Tuesday, December 20, 2016

Private Equity, The Translation Industry & Lionbridge

Lionbridge has recently been in the news as the story of their “agreement” to be acquired by H.I.G. Capital spread. I thought it would be useful to examine more closely what Private Equity is, and what they do since I found much of the commentary on the Lionbridge deal unclear, unsatisfying and quite unlikely to be accurate as they seem to overlook why PE gets involved at all.  I thought that while I am at it, let me also add Luigi’s opinion which is also not a translation industry mainstream opinion, to provide alternate perspectives to the ones we have been hearing.

From my early business career when I worked close to Wall St. and institutional investment, private equity meant firms like Kohlberg Kravis Roberts, The Blackstone Group, and Apollo Global Management. They were often called corporate raiders, and, in fact, they made a movie about a PE raider, called Wall Street, where Hollywood made PE rock stars like Gordon Gekko, look bad, and suggested he/they lived by an ethos that “greed is good”, destroying companies to extract a few million dollars to buy a private yacht. Maybe that was an exaggeration, but it is true, that PE generally went into companies that they felt were undervalued or under-performing and went in and “cleaned up and improved the situation”. They showed them “how to do it right” as Frank Zappa would say. In fact, there is research that suggests that private equity investors are corporate doctors. Perhaps things have changed since the 90’s, and now Private Equity is a much more friendly and fluffy experience, but my ample gut tells me that generally investors want to make money, and they don’t acquire assets to get a board seat and hang out with the management. They generally want change that results in them making MORE money.

An informative Harvard Business School draft paper provides some insight on the whole Private Equity view of the world.  Given that they base their observations on a study of 79 PEGs (Private Equity Groups) with $750B under management suggests to me that there could be some truth here. Top Private Equity Companies are listed here HIG Capital who acquired LIOX is #70 in this list.

What do Private Equity firms do?

PE firms typically buy controlling shares of private or public firms, often funded by debt, with the hope of later taking them public or selling them to another company in order to turn a profit. Private equity is generally considered to be buyout or growth equity investments in mature companies.

What do PE firms do after they invest?

PE firms typically take three types of value increasing actions financial engineering, governance engineering, and operational engineering. These value-increasing actions are not necessarily mutually exclusive, but it is likely that certain firms emphasize some of the actions more than others.

In financial engineering, PE investors provide strong equity incentives to the management teams of their portfolio companies. At the same time, debt puts pressure on managers not to waste money. In governance engineering, PE investors control the boards of their portfolio companies and are more actively involved in governance than public company directors and public shareholders. In operational engineering, PE firms develop industry and operating expertise that they bring to bear to add value to their portfolio companies.

In fact, because PE firms often fund investments with debt, they are usually very concerned that these investments can service the debt organically i.e. without injecting in more money. So they are often all about cash flow and look for companies that can service the debt while they do their restructuring magic. It is said that they have a pretty strict requirement on return and look for internal rates of return that are in the 20-25% range.  The Harvard paper suggests that there is often evidence of both financial and governance engineering. PE investors say they provide strong equity incentives to their management teams and believe those incentives are very important. They regularly replace top management, both before and after they invest. And they structure smaller boards of directors with a mix of insiders, PE investors, and outsiders. These boards are much more concerned about real progress and have much more clout and impactful involvement than in a "normal" public company setting where a board may allow a non-performing CEO to sit for 17 years without asking any probing questions.

There is evidence that the sweet spot for private equity is a company doing okay in an industry whose fortunes are about to improve dramatically. 
Several characteristics of the PE business model directly impact the operations of their portfolio companies:
  • First, private equity investments are illiquid and more highly leveraged than investments in publicly traded companies–hence, riskier. They need to yield high returns to be worth undertaking.
  • Second, the high debt that portfolio companies must service means they must quickly achieve an increased and predictable cash flow. Cutting costs by squeezing labor is the surest way to accomplish this.
  • Third, the PE model is the opposite of "patient capital." While limited partners make a long-term commitment to the PE fund, portfolio companies have only a short time to show results to the general partners.
  • Finally, PE will not undertake long-term investments in its portfolio companies unless capital markets are efficient and reward such investments with a higher price when the company is sold. There are definite incentives to turnaround investments as quickly as possible to maximize internal rates of return.
So the research definitely seems to suggest that HIG is not here to just be in the wonderful language loving translation business.  They want returns, and they probably want returns soon. As they say on their website:  Flexibility, speed of execution, and delivering on commitments are our hallmarks.

