After years of relative quiet, the Russian language industry has returned to the M&A scene. On June 16, 2017, ABBYY Language Solutions (ABBYY LS) and Traktat announced they are going to combine operations. The merger creates Russia’s largest language service provider (LSP) with pro-forma annual revenues for 2017 of around RUB 1bn (USD 18m). The firm is headquartered in Moscow.
Slator discussed the merger with Traktat CEO Aleksey Shesterikov and ABBYY LS’s VP of Innovation Anton Voronov. According to Shesterikov, the transaction was completed through a share-swap. Both Traktat and ABBYY LS have a very diversified shareholder base, consisting of both outside private investors and management shareholders.
Shesterikov is to lead the combined firm as CEO. Voronov, meanwhile, said he will continue in his current role for the time being but expects to take on a role in “technology and innovations” in the new group.
Lack of Growth in Russia
Shesterikov said a main driver behind the merger is the lack of growth opportunities in Russia. “Our market is full at the moment and there is no way to grow, no way to become larger,” he observed, adding that lowering prices was among the few avenues to capture additional market share. He concludes that “the only way to grow, to become much bigger is to merge.”
According to Shesterikov and Voronov, the merger is also meant to provide the scale necessary to expand beyond Russia and into Eastern European markets and beyond.
Both companies have a very diversified client base in terms of industry verticals. What’s different is the channel. Traktat receives significant amounts of work through its physical presence in business centers in Moscow while ABBYY LS operates through technical integrations with clients.
“The only way to grow, to become much bigger is to merge” — Aleksey Shesterikov, CEO, ABBYY LS/Traktat
Traktat does most of its business with direct end clients. ABBYY LS, meanwhile, also works with global LSPs as a vendor for Eastern European languages. “It’s not a huge part of the business but it’s significant,” said Voronov.
Asked whether this might eventually present a conflict as the combined firm plans to compete with global LSPs in markets outside Russia, Voronov pointed out that “the majority of the customers we work within the US, for example, are not interesting to (global LSPs). So I think there is still a lot of potential to collaborate and we wouldn’t see a conflict here for quite a long time.”
No Translation Productivity Headache
One thing the two companies will not have to fret over as integration plans are drawn up are translation productivity tools. Traktat and ABBYY LS both already use SaaS platform SmartCat. In August 2016, SmartCat raised USD 2.8m in a seed round and appears to be gaining traction.
In terms of translation management systems (TMS),Traktat relies on a customized version of Russian ERP platform ERP 1C (which, according to Shesterikov is used by the vast majority if Russian companies). ABBYY LS has developed a proprietary TMS “a long time ago,” according to Voronov. There are plans to merge into a single platform but it’s still too early to say how.
Plans are afoot for a complete rebranding in 2018. For the time being, the company will operate under the name ABBYY LS/Traktat. Voronov pointed out that “the branding will not be about the renaming only” but will involve creating a unified go-to-market strategy.
Breaking the M&A Freeze
Asked about the impact of the merger on the Russian market, Konstantin Dranch, Localization Industry Researcher and Publisher of translationrating.ru, told Slator that others might now follow ABBYY LS and Traktat’s example.
“The Russian market has seen virtually no M&A for years. And now other deals might follow since someone important has shown the way. Everything depends on how successful the combined LSP will be post-acquisition. It has to establish a clear leadership structure in amongst multiple shareholders, find a way to optimize without cutting too deep, and use the financial leverage,” he said.
“Now other deals might follow since someone important has shown the way” — Konstantin Dranch, Publisher, translationrating.ru
ABBYY LS/Traktat faces a tough competitive environment in Russia, according to Dranch. The combined firm will “remain a competitor with major generalist players, such as Translink, EGO Translating, Neotech, Transtech, and medium-sized firms with an aggressive customer acquisition strategy such as Proflingva,” said Dranch.
As the new company expands internationally, Dranch said it will have to compete with every (large LSP) out there, beginning with other firms with Russian roots such as Janus.
Correction: an earlier version of this article incorrectly described SmartCat as a Russian SaaS platform. SmartCat is incorporated and headquartered in the US with a R&D Center in Russia.