4 years ago
July 29, 2016
Buying Was the Easy Part: M&A Integration in the Cold Light of Day
We know the translation market is growing and with it the number of mergers and acquisitions. What we do not know yet is the true impact all this activity will have on the overall market—clients, technology companies (established or disruptive), and the supply chain.
If we take a look at the M&A stage, investor-backed and publicly traded companies are set to follow the juicy recipe of diversification by acquisition; buying new clients, brands, technology, and expertise in order to gain market share fast, beat margin compression, and accelerate returns.
Thus, any company that has achieved a revenue of at least USD 4m and 20% EBITDA (earnings before interest, tax, depreciation, and amortization) through building valuable international client loyalty in one or two regulated industries, and has a solid brand and niche expertise, is a prime target for acquisition, especially if the owners have teed up the operation for takeoff and are ready to exit.
Similarly, it makes sense for small companies of USD 1–2m turnover that fulfill the above characteristics to consider merging with a competitor instead of embarking on another decade-long stretch to triple in size and attract buyers; but we have yet to see true movement in this area.
As more deals seem to be going over the line this year, here are a few thoughts on M&A integration.
There is an interesting trend to go for multi-brand entities (i.e., X, a Y company) under an umbrella buyer organization. Whether motivated by minimizing the risk of rebranding or not, ultimately, the combined pool of clients is likely to be on board as long as they get the same or better value. Beyond strategic messaging, there are two underlying challenges here in order to maximize the ROI of acquisitions and hit synergy targets.
On the one hand, decentralized procurement prevails in regulated industries, where each client subsidiary owns the decision to choose the providers. On the other hand, there is a reliance on the provider to handle complexity and figure things out on the other side of the fence no matter what, which generates stickiness.
Maintaining client loyalty is already an effort in itself. Gaining traction inside client companies to snatch business from incumbents with a new value proposition in additional geographies and services is going to be as hard as it has ever been.
Smaller incumbents are perceived as agile and flexible, with company owners who will give “everything” to keep stakeholders happy
It all boils down to earning confidence through relationships, offering a competitive solution, and delivering on what was promised.
Big corporations can effectively use economies of scale, seasoned sales and marketing, and professional RFP capabilities to their advantage to penetrate decentralized organizations. However, smaller incumbents are perceived as agile and flexible, with company owners who will give “everything” to keep stakeholders happy. And that is still very, very powerful.
Also, given the different industry regulations in each country, there is an elevated sense of accountability placed on the provider—preserving brand reputation aside—to ensure that any compelling changes to win additional business after an acquisition (e.g., price reductions, faster turnarounds, increased capacity, and so on) will not result in lack of compliance.
Now, if a new value proposition as a result of an M&A is based on scale and infrastructure behind an impeccable shop window, what needs to happen under the hood?
Everyone is looking for cloud-based simplicity, seamless interoperability, and automation in order to remain competitive. So the focus now is on UX (user experience) design, a comprehensive range of APIs (application programming interfaces), a robust TMS (translation management system) with accounting connectivity, talent matching functionality and MT (machine translation) solutions to maximize value through high productivity and custom quality outputs.
In an M&A scenario, customized systems used by buyers and sellers and built to cater to their particular requirements until point of transaction, are bound to pose integration challenges, ranging from the easily surmountable to trying to fit a square peg into a round hole.
In a five-year investment exercise, aggressive growth through diversified M&A means multiple integration efforts; and the total price tag can become astronomical. Mighty capital expenditure requires board of directors sign-off linked to tangible ROI. Any returns based on optimistic modelling will be subject to scrutiny. Plus, all of this needs to be tied to the strategic value proposition.
Therefore, the dilemma is whether to revamp/connect existing systems, buy new/develop from scratch or to hybrid variations. Elements to weigh up are not only the loaded costs of technology options and operational savings, but also the testing, training, and implementation costs, and sustainable maintenance, support, and new development long-term.
Everyone is looking for cloud-based simplicity, seamless interoperability, and automation in order to remain competitive
Counter-intuitively, the acquirer may decide to kick the can down the road by maintaining multiple systems across its M&A activities and connect as necessary. But if this approach is properly executed, it means managers will not be distracted from growing the business as it reinforces its multi-brand strategy message.
