While world economies sputter and governments debate fiscal restraint, the language services sector continues to power along, as evidenced by two new acquisitions announced in the past week and a third earlier this month:
What's the attraction? A robust market sector has attracted broad investor attention – and cross-border merger and acquisition (M&A) activity is picking up. Our 2012 global market study found that the industry grew 12.17% in 2011 (if you're a language service provider or translation technology company, take this year's survey to tell us how you fared in 2012). When Common Sense Advisory asks potential investors why they're interested in the sector, they always point to sustained growth over the last four years - despite the unpredictable economic climate. That pace of growth has led to continuing interest in investment and acquisition by private equity groups, celebrities, and language service providers (LSPs) anxious to expand within their markets and across borders.
That cross-border M&A trend has been developing over the last few years in Europe, North America, and more recently, Asia. In particular, we've seen increased interest among small to mid-size European companies in entering the North American market. Their goals as of late are three-fold: 1) participate in a healthier American economy; 2) take advantage of the value of the euro against the U.S. dollar (1 euro = 1.33 dollar at today's rate); and 3) deal with the euro-dollar conversion, a perennial sourcing headache for LSPs that buy translation services for one currency but sell them in another.
However, there's been a change in the type of companies being targeted for acquisition. Starting in 2012, Common Sense Advisory noticed an uptick in interest from European LSPs that would like to acquire smaller American providers – in the range of one to two million dollars in revenue. Many of them have been shopping for translation firms that focus on a single vertical (for example, automotive or life sciences). The two European-American deals that closed last week fall in line with this trend.
OMNIA's Managing Director Cesare Zanni briefed us on the acquisition, finalized through the Italian company's OMNIATEXT subsidiary in the U.S. With OMNIA's automotive clients such as FIAT Group Automobiles in Europe, Zanni views IteroText as a stepping stone to the U.S. and Canadian auto industry. He sees other business opportunities in adjacent and related industries, such as agricultural equipment, aerospace, other precision manufacturing verticals, and life sciences. OMNIA will manage European language production services from its U.K. and Italian facilities, and will handle North American sales and production needs from its Michigan operation.
OMNIA and IteroText have a similar service model based on technology, but in different areas, which Zanni says will complement each other's strengths. For example, OMNIA has a strong translation technology offering, while IteroText has built a controlled-language authoring tool driven by its expertise in the automotive industry.
TranslateMedia's managing director, Patrick Eve, echoed the theme of expanding his firm's vertical industry expertise -- technology and life sciences – into another region. Eve told us that he sees the acquisition as a "very complementary play for McElroy's clients, who can now benefit from TranslateMedia's U.S. offices on the East Coast, in the United Kingdom, in Europe, and in Asia."
Like Zanni, Eve sees a common approach to the balance between client service and the role of technology within the business. He went on to say that he's particularly interested in how McElroy's clients can benefit from TranslateMedia's proprietary workflow platform for managing the entire lifecycle of the translation process. Make no mistake - technology played a role in both of these acquisitions.
These acquisitions signal increasing and ongoing consolidation in the language services sector. What's interesting now is that more acquiring LSPs are dropping their target to less than the five to seven million dollar revenue range frequently targeted by acquiring companies. When there's a good and complementary match, these smaller acquisitions can be easier and quicker to integrate than larger firms - assuming it's a solid business (see "The Owner's Guide to Maximizing LSP Value," Apr10). And if the economic forecasts for Europe and North America hold (and U.S. manufacturing expands), we expect more European LSPs in the small to mid-range to shop for these smaller U.S. and Canadian firms. This could lead to consolidation of the market from further down the list of the top 100 LSPs - rather than the traditional top-down merger and acquisition activity of the largest players.