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The
business of providing language services like translation
and localization is critical to global commerce, branding,
and other communication. Globalization has made interpretation,
dubbing for TV and film; and translation of documents,
software, product information; and websites commonplace
items on any knowledge worker’s task list.(1) But as a US
$10 billion industry, (2) it remains highly fragmented and
a bit obscure even after several waves of consolidation
over the last decade.
Common Sense Advisory believes that the
language industry is poised for more consolidation driven
by the quest for more market effi ciency, better technology,
rationalized offerings, and global scale. At the same time,
we see it continuing to be a very fragmented industry. We
see a fundamental paradox here - the industry must consolidate,
but won’t change very much. If you’re a buyer of language
services, how this industry drama plays out should prove
very interesting in your planning. How it evolves will have
a profound impact on how you buy the services that keep
your company able to operate internationally.
MERGERS & ACQUISITIONS AMONG LANGUAGE
SERVICE PROVIDERS
Mergers
and acquisitions (M&A) in the language industry have been
on everyone’s mind since Lionbridge acquired its much bigger
rival, Bowne Global Solutions, in June 2005. That same month
SDL upset the technology side of the market by swallowing
its smaller but dominant competitor, Trados. Since then,
middle-market language service providers such as TransPerfect/Translations.com
and Welocalize have snapped up a raft of smaller companies,
while other players like euroscript, from Luxembourg, absorbed
firms closer to their own size.
For the last two years, "selling for a good
price" has also been a hot topic among owner/operators and
at conferences. Big investment bankers like Goldman-Sachs
and equity research firms such as Clear Capital evaluate
the few publicly traded firms as they do for the leading
companies in any industry. Meanwhile Common Sense Advisory
sees that the market will continue very similar to certifi
ed public accounting, in which a few mega-sized companies
dominate the headlines and handle work for publicly traded
companies, while thousands of smaller firms deal with the
masses of small and medium businesses that also require
such services. However, market realities will keep the industry
in its current pregnant state as buyers wait for sellers
to meet their terms and conditions - and sellers hold out
for enough to buy that villa in Tuscany.
Today, a few notable but not impressively
large firms lead the charge. The question that everyone
asks is who will consolidate the industry - today’s leaders,
smaller but more aggressive agencies, services firms from
outside the business expanding their portfolios, or newcomers
backed by venture capital or private equity?
Of course, none of this consolidation will
happen in a vacuum. The demand for language services increases
year over year, driven by consumer need, corporate desire
to provide more content in more languages, and government
regulations. At Common Sense Advisory, we characterize these
drivers as "market-driven localization, "all a function
of buyer needs.(3)
IT HAPPENED BEFORE, IT WILL HAPPEN
AGAIN
Mergers and acquisitions have been a fact
of life in the language industry for the last dozen years.
As long-time observers, we note several periods of increased
consolidation in the translation and localization market.
- The language industry as we know it
began in the 1980s. The beginning of the translation and
localization specialty started with small agencies like
GECAP, Harvard Translations, ICI, I LE, INK, ITP, Logos,
M2 , McElroy, Polyglot, Randall Woolcott Services, S&D,
and Tek in the 1980’s and early 1990’s. Through the 1990’s,
these companies ebbed and fl owed as firms like Mendez,
Lernout & Hauspie, LMI, Berlitz, Bowne, Lionbridge, and
SDL snared companies in their bid to grow to a size and
visibility that would attract customers. Their goals were
to assemble a global footprint and reach $50 to $100 million
in revenues.
- The pre-2001 web inspired dreams of
localization fortunes. In the late 1990’s the web widened
the world of translation and localization, creating new
demand for language services as everybody deployed their
global websites. However, the party came to an end in
2001 when the internet-infl ated bubble burst, shutting
down many companies’ ambitious global website projects
and threatening the existence of many language service
providers. While several large transactions occurred,
these were themselves triggered by implosion from the
downturn - Lernout & Hauspie’s fabled meltdown in December
2000, the dispersal of L&H assets such as Mendez and Dragon
over the next couple of years, and Berlitz’s acquisition
by Bowne Global in 2002 stand out as the wave broke. This
otherwise fallow period lasted until 2004 when activity
resumed, both in startup activity and in consolidation
by the bigger players in the marketplace. During this
phase, the top companies aimed at revenues between US$100
and US$200 million.
- The current round of consolidation began
in 2005. Since Lionbridge and SDL made their high-profi
le acquisitions in 2005, there have been many smaller
acquisitions. TDC has been especially active, purchasing
ArchiText, Crimson, and iSP. Welocalize snatched up Connect
Global, M2 (2006), and Transco. Across the pond RWS acquired
Eclipse and euroscript bought eurodoc. In some cases,
they bought specialty capabilities (for example,
ArchiText’s methodology), in-China expertise
(Transco), or a foothold in Europe (Connect and iSP). UK’s
thebigword also shelled out for China, buying Rainbow in
2006. While some acquisitions remain separately branded,
they do roll up their revenue to a bigger company. In this
round, the leaders are competing to become the first billion-dollar
company, while the followers shoot for the quarter-billion
mark.
