Will embattled Lernout & Hauspie survive?

LERNOUT & HAUSPIE'S filing for bankruptcy protection this week is raising questions
within the industry about whether or not the vendor long recognized as a market and
technology leader in speech recognition will survive.

At a press conference Friday, L&H chairman of the board Roel Pieper assured
analysts that the company would remain intact. "We are going to focus on preserving
what we have, not on spinning it off," Pieper said.

Yet analysts were less optimistic, saying that the 5,500-employee L&H may be too
vulnerable on numerous fronts for survival without major changes.

Finding a suitor willing to acquire L&H is also unlikely, some analysts argued,
because bailing out a company with an almost half-billion-dollar debt and an open
investigation by the Securities and Exchange Commission for irregularities in financial
reporting isn't very palatable.

Meanwhile, adding to the company's problems, Dictaphone shareholders said they plan
to return to court seeking to nullify the original deal in which L&H bought Dictaphone
earlier this year.

"If [L&H officers] think they are going to lose Dictaphone, their survival strategy
may change," said Amy Wohl, president of Wohl Associates in Narberth, Penn.

L&H has one asset that everyone in the speech recognition industry wants, more than
1,000 computational linguists and software engineers. Linguists are a scarce commodity,
according to Wohl.

"These high-priced scientists are very much in demand from Philips and IBM down to
many smaller guys in the Boston area," Wohl said. "They wouldn't even have to move,"
Wohl added, referring to L&H's Burlington, Mass., headquarters, which are right outside
Boston and near many other speech technology companies.

"My guess is these companies will be circling the parking lot at this point," Wohl
said.

L&H spokesperson Ron Schuermans said the company will do its best to retain key
employees. "It is obvious that confidence has been shaken and employees are worried but
no sign of a brain drain for the moment," Schuermans said.

According to Schuermans, the company is already looking into a retention program to
motivate employees to stick around.

The company is also under attack from external forces and possibly internal forces
that might drain company talent, including its ability to retain its customer bases.
Schuermans admits that maintaining delivery schedules is "difficult at this time."

"We have to wait for a ruling [from the court], and that will determine our
obligations to customers," Schuermans said.

However, L&H already lost one of its premier customers, Visteon, a major supplier
to the auto industry, which took L&H to court after L&Hs financial irregularities came
to light and before the Chapter 11 filing.

Other customers are already looking to "swap out" L&H technology, according to
Steve Ehrlich, an executive with L&H rival Nuance Communications, in Menlo Park,
Calif.

The problem, however, is that L&H has numerous high-profile customers, especially
in the automotive market, who rely on its technology.

"Microsoft recommends L&H for its AutoPC products," noted Bill Meisel, president of
TMA Associates, a speech technology research company in Tarzana, Calif.

Microsoft officials declined to comment on L&H.

Another tier-one automotive supplier is Delphi Delco Electronics Systems in Troy,
Mich. Currently L&H is supplying the speech technology behind Delphi's in-vehicle
CommuniPort Infotainment PC System, which among other features will allow drivers to
navigate the radio and music systems in the car by voice. Delphi is also set to launch
its Mobile Productivity Center later this month using L&H technology for voice dialing
and Web surfing.

So far, it appears that Delphi is not abandoning L&H.

"We are watching the situation like every customer," said Milton Beach, a Delphi
spokesman who added they are still expecting to ship products on time.

Barring major desertion by its software engineers, L&H still has one market-leading
technology.

"There are not many alternatives like embedded-speech technology. It is a broad-
based technology that people are using a lot, and there are still limited sources,"
TMA's Meisel said.

Speech analyst Amy Wohl agrees that L&H is a technology leader in some areas of
speech.

They have done a lot of work in natural language processing, and they have
extraordinary people in that place," Wohl said.

However, speech technology requires a huge investment to get to a certain level,
Mesiel added, and that may be at the heart of L&H's problem.

Speaking as a competitor who understands the industry, Nuance's Ehrlich believes
L&H should have selected one or two areas to focus on.

"They tried to consume too much, too quickly, [when they bought] Dragon and
Dictaphone. Their stated strategy was they were leaders because they had all the bases
covered, text to speech, translation, dictation, speech recognition. You could argue
that, that strategy failed because no one company can be successful in so many things,"
Ehrlich said.