Why Private Equity Firm CataCap Backed LanguageWire’s Acquisition of Xplanation

Almost a month to the day after LanguageWire acquired rival language service provider Xplanation, SlatorCon Zurich 2018 was delighted to host Rasmus Lokvig, Deputy Chairman of LanguageWire and Partner at its majority stakeholder CataCap, a Danish private equity firm.

Lokvig, who immediately confessed that “he knew nothing about this industry two years ago,” walked the SlatorCon audience through CataCap’s rationale behind investing in LanguageWire in May 2017, and why it went on to champion the USD 30m LSP to buy Xplanation, a company roughly equal in size.

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Lokvig described how LanguageWire CEO Henrik Lottrup painted a convincing picture of his vision for the company, which helped to entice CataCap into investing in LanguageWire initially. Crucial for CataCap was that, “there was actually a bridge between what Henrik was saying and how he articulated the future and what he had done in the past. That was very convincing. After a four month due diligence, we joined forces.”

LanguageWire’s performance in “growing year on year on average 10-12%” coupled with the fact that “Henrik [Lottrup] had invested more than EUR 4 million into a new technology platform,” meant that “there was a lot of good momentum in LanguageWire,” Lokvig said.

“There was a lot of good momentum in LanguageWire” – Rasmus Lokvig, Partner, CataCap and Deputy Chairman, LanguageWire

Tons of Opportunities out There

So CataCap saw a compelling investment in the Denmark-headquartered LSP. The 10-12% growth rate was good, Lokvig said, but Lottrup’s “dreams for LanguageWire were about going beyond that and he wanted to step-change the company.” Yet, “10-12% is not enough to fuel the investment” so the company “decided to pursue the M&A roadmap. There were tons of opportunities out there,” Lokvig shared.

Initially, LanguageWire began considering smaller, technology focused companies as acquisition targets, Lokvig said, but once they started looking under the hood, “the problem is theory vs reality,” he added. What they were after in particular was a good cultural and leadership fit, which Lokvig called “a fit between the humans.”

He continued: “Then we came up with Xplanation. Xplanation, early on when we did this filter, was at the top of our list.” But there was one slight downside, according to Lokvig: “One con, I would say, was that the size of Xplanation was actually at the same size as ourselves, and that was not what we had anticipated, at least at the beginning of this journey,” he admitted. As a representative of LanguageWire’s investor, CataCap, Lokvig is naturally concerned with the risk and reward attached to an investment, and “it is always more tricky and there are more risks in doing acquisitions which are pretty much at your own size,” Lokvig explained.

“We didn’t want to engage into auction processes where you have four, five, six bidders for the same company”

Yet, with Xplanation, “we very quickly had a gut feeling that here is a good fit,” meaning the “cultural aspects and risks became lower.” So they decided to move forward in extending an offer to Xplanation, securing exclusivity as a result. “That was also one of the very critical criteria that we had because we didn’t want to engage into auction processes where you have four, five, six bidders for the same company,” Lokvig said. For LanguageWire, exclusivity was a deal-maker, particularly because of the involvement that it requires from the leadership on both sides: “They have to do 80-90-100 hour work weeks in order to facilitate both this process but also the daily running of the business,” Lokvig said. 

Why Xplanation Ticked the Boxes

And aside from gaining exclusivity and a strong leadership fit in Xplanation CEO Véronique Ozkaya, LanguageWire saw that the deal would bring benefits for the combined company in five key areas, these being size, geography, customer base, technology, and people.

By joining forces, LanguageWire and Xplanation have become a “fairly large company within the Europe borders,” Lokvig said, although he confided that “it’s not a goal in itself for us to be the biggest company in this industry [and] I think if we had that as a goal, we have a long way to go.” But for pure text translation, Lokvig highlighted, “we are becoming one of the 5, 8, 10 players in the world.”

“It’s not a goal in itself for us to be the biggest company in this industry [and] I think if we had that as a goal, we have a long way to go.”

