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Welocalize Recapitalizes with Norwest Equity Partners
Posted by Donald A. DePalma on June 3, 2015  in the following blogs: Business Globalization, Market Data, Translation and Localization, Technology
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Earlier this week, CEO Smith Yewell of Welocalize, told us about the company's newest investor, Norwest Equity Partners (NEP), a private equity group (PEG). Norwest bought out Riverside Partners, which had made a large investment late 2010. Yewell would not disclose the stake that Norwest has in Welocalize, #9 on CSA Research's 2014 list of the world's largest language service and technology firms.

Yewell said that Welocalize had begun a search for a new investor at the beginning of 2015 with the goal of finding a "big backer for our next growth phase." The company investigated a variety of investors with different goals, several of whom sought CSA Research's insight about the language sector. Welocalize chose to partner with NEP, which manages a US$2.4 billion fund with investments in companies offering business services and technology, among others. NEP, one of the two investment units of Wells Fargo Bank, has been in the private equity business since 1961. In our interview, we asked:

  • Who will run the company? Yewell and his management team will continue to run Welocalize. Tom Schauerman of NEP will have a seat on a newly constituted board along with some other external advisors to be named. While NEP will follow Welocalize's lead on the business, Yewell said that his new partner has a lot of ideas and "significant capital that gives us the ability to make large investments in people, technology, and acquisitions."

  • What will the newly recapitalized Welocalize do with the money? Expect more acquisitions as well as investment in technology. Yewell said that, "We are looking to diversify into new verticals such as life sciences medical. Our technology investments will focus on automation, predictive analytics, and ease of use for the customer experience across the supply chain." In other words, it's business as usual. Welocalize has grown consistently, thanks to acquisitions such as Park IP Translations to enter new industry verticals and Transware that brought it translation management technology. Besides its M&A activity, the company has also embraced technologies such as business intelligence and machine translation that have enabled organic growth. 

  • Is NEP ready for the language business? With some of the venture capitalists and PEGs that we advised, we got a sense of a surface-level understanding of the language business and, in some cases, a whiff of an urgency to spend down funds that might be close to expiring. Yewell responded, "While they are new to the localization industry, NEP has a rich history of helping to grow tech-enabled service companies. NEP just raised a new fund, so there is no time constraint." He also noted that since NEP is backed by a single limited partner, Wells Fargo Bank, decisions can be made more quickly.

  • How much growth can you gain organically versus by acquisition? Once LSPs reach a certain size, substantial growth comes only from buying other companies. CSA Research predicted that another major acquisition or two could cause the floodgates to open as LSPs and investors realize it's now or never to purchase a company large enough to trigger massive expansion. Yewell responded, "We do see consolidation accelerating. We have a successful track record of 14 acquisitions. With the addition of NEP, we feel we are in a really great position to lead that consolidation. We are also growing organically at over 10%."

Why is Welocalize's recapitalization interesting? The company has been an active acquirer of companies over the last 10 years and one of the few language service providers in which outside parties have made substantial investments. NEP's backing of Welocalize is another sign that mainstream investors understand both the need for consolidation in this fragmented market sector and the value of language services and technology in global business. Its investment echoes large bets placed on companies such as Moravia and Smartling.

Supplier amalgamation is a long-standing factor in this industry. It currently takes two forms: 1) investment by external players such as venture capitalists and PEGs; and 2) mergers and acquisitions among existing providers.  However, with the three largest LSPs accounting for just 3.5% of the US$37.19 billion market, the language services sector has yet to reach the second of four stages of typical industry consolidation - in which the top three own 15% to 45% of the market (see "The Consolidation Curve," Harvard Business Review).

Nonetheless,CSA Research contends that outside investment will lead to more M&A activity in this space with such low market concentration. LSPs or venture funds looking for a big increase in revenue from a single acquisition will find a limited set of targets with the right mix of revenue, service or technology offerings, vertical market penetration, and location. Consolidation will accelerate as the most desirable companies are acquired or backed by external players.


 

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