wednesday. Fonix declined to comment.

The founders of Dragon Systems, James and Janet Baker are also going to bid on L&H. They sold their company for US$460 million of now worthless L&H stock, and they want their company back, Janet Baker said.

“We are involved in the bidding process,” she said. “It’s not just Dragon either – we are interested in possibly all of the speech and language technologies.”

She expects several other bidders to step forward. “It is not impossible that someone like IBM might bid,” she said.

IBM Corp. has well-developed speech technology operations.

“We are endeavouring to make the winning bid with both strategic and financial partners,” Baker said, without revealing how much she and her husband are offering or the identities of their partners.

SpeechWorks International Inc. of Boston, another L&H competitor, offered just over US$12 million for the bulk of the core speech and language technologies last weekend, said one Lernout employee who requested anonymity.

Two other U.S. companies have expressed an interest in the core of Lernout: Critical Path Inc., based in San Francisco, and Automated Voice Systems Inc. from Yorba Linda, Calif. “These two are interested in all of the core business,” the L&H employee said.

Fonix’s offer stands until Nov. 2. “We understand that this offer may be subject to higher and better offers through the bankruptcy court, and the potential buyer reserves the right to modify this offer if other offers are received,” Jones wrote in the letter.

Jean-Marc Vanstaen, one of the five liquidators appointed Wednesday by the Ieper court, said he has been in contact with SpeechWorks. “I know of the name Fonix, but I cannot say if there have been formal contacts – we have got a great number of faxes,” Vanstaen said.

“Everyone is welcome to bid. Everyone will be informed how we will proceed very soon,” he said. “The aim is to sell the operations as going concerns if it is possible, and I hope it is.”

“If Fonix buys the intellectual property from L&H, their value on the speech recognition marketplace will increase tremendously. It makes them a comprehensive speech company, putting them 2 to 3 years ahead of any U.S.-based competitor,” said David Webb, co-founder and chief executive officer of West Palm Beach, Fla.-based Voicetel Systems Inc., which uses L&H software.

Meanwhile, MedQuist Inc., a Marlton, N.J.-based speech recognition company made the winning bid of US$25 million for L&H’s medical transcription business Monday. A bankruptcy court in Camden, N.J., will decide Friday whether to allow the deal to go through.

MedQuist was confident the deal will still go ahead, according to a statement Thursday, but Vanstaen said he couldn’t confirm if this deal can take place or not. “We are waiting to hear from our U.S. lawyers about that,” he said.

The former chief executive of L&H, Philippe Bodson, is willing to help the liquidators in their task of selling off the company, according to the Lernout employee.

“We will accept Bodson’s help where needed,” Vanstaen said.

L&H began to unravel when a US$100 million cash shortfall was discovered in its South Korean unit midyear last year. An investigation uncovered accounting irregularities throughout the company with sales overstated by US$373 million from 1998 to 2000.

The company’s founders, Jo Lernout and Pol Hauspie, were arrested by Belgian authorities in April of this year, and were among four top executives charged with falsifying accounts and stock manipulation. The cases against the executives are awaiting trial.

Lernout & Hauspie, with dual headquarters in Belgium, and Burlington, Mass., is at