In terms of the companies’ geographical footprint, Lokvig said that “LanguageWire was mainly focusing on Denmark, Sweden, Germany, UK. [But] what we had experienced over the last three years with existing customers was that they were also demanding more geographical presence globally.” And, while “it’s not that difficult to establish a US presence [what is difficult is] to really have a track record.” In Xplanation, LanguageWire is “getting a better foothold into Northern Europe but also a foothold into the US and also into Asia. We thought that made a lot of sense,” Lokvig commented.

The deal also made sense from a customer perspective since “LanguageWire is predominantly focused on business to consumer companies [whereas] Xplanation is very much focused on business to business companies: retail, manufacturing, medical device, financial sector,” Lokvig said. Moreover, he added, “we did not have one single overlap of customers, which came as a big surprise to us.”

Giving additional insight into the reality of servicing customers in the B2B segment, Lokvig commented that “customers are fairly unclear about how to structure localization going forward so being five steps ahead of the customer is not really always an advantage. You really have to just talk about being half a step ahead.”

On the technology front, which is a “major risk when you are merging two companies of a similar size,” there were significant differences between the capabilities of the two companies, Lokvig shared, which also came as a (pleasant) surprise. For Xplanation, implementing the LanguageWire technology would bring gains equivalent to “almost a one to four or one to five difference in productivity (time spent per average job that came in),” Lokvig said, which would effectively turbocharge the company into an “Xplanation on steroids,” Lokvig said, quoting one of Xplanation’s senior management.  

“We did not have one single overlap of customers, which came as a big surprise to us”

Yet, most importantly for Lokvig is that “in the very end it’s all about the people,” and for LanguageWire “this is not a journey where we anticipate laying off a lot of people. We are actually trying to build something together.”

The Hard Work is Ahead

In preparing for the Xplanation deal, LanguageWire saw all of the makings of a successful partnership. But, said Lokvig, “that’s all theory and that’s before you do the transaction.” Acknowledging that the hard work is still ahead of them, Lokvig said that “the tricky part happens when you’ve closed the deal and you’ve paid the money and suddenly you have a company that is double the size. This is when you start to make mistakes, and you have to make mistakes.”

Rasmus Lokvig, CataCap and LanguageWire

In the near term, Lokvig told the SlatorCon audience, “nothing will change in the very short run. It’s business as usual.” Moving forward, the priority will be to “merge into one platform and form a common commercial strategy: what type of customers do we want to serve, how do we want to serve them, which technology,” etc. Lokvig also clarified during the panel session that, “it’s really about moving the Xplanation customers onto the LanguageWire platform,” rather than attempting to merge two platforms, which he said “would have been a nightmare and have implications of a lot of risk.”

“The tricky part happens when you’ve closed the deal and you’ve paid the money and suddenly you have a company that is double the size. This is when you start to make mistakes, and you have to make mistakes.”

Additionally in the panel session, Lokvig expanded on the plans to migrate Xplanation customers onto the LanguageWire platform, and the challenges that beginning to service new segments of customers will likely bring.

Moving Xplanation customers to the LanguageWire platform “is going to free up a lot of synergies. It is also going to have a positive impact on the product development, MT, and AI that we are working on internally. The longer we have two systems, the less strategic flexibility we are offering to the market and to customers.”

But as with any migration, there are additional complexities to bear in mind. For example, Xplanation services some very large customers who apply a multi-vendor strategy, such as automotive companies, meaning they often work within a customer’s own translation environment. This is counter to LanguageWire’s traditional strategy which has involved targeting “best fit customers” who benefit from using their platform. Lokvig explained: “If we can’t apply our technology to our customer, we will never become a strategic partner for that customer. So we were actually going away from that and looking at small to medium sized players.”

Now, however, there is an extra “skill-set that we now have to develop internally,” in incorporating customers who work with multiple vendors and use their own translation environments. “We have to adjust our strategy going forward based on the fact that we are servicing a larger segment of customers,” Lokvig said. But in Lokvig’s view, “we are [still] going to focus more on our own software. The key word here is flexibility.”

Esther Bond

Research Analyst at Slator. Localization enthusiast, linguist and inquisitor. London native.