Private equity firms typically excel at putting strong, highly motivated executive teams together.  Good private equity firms also excel at identifying the one or two critical strategic levers that drive improved performance. They are renowned for excellent financial controls and for a relentless focus on enhancing the performance basics: revenue, operating margins, and cash flow. Plus, a governance structure that cuts out a layer of management - private equity partners play the role of both corporate management and the corporate board of directors - allows them to make big decisions fast.
The following data certainly suggests that Lionbridge (LIOX) was a lackluster if not a failing public company. At no point in the last 10 years did the company market valuation ever reach it’s revenue levels. This is usually a sign that something is not quite right. But the LIOX board sat with this for over a decade. Its market value is terrible even relative to other peer translation companies as the table below shows. In October 2008 the $500M revenue company had a market value of about $70M! It is surprising that HIG is apparently, making no real management and strategy changes, and from all reports will continue with the same management and the same strategy. Some additional things to note:
  • The company is being sold for close to the highest value it has had in 10 years and investors in LIOX must be sighing in relief that they did not use an average of the stock price of a longer time period to establish the acquisition price.
  • The management team has been mostly the very same for the last 17 years and is said will remain in office.
  • The CTO, Eric Blassin, very suddenly left and joined TransPerfect as Luigi has pointed out in his comments below.
  • Lionbridge has made less than $50 million net income in total from 2011-2015. This is less than 2% of revenue which I suppose is better than losing money.

Perhaps HIG does not really want to discuss their real plans at this point. As a Limited Partner, I would certainly be concerned about the rationale behind this investment, if no changes are planned, and you are simply expecting to ride the coming translation industry wave of growth. But stranger things have happened, and we do live in a world where the #americanbuffoon Don Trump is the next President of the US.

Interestingly, we now have an attempted action by some investors who think the price is too low and want more cash! Luckily for them a 10-year average was not used as the takings would be a lot slimmer. The odds of this class action suit leading to any changes are pretty slim, since the data overwhelmingly suggests that the investors were lucky to get $360M.

Private Equity investing regularly in an industry is usually a sign that they think that things can be done better (more efficiently, effectively, profitably) and that they can expedite this. We shall have to wait and see if big changes are indeed made, or wait and see if we suddenly start seeing really savvy and skillful execution, and market-leading strategy coming from Lionbridge. That is rare enough that we would all notice. ;-)

I think it is also pretty safe to say that when a private equity firm gets involved with a translation company, it is a clear signal that the PE firm thinks that the company in question can be run more efficiently, and they believe strongly enough in this possibility that they would be willing to put some money on it and prove it.

On a completely different note, I read today that Mike Schuster at Google who I had accused of hyperbole and deception, apparently did not care for the outrageous MT performance claims that were made either, this is described in a fascinating story in the NYT on how Google developed their NMT. He seems like a very smart, nice, chap with a "piston-shaped head", and I hope that I meet him some day and laugh with abandon. Here is the specific quote from this great background story:

 At the party, Schuster came over to me to express his frustration with the paper’s media reception. “Did you see the first press?” he asked me. He paraphrased a headline from that morning, blocking it word by word with his hand as he recited it: GOOGLE SAYS A.I. TRANSLATION IS INDISTINGUISHABLE FROM HUMANS’. Over the final weeks of the (technical overview) paper’s composition, the team had struggled with this; Schuster often repeated that the message of the paper was “It’s much better than it was before, but not as good as humans.” He had hoped it would be clear that their efforts weren’t about replacing people but helping them.

