From the New York Times
May 7, 2001

Dragon Systems Sputters After Belgian Suitor Fails


       May 7, 2001
       Dragon Systems Sputters After Belgian Suitor Fails
       By JENNIFER 8. LEE
       EST NEWTON, Mass. — The courtship began in the unlikely setting
of the Grand Hungaria hotel in Budapest in September 1999, where a
speech recognition conference was under way. Over dinner, Jo Lernout and
Pol Hauspie, founders of the highflying speech recognition software
company that bears their names, tried to persuade Janet Baker, who with
her husband, James, had founded and nurtured Dragon Systems over 18 
years, to combine their resources into one company.
       It was a highly reasoned proposition. The acquisition would
combine some of the world's most advanced speech technologies under one
company. In a field where Microsoft and I.B.M. were players, Lernout &
Hauspie and Dragon would be better off working together than competing
against each other.
       Lernout & Hauspie had approached the Bakers several times over
the years about acquiring Dragon, a small but highly respected
technology company that had recent success. But this time the
circumstances were different: in the preceding two years, Dragon had
been through two failed attempts at taking the company public, and its
board was strongly considering selling it to a larger company.
       Lernout & Hauspie was not, in fact, Dragon's suitor of choice. 
Visteon, a Ford Motor Company spinoff with $18 billion in annual
revenue, seemed more attractive. But Visteon left Dragon at the
corporate altar in February 2000; Visteon would later argue in court
papers that it did so at the urging of Lernout & Hauspie. Mrs. Baker
then picked up the phone and called Lernout & Hauspie to resume their
talks. Within weeks, the deal was done; Dragon was wed to Lernout &
Hauspie last June for stock then valued at about $600 million.
       But within 60 days, things began to unravel. Unusual spikes in
sales from Lernout & Hauspie's Asian division raised questions about the
company's finances. Hundreds of millions of dollars in either missing or
fictional revenues eventually forced Lernout & Hauspie to file for
bankruptcy protection in Belgium and the United States.
       Less than a year after the merger, Mr. Lernout and Mr. Hauspie
are detained in Belgium, charged with stock manipulation and falsifying
       documents. The company has become the subject of numerous 
investigations, and its stock price has dropped more than 99 percent
from its record of $72.50; it closed at 63 cents on Friday. It has been
an embarrassing episode for the Belgian government and major investors
like Microsoft.
       The Bakers' tale has become a dramatic side plot to Lernout &
Hauspie's financial travails. For the couple, it is not only about the 
hundreds of millions of dollars lost, but the pain of watching the 
disintegration of a company that represents two decades of their
emotional, intellectual and financial investment. Since the acquisition,
more than two-thirds of the 300 or so Dragon employees have left or have
been laid off, including the vast majority of its engineers and
researchers, who were considered the company's most valuable assets.
       Parts of Dragon's technology have already been sold to help pay 
Lernout & Hauspie's debts and settle disputes, including a sale of voice
recognition technology to Visteon for $13 million — far less than Mrs.
Baker said it was worth. And two weeks ago, Lernout & Hauspie's current
chief executive, Philippe Bodson, announced that the company would
probably be forced to sell its assets, including the former Dragon, to
pay its creditors.
       "It's like being caught in the middle of a soap opera, and I've
never liked soap operas," said Mrs. Baker, who, like her husband, seems
more like a seasoned academic than an archetypal technology
entrepreneur. "The idea of being trapped in one is very surreal."
       Today, the Bakers spend 30 to 40 hours a week trying to extricate
Dragon from Lernout & Hauspie. They have enlisted the law firm of David
Boies, who represented the government in the Microsoft antitrust suit
and Al Gore in the Florida election recount. The couple has tried to get
the bankruptcy court to appoint a separate trustee for Dragon in the
bankruptcy proceedings and has spent days testifying in court. The
Bakers have expressed their desire to reacquire Dragon, or what is left
of it.
       But it may be too late to divorce Dragon from Lernout & Hauspie. 
"Dragon no longer exists," said John Shagoury, a former president of
Dragon, who now heads a division of Lernout & Hauspie. "The Dragon
technology is part of the business unit within Lernout & Hauspie."
       The Bakers remain determined to reclaim their legacy. "If it was
put back in the hands of the shareholders of Dragon, it could be
rebuilt," Mrs. Baker said. "Surely it's a very strong setback — you need
to have more people and so forth — but the technology is still at the
top of its field."
       The Lernout & Hauspie debacle is a sour patch for a 30-year-long
speech technology love story. The Bakers built their marriage and lives
