Why Investors Like the Language Industry’s Fragmented Nature and Sticky Clients

Investing in language service providers (LSPs) has been a winning proposition of late, with both strategic and financial investors ramping up their M&A activities and the shares of listed LSPs outperforming the world’s stock markets.

Most large LSPs reported double-digit revenue growth and two LSPs achieved billion-dollar valuations in the last 12 months. LanguageLine was sold for USD 1.5bn and RWS traded above USD 1bn. Slator has covered over 50 M&A deals since the start of 2016 — just a portion of the global merger activity that is not showing signs of letting up anytime soon.

Understanding the language service industry’s attributes that attract investors is vital to both buyers looking to accelerate their organic growth through acquisition and sellers looking to cash out.

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Simon Baertl, Managing Director and Partner at investment bank William Blair, discussed these attributes with over 60 senior industry executives at SlatorCon London on May 9, 2017.

Baertl has been involved in three major language industry transactions, advising on the sales of CLS Communication to Lionbridge, Welocalize to Norwest Equity Partners, and Wieners+Wieners to ECM.

He provided insights into the growth market dynamics, fragmented industry structure, and recurrent revenue business model driving deal activity. “These aspects make it a focus area for investors,” according to Baertl.

“I think the recent take private of Lionbridge through H.I.G. Capital is probably the best proof of the attractiveness for investor interest,” he added.

Baertl also mentioned the ever-rising global online population — which currently stands at 3.4 billion and grows over 7% each year — as one of the language service industry’s growth drivers, adding tens of millions of new local-content consumers every month in countries like India.

Sticky Clients

Sticky client relationships are another attractive feature and provide recurring revenues in the business. While it is not a subscription model, Baertl would argue that switching costs are high as blue chip clients accept only the highest levels of quality.

“They will not just switch if they have a service provider with whom they are happy,” noted Baertl; “which again is a key aspect when you think about an industry from an investor’s perspective.”

Technology enablement is another attribute that investors like. “It’s not a pure services model, where you just have to increase the number of staff to increase revenue and there is limited economies of scale,” said Baertl.

“I would not be surprised if disruption comes from outside the language services industry” — Simon Baertl, Managing Director, William Blair & Company

“You do have economies as you grow and you will have synergies as a service provider — be it in the freelancer pool, be it that you can access new client segments, or because you achieve a certain size and can offer 24/7 services for some clients,” he explained.

Fragmented Market

These attributes within a fragmented market sustain the attractive M&A opportunity for buyers looking to accelerate their growth. The top 20 LSPs only capture 10% of the global market share.

Other international and regional providers might account for another 10 – 15%; but the overwhelming majority of spend is still spread among the multitude of small agencies and freelance translators.

Baertl believes that each segment offers good targets for acquisition and there is a scalability of the business model. “Once you have a working platform, essentially all you bring on are the client relationships,” Baertl said.

“The freelance base is there, the admin part is there, the management part is there, and you will be able to realize a lot of synergies through the smaller add-on acquisitions,” he said.

Other reasons to acquire highlighted by Baertl include the following:

• Expansion in geographic areas – Think Amplexor acquiring Sajan to build out its US presence.
• Access to vertical expertise – Think RWS’ purchase of LUZ, one of the largest pure-play life sciences LSPs.
• Noteworthy clients with the potential for increased spend – Think Lionbridge’s acquisition of CLS and its Swiss banking clients.
• Complimentary skill set to broaden offering – Think Keywords acquiring XLOC, whose system is used for an earlier stage in gaming and enables Keywords to provide end-to-end services.

When asked by the audience about the challenges that sellers need to be aware of in the process, Baertl’s advice was this: “Spend as much time on the preparation as you need and only talk to potential investors once you are really prepared. Preparation is really key and if I would pick one thing, I think client concentration is the one topic that is really scrutinized in due diligence.”

David Canek, CEO of Memsource, asked Baertl whether or not he thought industry disruption would come soon from one of the large LSPs.

“I would not be surprised if there is disruption at some point,” cautioned Baertl, adding, “I’m not saying it is in the near future. And I would not be surprised if it comes from outside the industry.”

For now, the market conditions for M&A are favorable and looking into the attributes driving investor interest offered by Baertl should be valuable to both strategic and financial investors as they seek to accelerate growth.
For a copy of the full presentation, register free of charge for a Slator membership and download a copy here.