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Lionbridge Acquired by H.I.G. Capital
Posted by Donald A. DePalma on December 16, 2016  in the following blogs: Market Data, Supplier Business Issues, Translation and Localization
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In our annual report on the state of the language industry in June 2016, CSA Research observed that "uncertainty reigns at four of the five largest companies." Recent and upcoming events will remove much of that feeling for all five. On January 18, TransPerfect (#2 on our list of the 100 biggest providers) goes back to court for what should resolve its long-running custody battle. HPE ACG (#3) will join CSC in a new company in April. LanguageLine Solutions (#4) became part of Teleperformance, and SDL (#5) reorganized and began divesting non-core assets.

What about Lionbridge, the largest commercial provider? This week, H.I.G. Capital, a global private equity group (PEG) that provides debt and equity capital to small- and mid-sized firms, answered that question, saying it will acquire the company and take it private. Lionbridge's chief sales officer, Paula Shannon, and chief marketing officer, Clint Poole described the deal. We analyze what the transaction means for Lionbridge, its customers, its employees, and the market. 

  • First, the numbers. H.I.G. will pay US$5.75 per share, a 17% premium over the 60-day-weighted average price as of December 9th, 2016. That amounts to roughly US$366 million or 67% of Lionbridge's 2016 revenue estimate of $550 million. While the bid has the unanimous approval of the company's board of directors, the agreement includes a 45-day "go-shop" provision that allows the company to actively solicit a better offer. The two parties don't expect one, and plan to close the deal in the first few months of 2017. 

  • Why did H.I.G. buy Lionbridge? According to Shannon, H.I.G. sees growing opportunity in Lionbridge's focus on digital marketing, content digitization in general, and its core globalization business. H.I.G reviewed the company's language technology stack compared to other solutions in the marketplace, as well as its capabilities in areas such as software testing. Shannon related how H.I.G. also saw the value in the long-term relationships that Lionbridge has with customers in verticals such as IT and financial services. The investors were impressed with the talent of the global project management team. She noted that, "Not every firm would have understood the importance of our human capital."  

  • Why did Lionbridge choose H.I.G.? The equity firm has US$21 billion under management and investments in technology and IT service firms in the United States and Europe, so Lionbridge saw a good partner that could help it grow. While they wouldn't comment on the financial value of the deal to shareholders relative to much higher multipliers in other transactions, Shannon and Poole cited the acquisition premium of 17%. Other factors that drew them to H.I.G. include the retention of senior management – CEO Rory Cowan will remain at the helm, as will most senior executives; the absence in the agreement of layoffs and office closings; and, of course, access to capital and H.I.G.'s expertise. Shannon emphasized that the company will continue operating as a public company until the deal closes. 

  • What should we expect from PEGs? Lionbridge fits a classic profile – private equity firms acquire mature companies from which they expect to extract more value than the current owners. They apply their expertise in streamlining operations, consolidating locations, reducing staff, sometimes merging like businesses, selling off extraneous units, and otherwise optimizing the company. Shannon said Lionbridge's business plan this year has already done much of the work that a PEG would have done to make its results more predictable. She added that H.I.G. acquired the company with no plans to spin off or carve out units, but instead is focused on growing the business. 
H.I.G. joins a sector with historically solid growth that exceeds the overall economy – and thus has attracted investors seeking a good return. How will this transaction affect the market?  

  • The valuation is on the mark. Given Lionbridge's stock price and growth rates that have lagged those of more nimble competitors, the purchase price is fair – but obviously not on par with multipliers in deals such as LanguageLine and RWS-Corporate Translations. TransPerfect, with the twice-revenue appraisal that financial analysts expect it to sell for, sets performance benchmarks for revenue per employee and profitability: US$140,000 revenue per employee on $506 million in 2015 gross revenue with estimated $80 million EBIDTA versus Lionbridge's $95,000 per employee on $560 million in revenue with $30 million EBIDTA for the trailing 12 months. 

  • H.I.G. has challenging fixer-upper work ahead of it. In its deals, the equity firm seeks to "contribute meaningfully to its portfolio companies to help them achieve their operating and financial objectives." PEGs typically approach acquisitions with a chainsaw, axe, and scalpel – and successful ones know which tools to use and when so that they can fix problems without breaking what works, destabilizing the company, and hemorrhaging staff. By taking layoffs and office closings off the table, H.I.G. makes its job much more difficult – it will demand more organic growth plus lots of new business, successful product and service offerings, and breaking into new markets. If successful, Lionbridge will be a more efficient, profitable, and focused company – so competitors should expect a faster-moving rival. No matter what happens, these competitors will target Lionbridge's clients and best staff during the transitional period.

  • The pool of potential acquisitions is shrinking. As we predicted in mid-2015, consolidation accelerated as the most desirable companies were acquired. Future buyers in the space must balance H.I.G.'s sober valuation with the shrinking pool of companies big enough to move the needle. Most LSPs don't have the cash flow to buy other firms, but three types do – investor-backed, business units of large enterprises, or publicly-traded companies. PEGs have been active over the last two years in buying LSPs, but the ones they bought have had a mixed history of M&A utilizing their owners' cash: for example, Welocalize (#7) has been active while Moravia (#10) sat on the sidelines – though the latter's PEG owner might still push it to start buying as its organic growth slows. Subsidiaries of big companies such as Capita (#20) and Donnelley Financial Solutions (#13) haven't acquired much, if anything. On the publicly traded front, Keywords Studios (#18) has been very active. Wildcards such as Amplexor (#9) and thebigword could accelerate their M&A plans to target a firm among the remaining top American LSPs. And once it's unfettered by litigation, the traditionally acquisitive TransPerfect will get back into the fray.

  • The good news is that Lionbridge is a known brand and has the right memes. And H.I.G. has the cash. Under the banner of "globalization and digitization," Lionbridge could expand its capabilities to support digital marketing campaigns, global content strategy, and smarter systems. With access to more investment funds than its own free cash flow, it could equip project managers with solutions that focus energies on client service rather than tasks that can be automated with a full menu of neural machine translation, adaptive intelligence, and micro-services. Importantly, as a private company, it could eliminate the obsession with quarterly numbers that might allow it to be more agile and innovative.
H.I.G.'s purchase promises to give Lionbridge much-needed capital to grow its business, but we look forward to seeing what measures it takes to bring the company up to the profitability and revenue per employee rates of its most aggressive rivals. We also anticipate more attention to automating operations, including the increased deployment of technological advances such as neural machine translation and adaptive or artificial intelligence. On the services side, we expect increased investment in cradle-to-grave global content creation, management, and exploitation as Lionbridge expands it reach beyond its traditional technical roots to more of a corporate, content, customer experience, and marketing role. It won't be alone in this quest since many of its competitors have taken aim at the same opportunities.


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