And yet there may be a desire to turn full-tilt consolidation into a key differentiator. Here, the onus is on the CTO to make a compelling ROI case for a homegrown uber-platform with a minimal number of commercial or acquired solutions.
This means a show of strength, innovation, and self-sufficiency; but it can soak up too much energy and attention. Whatever the case, it will need to deliver tangible results across the board within two or three years, else it leave a huge amount of value on the table.
In this context, any revolutionary technology products, which emerge to competitively solve the bigger part of the puzzle at an indisputable scale, could become strong contenders, particularly if the acquirer wants to focus efforts on the core business as opposed to building technology.
Brute force may save the day at first, but it is not a viable option long-term
Also, this is the era of data-centric management. Financial planning and analytics capabilities are key, especially in relation to performance, forecasting and, yes, capacity planning.
Regardless of the chosen technology solutions through M&A, the resulting entity will need to ensure that sophisticated dashboards to cater to enterprise KPIs (key performance indicators) are not only available but also as automated as they can be. As with anything, brute force may save the day at first, but it is not a viable option long-term.
Together with the growing shift toward audiovisual communication replacing text, with new pricing models on the horizon, the big question now is, are the technology roadmaps and budgets out there truly in sync with the times?
Regardless of M&A activity and chosen technologies, the people at the bottom of the supply chain remain the same. And, differentiator narrative aside, without the right resources available at the right time, it is impossible to deliver.
In regulated industries, it is even more evident that expert credentials are the added value. Risk-conscious clients favor disintermediation and certifications. The real issue at hand is to ensure that the chosen and approved capacity will be there when it is needed, and can scale as required.
Whether we are talking about the usual Darwinian selection or creatively tapping into brand new talent, the key here are easy-to-use systems; from on-boarding to training, procurement, and production to quality assurance.
In regulated industries, it is even more evident that expert credentials are the added value
This is where small and big players choke under double-digit growth pressure—too many moving parts, intrinsically labor-intensive, and human error-prone. Add rate reductions to this mix without the proper due diligence on viability and it will be nigh on impossible to avert disaster at some point.
Hence, companies everywhere have put their skates on and have started throwing systems and experts at the most obvious problems. However, beyond all the bells and whistles, the adoption of new technologies can be a hard sell even at the best of times.
Many argue that accelerating the learning curve of newcomers (under the right controls) may be faster than training experienced resources who are largely set in their ways.
Let’s face it, as the market grows and M&A activity gains traction, a balance between the two is the way to go. Using smaller providers as expert resource-broker platforms to support scale can still help if the numbers add up. But if the middleman neither keeps up with the times nor is perceived to provide added value, more organizations will choose to transact directly with individuals at less total cost.
So ask yourself, as the market grows, can you expect loyalty without some form of appreciation?
And yet, do individuals guarantee capacity when they are a code number dealing with a task allocation portal? According to research, crowd motivation is not only about compensation but keeping people engaged as they work harder and better.
Note how volunteer or enthusiast-crowdsourced communities do not get paid, and yet quality KPIs are pretty much on par. So ask yourself, as the market grows, can you expect loyalty without some form of appreciation?
Again, the miscalculations usually happen around genuine efforts of doing all this successfully. Too many budgets assume capped resources and cost leverage to sustain both supply chain, rabbit-out-the-hat innovation and business-as-usual acquisition after acquisition.
So what is really at stake is to ensure that upfront savings do not generate a fixing-spree down the line, which merely shifts costs from one income statement line item to another.
About the author
Olga Blasco works as a consultant helping both international private companies and non-profit organizations with business strategy for growth. She also drives special programs on the field as coach. A professional nomad, she currently operates based out of Dublin, Barcelona, and Istanbul. Olga has 20 years of experience in the translation industry, having held senior leadership positions at Lionbridge and Welocalize through mergers and acquisitions. She proudly supports The Rosetta Foundation with strategic planning, financial sustainability, and partnerships.