around speech recognition, having met at Rockefeller University when
they were graduate students in the early 1970's.
       They worked together in a variety of speech research posts, and
when they found themselves unemployed in 1982, they formed their own
company in the nascent speech recognition industry, with no venture
capital financing and no business plan.
       What they did have were two young children, enough savings to
last them about a year and a half, and a large mortgage on their white
Victorian house, which also served as the company's first headquarters.
The company's name came from Mrs. Baker's longtime passion for dragons, 
which her husband came to share.
       Today, their Victorian house is still filled with hundreds of 
dragons from all around the world — ceramic, wooden, plush, metal,
miniature, large, fierce and adorable. A wooden plaque that reads
"Dragons' Lair" is on the front door. Even the wallpaper in the bathroom
has dragons.
       It is from this house that the Bakers handle most of their legal 
battles. "The year of the dragon has been horrible for the company,"
said Mrs. Baker, referring to the Chinese zodiac designation for the
year 2000.
       The financial scandal that engulfed Lernout & Hauspie is a bitter
irony for Dragon, a company that had followed a conservative fiscal
course throughout its existence.
       Speech technology is an exciting field that has always operated 
largely on its potential, promise and promotion. But Dragon Systems did
not act like an explosive technological start-up. For its first 12
years, Dragon accepted no outside financing, subsisting on a modest diet
of government contracts and special projects until a quarter of the
company was sold to Seagate Technologies in 1994.
       Mr. Baker immersed himself in the research, and Mrs. Baker, who
has seen dubbed the "Dragon Lady" by some in the industry for her
ferocious negotiating, took charge of the business side.
       After 15 years of modest success, the company finally had a big 
payoff in 1997 with Dragon NaturallySpeaking, inexpensive desktop
software that recognized nearly continuous, almost natural speech. It
became a top-selling software package, the salvation of bad typists and
those suffering pain from the stress of keyboard use. The company won 
dozens of industry awards and was portrayed as a technological David
battling the Goliath I.B.M. In one year, Dragon's revenues tripled.
       By all accounts, the sudden growth spurt strained Dragon's
ability to manage itself, which pushed it down the path of acquisition.
There was a certain amount of financial naοvetι within the company,
former and current employees say. The tight controls that helped Dragon
through its early, lean years may have hindered it as it grew. For
example, Janet Baker, as chief executive, personally had to authorize
any purchase over $500 — in a company with revenue that had by then
reached $60 million.
       Even in hindsight, the Bakers say there were no visible signs of 
Lernout & Hauspie's problems. For the deal, Dragon hired a premier crop
of advisers — Goldman, Sachs; Arthur Andersen; and the Boston law firm
of Hale & Dorr — all of whom approved the transaction. "We didn't cut
any corners," Mrs. Baker said. "I don't know what we could have done
differently."
       Former executives at Dragon still defend the value of the
acquisition, fraud charges aside. "The integration of the two
technologies has gone even better than we hoped it would," said Jeanne
McCann, a former vice president for development at Dragon who now works
for Lernout & Hauspie.
       She pointed to the introduction of software that allows police 
officers to dictate their notes directly to a computer as a successful 
integration of the two technologies.
       In addition, other speech technology companies, like Speechworks
and Nuance, have also had drops in their stock prices of more than 95 
percent in the overall market downturn. "I don't know how much
difference their fate would have been as shareholders, had there not
been fraud," Ms. McCann said.
       The speech technology industry, analysts say, will eventually 
recover from these setbacks. And people involved with Dragon agree that
for the Bakers, the money is largely beside the point. The real tragedy
for them is the loss of an innovative company's culture and the
scattering of Dragon's concentration of talented engineers and
researchers to other companies.
       Lernout & Hauspie's announcement that it would sell assets has
created some hope for the Bakers, but it is so far unrealized. "If the
Bakers found a financial backer with the right financial offer, the
company and the creditors would certainly consider it," Mr. Shagoury of
Lernout & Hauspie said.
       But the Bakers say they have not yet received a warm reception to
their overtures, although they remain upbeat as their legal battles
continue.
       "Maybe this is the natural evolution of the dragon," Mrs. Baker
said. "Dragons have a history of making themselves over."


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