The section below the dashed line is Luigi Muzii's take on the deal.

The news everyone in the translation community is frantically analyzing and commenting is emblematic of the irrelevance of the industry itself.

Rory Cowan summarized the experience of the company he is most probably going on to keep leading for the next few years with a statement that is as simple as disrupting: “The U.S. markets really do not appreciate the translation industry.”

While most commenters are looking at the company’s financial data, this does not seem to be the most relevant. The really important thing to think about is that the money shareholders will receive from H.I.G Capital for buying Lionbridge is no big deal.

The other important thing is Lionbridge’s former CTO’s relocation to TransPerfect. Both Lionbridge and TransPerfect have been investing in technology over the last twenty years, although with the very same spirit that moved the general business strategy of the two companies: Buy low, sell high.

This is the most-loved kind of strategy in most business circles—although definitely not creative or innovative, while possibly conservative and just lucrative.

On the other hand, like it or not, no translation business, however big, is perceived as important. We could long debate this, but the conclusion will always be the same.

The one differentiator, especially today, is technology, and this is the discriminant even in the Lionbridge sale.

Given the company’s recognized experience with professional service organizations, financial analysts at H.I.G Capital have most certainly gone through all industry outlooks. In Rory Cowan’s opinion, the translation industry “really has an extraordinary decade ahead of it.” This is the first discrepancy in the rationale for the sale. Why are they selling a buoyant company, that is profiting well from a sound industry with such an astonishing future? Certainly, not because the company’s efforts in the stock market for the past three years were expected to swing high and resulted in just hovering.

Actually, this could be a reason for not delisting Lionbridge. This option could have been a blood bath for shareholders, as the company could hardly find the necessary resources.

Also, in the last few years, Lionbridge underwent some major changes to the organizational structure, although the management team remained unchanged. Incidentally, according to what Rory Cowan told Slator, the management team will remain unchanged.

Curiously, right after the announcement of the Lionbridge sale, TransPerfect announced the hiring of Lionbridge’s former CTO Eric Blassin, who spent over two decades there. This not exactly the kind of movement that happened offhand, and it usually goes with some compelling NDA.

There is also another non-negligible element: stock options and compensations. Delisting Lionbridge would possibly deprive its management team members of their stock options and certainly force them to reduce their compensation or leave the company.

What financial analysts at H.I.G Capital have most probably done is to assess in detail Lionbridge’s financial statements first and books later, with the ability, knowledge, and due diligence that are typical of the business they are in.

So, if the people at H.I.G Capital will not change the management team or the business strategy, the investment would prove poor and unlikely to deliver a return.

According to Lionbridge’s chief sales officer, Paula Shannon, H.I.G. Capital saw growing opportunity in the company’s business and the value in the long-term relationships that Lionbridge has with customers in verticals such as IT and financial services. Curiously, Rory Cowan told Slator that he does not see much growth in the enterprise IT sector.

As more influential commenters noted, private equity firms acquire mature companies from which they expect to extract more value than the current owners by cutting costs and selling unessential units. This means squeezing overhead (that must be huge in a company the size of Lionbridge), closing offices, reducing staff. In turn, this optimization would procure the necessary funds for M&A to strengthen the core business.

Despite the fine words that have accompanied Eric Blassin’s time and work at Lionbridge, the technological capital does not seem to be enticing either, as the buy-low-sell-high investing adage applied to this sector too, with all the challenges and the backlashes of inconsistent implementation.

Rory Cowan told Slator that Lionbridge is going to participate very actively in M&A. The best candidate in this respect is TransPerfect. Not only would consolidation help elude the ruling of the Delaware Supreme Court, it would also be the perfect basis for focusing on services while leaving technology to a distinct entity, possibly not just a business unit but a conglomerate subsidiary.

For this operation to take place, the service unit of Lionbridge could be the first to be sold, after filling its safe with sufficient cash to enable it to sail off safely, and conceivably run a leveraged acquisition.

