By Eric Auchard, Reuters

SAN FRANCISCO, May 9 (Reuters) - ScanSoft Inc. said on Monday it had agreed to buy Nuance Communications Inc. in a $221 million merger of two of the survivors in the slow-to-develop market for computer speech recognition.

Under the cash and stock deal, ScanSoft will issue about 28 million shares of its common stock to Nuance shareholders who will receive 0.77 ScanSoft shares for each Nuance share, as well as $2.20 in cash per share. The deal was valued around $221 million using ScanSoft`s closing price of $4.46 on May 6.

Nuance shares jumped 55 percent to $4.81 from its closing price on Nasdaq of $3.10 before the deal was announced while ScanSoft stock dropped nearly 12 percent to $4.00 from its closing price on Nasdaq of $4.53.

But while speech automation has been held out as one of the most promising technology frontiers for more than a decade, it has met with only limited success except in structured settings like telephone call centers or medical or legal dictation.

Computers that can simulate nuclear blasts still struggle to differentiate a cacophony of human accents and languages.

ScanSoft, which started out supplying document-scanning software, over the last four years has bought up many of the struggling makers of speech recognition software, including brands like Dragon, SpeechWorks and Lernout & Hauspie.

Nuance is a leading supplier of technology used to run customer call centers. The merger of the companies creates the leading independent supplier of voice automation software used in customer service centers, office dictation and the emerging market for controlling mobile phones via voice commands.

``The most important competition in our market is Microsoft and IBM,`` ScanSoft Chairman and Chief Executive Paul Ricci said in a phone interview following news of the proposed deal.

SO FAR, NOTHING TO SHOUT ABOUT

The merged company will be known as Nuance, reflecting a desire by ScanSoft to emphasize its speech businesses over the remaining 20 percent to 25 percent based on document-scanning business.

Ricci said the combination of the two companies, which is subject to regulatory and shareholder approvals, should occur on or around September 30.

ScanSoft of Peabody, Massachusetts, reported a narrower net loss for its second fiscal quarter ended March 31 of $1.0 million, or 1 cent per share, compared with a net loss of $2.8 million, or 3 cents a share, in the year-earlier quarter. Excluding charges for prior acquisitions and employee options, ScanSoft would have reported a profit of $3.5 million it said.

Separately, Nuance of Menlo Park, California, reported a wider net loss for its first quarter ended March 31 of $4.6 million, or 13 cents per share, compared with a loss of $2.6 million, or 7 cents per share, in the year-earlier quarter.

In addition, private equity investor Warburg Pincus, ScanSoft`s biggest shareholder, said it had agreed to nearly double its investment in the company by buying an additional $75 million in stock to help fund the merger with Nuance.

The combined company will have 300 speech engineers and researchers and 250 speech patents, Ricci said. It expects to generate revenue of $315 million to $320 million in the year ending September, 2006, Ricci said, adding that the merger can contribute to profits for the 2006 year as a whole.

He said competition in the customer call center market has heated up since IBM and Cisco Systems Inc. began working as partners. Microsoft Corp. has also been more active in the past year, the executives said.

IBM and Microsoft have spent large sums developing speech recognition systems over the years but the results have failed to live up to optimistic projections.

In 1995, Bill Gates wrote in his book ``The Road Ahead`` that within ten years computers would be able to ``read your lips as well as listen to you speak.`` While technically possible, such technology remains far from mainstream in terms of PC users.