![Consolidation continues in language services](../images_articles/language_services_01.jpg)
BALKANIZED FOR GOOD REASONS
The LSP market is often characterized as
balkanized or fragmented. The industry provides a wide range
of language services, with the individual firms focusing
variously on translation, localization, interpretation,
or all three segments. There are literally thousands of
players, ranging from the largest firms with thousands
of employees to the middle market of firms with US $20-100
million in revenue to tiny mom-and-pop shops with just one
or two employees. But it is an interesting market to observe
given its evolutionary state:
- The top suppliers account for too little
revenue. The 20 largest LSP’s booked just 18 percent
of the US $9.4 billion revenue earned by the industry
in 2006 (see Figure 1).(4)
That means thousands of smaller firms brought in the balance
of that nearly $10 billion dollars in annual turnover.
![MARKET SHARE OF THE TOP 20 IN 2005 AND 2006](../images_articles/language_services_02.jpg)
FIGURE 1: MARKET SHARE OF THE TOP
20 IN 2005 AND 2006
SOURCE: COMMON SENSE ADVISORY, INC.
- Each acquisition generates 10 new language
service providers. With each purchase of an LSP, staff
from the acquired firm tends to get squeezed out or find their roles diminished to the point of meaninglessness
- so executives and operational managers start their own
agency because it’s sometimes easier than finding a job
with another company. Barriers to entry are low, although
ongoing operations prove more diffi cult to manage.(5) Their
desire to keep running the show perpetuates the cycle
of balkanization. Meanwhile, many translators dream of
hanging out their own shingles to yield more than the
pauper’s share of translation fees that a freelancer receives.
- The diverse needs of clients perpetuate
the fragmentation. Every buyer needs something different.
Some are public agencies, most are commercial operations;
some jobs are big, many are small; some firms are satisfi
ed with just Asian tongues, others demand 36 languages
from around the world; some need very specialized work,
others rely on generalists. This is also why the market
is so compartmentalized. It’s not just about market effi
ciency, but also about the various needs being filled
- from provisioning service departments to enabling global
brand management to powering customer experiences across
the planet.
Dilemma: Artificial Short Supply Stymies
Big Demand- With thousands of companies operating in this
industry, we always wonder why there isn’t more M&A. The
reason lies in the mismatch between buyer and seller requirements
and expectations.
- Demand. LSP’s are growing to meet client
demand. Besides that, they have to grow to generate the
returns expected by the financial markets or their ambitious
investors. Thus, they have to produce more new business
than they can generate organically. Smaller firms crow
about their success in doubling turnover from a base of
US $1 million, but sustaining that rate to leap from US
$50 million to US $100 million is impossible unless they
take the M&A route.
- Supply. Lots of companies tell us they
want to buy, but we find that very few of the smaller
service providers want to sell. The big obstacle here
is that owners of LSP’s harbor unrealistic expectations
about the worth of their firms. We have had LSP’s tell
us that they would consider selling out for two- to threetimes
leading (that is, this year’s projected) revenue. One
company told us that it would start conversations if and
only if someone paid five times revenue. Given the multipliers
that the market pays for human-delivered services companies,
these expectations don’t jibe with reality.(6) Traditional
market valuations for LSP’s fall in the range of 0.7 to
1.2 times revenue.
MORE M&A? IT’S A WAITING GAME
There are many prospective buyers and few
sellers right now. In today’s climate, Common Sense
Advisory thinks there’s a low likelihood of any company
rolling up the language services market. What will move
the market and change our prediction could come at any time.
Any of several trigger events would signal boom times for
M&A specialists: 1) A transaction for an LSP closes at more
than six times EBITDA; 2) Lionbridge earns an appreciable
profit for three quarters in a row; or 3) a flashy LSP with
offshore operations and spiffy offices in London or New
York IPO’s on a toptier stock exchange with resplendent
publicity fireworks.
Any one of these events could happen in
the next 18 months - or not. If any of them do and the word
gets out, we think there will be a rush to buy LSP’s.
ADVICE TO BUYERS OF TRANSLATION
SERVICES AS THE MARKET
CONSOLIDATES
Mergers, acquisitions, and other market
consolidations are a fact of life. That said, there are
a few things you can do to protect yourself and your company
from the vicissitudes of the free market:
- Think ahead. Add a clause to your service
agreement that lets you rescind your service agreement
in case somebody you don’t like buys your supplier. Consult
with an attorney about other remedies that you could write
into the contract.
- Ask for the moon before the fact. When
they are in the due diligence process of being acquired,
most suppliers will schedule conversations with key clients.
This is the time to ask for guarantees and service improvements.
Clients usually don’t ask for much. They might say that
they like their project manager and don’t want him or
her to change. Ask for more.
- Be vocal after the fact. As the acquiring
company rationalizes the two businesses by eliminating
jobs and overlap, somebody - or lots of people - inevitably
get fired, moved, or somehow diminished. For example,
we’ve seen clients angered because their account teams
were moved from one coast to the other or from the U.S.
to Montréal or Dublin. If this matters, let them
know that you’re not happy.
Renato Beninatto is the vice president
of consulting for the research and consulting firm Common
Sense Advisory (http://www.commonsenseadvisory.com). He
can be reached at renato@commonsenseadvisory.com.
(ENDNOTES)
(1)
"Developing Products for Global Markets," Common Sense Advisory,
June 2006.
(2)
"Ranking of Top 20 Translation Companies," Common Sense
Advisory, May 2007.
(3)
"Consolidation in the Language Services Market," Common
Sense Advisory, July 2007.
(4)
"Ranking of Top 20 Translation Companies," Common Sense
Advisory, May 2007.
(5)
"How to Avoid Getting Lost in Translation," Common Sense
Advisory, December 2003.
(6)
"Lionbridge 2005: Opportunities and Challenges," Common
Sense Advisory, September 2004.
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