The translation industry will soon be made up of one or two global mammoths, with all the problems of mastodons, and a dusty galaxy of scattered mid-size companies, where mid-size here, as usual, for this industry, means micro for any other sector.

Luigi Muzii's profile photo

Luigi Muzii has been in the "translation business" since 1982 and has been a business consultant since 2002, in the translation and localization industry through his firm . He focuses on helping customers choose and implement best-suited technologies and redesign their business processes for the greatest effectiveness of translation and localization related work.

This link provides access to his other blog posts.


  1. Great article. Expect the comment about Donald Trump.

  2. Thanks for sharing your view on it.

  3. Thanks for sharing your analysis, Kirti Vashee. Interesting to see how PE invests into niche industries.

  4. Great analysis by both. Thank you Kirti and Luigi.

  5. Interesting take on recent developments in the translation industry. TransPerfect is the overall winner and best placed to be the first to get to $1 billion per year

    1. I seriously doubt that TransPerfect is "overall winner" in the translation industry -- my bet would be on smaller LSP's ($25M to $50M) who are specialists and considered the most valuable thus far. The odds of a PE takeover of Transperfect are quite high, given the management drama which, believe it or not, does reduce the value of the company for many, and in fact, helps to justify lower valuations.

    2. I am seriously humbled by the quality of the people, leadership, vision and value-proposition to clients we have at TransPerfect. Having been through my share of LSPs and having interacted with most, I stand by my assessment and hope you'll buy me a beer when that happens! :) Warm regards!

    3. I share Kirti's doubts, and possibly I'm even more doubtful.
      Not only is TransPerfect a global-scale taditional translation agency extensively applying the buy-low-sell-high mantra, it has been adding almost nothing to the industry in terms of innovation, especially from a technological standpoint.
      Also, hiring Mr. Logoport to be (presumably) its CTO tells much about the vision of its management team.
      Claiming to be an overall winner betrays a very narrow view of the market, as all major players do not sum more than 20% of it. Certainly the market is growing, but there's a considerable difference between volumes and revenues, not only in terms of growth.
      In short, TransPerfect is the perfeft pray for a takeover: it's possibly profitable on services and might ensure a steady cashflow, and the soap opera underway is going to help a court ruling in favor of a solid buyer.

  6. Excellent insights. I'm reposting my comments from LinkedIn in reply to Renato's article.

    As an 'enabler' of international business, the translation industry is up for grabs. There's going to be plenty of action not just between LSPs but in technology companies servicing them and branching out horizontally to other industries. I wrote about Big Data companies acquiring machine translation companies back in 2014 ( It still makes sense as MT enables the companies mentioned in the blog to monitor, secure and control their international channels. The Amazon/Safaba deal last year made complete sense, and it was not because Amazon wanted to save money on its MT bill. There's a real war for NLP talent between FB, Google and with global B2C and E-commerce interests Amazon had to join the frey.

    Kirti is very right when he mentions "the sweet spot for private equity is a company doing okay in an industry whose fortunes are about to improve dramatically." The point, though, is what technology or advantage did Lionbridge have to make it so attractive. Certainly not past margins, but no PE firm would miss a cent in the valuation and due diligence. Surely HIG has gone through all the books to the dot in every i.

    Lionbridge's workflow system is very neat, but that cannot be the reason. The top 10 LSPs are in the game, in different degrees or already owned by private equity. Consolidation means deals, which translates into investor revenue.

    I favour the view of a general market with plenty of M&A action to come where either a resale or further acquisitions would increase value.

  7. The best article I've read in a while.. Thanks a lot Kirti Vashee for the wonderful analysis.

  8. To understand what can happen when PE gets involved here is an example: ULG where the founder is now suing the investors.

  9. Here is more detail from SEC Proxy statement that shows that LIOX was really a very unappetizing acquisition, (low value) and several suitors retreated very quickly as the price inched it's way up. This suggests that our analysis in this blog was pretty much on target.

  10. Very interesting article. Thank you guys for sharing your thoughts!