Consolidation ignited

By Andreé-Paul Pellet,
VP at Welocalize

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2007: The localization industry is consolidating and the pace will increase rapidly over the next two years. Organic growth is slowing, and the marketplace will not support the increase in sales needed to maintain the growth. Vendors will need to look at Mergers and Acquisitions (M&A) to fill this void and grow in revenue, services, and talent. However, with limited high-quality, profitable vendors to acquire, the best companies will be strongly courted, and the acquisitions will occur quickly. This means increased opportunity for higher profits, professional growth, and competitive advantage. For those who elect to do it alone, the future is unclear, and growth – most likely limited.

Consolidation is the natural progression of any industry as it matures. Almost every industry follows similar growth cycles throughout its history, and exhibits similar factors that ignite rapid consolidation. Consolidation has profound effects on the rest of the industry players impacting value and exit strategy, while limiting the amount of business available for everyone else. Just looking at some other industries such as the PC market, airline, automotive, or banking illustrates that each had a multitude of vendors at one time, and now only a few strong ones remain. In each example, there were clear signs of the pending consolidation.

There are 4 stages to a product or service life cycle: development (low sales), expansion (high profit/high demand), maturity (high competition/reduced profit), and decline (customer in maintenance mode/reduced sales). Right now, the localization industry bridges the maturity and decline stage, with large savvy buyers who are familiar with the process and looking to manage costs. The reduction in sales limits the possible growth of the larger suppliers, as there is not enough “other” business to meet their growth targets. For example, if Lionbridge and SDL were to each target 15% growth in services, this would represent an approximate $90 million dollars in new business per year. Does the current localization industry have enough buyers to meet that number (not including government work)? Is there enough work in the industry to support the growth?

In the localization industry, there is a lack of even distribution of vendor size. There are a few large vendors, a handful of mid-tier vendors, and an extraordinary high number of small companies. All, except the top companies, are competing for the same business, the scraps left over from the larger players, or business stolen directly from them. If you look at the revenue levels of the various groups, you see that there are rapid drops at each revenue level. Normally, when an industry is in a growth period, there is more than enough business to support companies from the startup stage to the very large size, which results in better distribution of revenue.

The continued innovation and development of technology, which you can already see from Lionbridge, SDL, and other key vendors, requires larger investments that cannot be made by smaller vendors. The amount of time and resources needed to build, maintain, and fund large scale solutions for customers is simply not possible at a smaller scale. As mature customers become accustomed to receiving more comprehensive solutions, services, or technology, they will begin to include this as a requirement for selecting their vendors, thus effectively eliminating these smaller vendors.

Savvy customers are demanding to work with only a few, but very capable vendors. The largest l10n customers require more scalable solutions, added value and offshore rates. Smaller vendors do not have the scalability or resources to meet the demands of mature buyers. In addition, with the industry reaching the maturity/decline stage, customers are now focused on maximizing their investments, reducing internal head count, and combining multiple tasks (development, localization, testing) into a single-source solution.

These factors all point to one thing: Rapid industry consolidation through M&A. M&A brings additional revenue, service specialty, and new management to existing companies, providing the growth and scalability that is needed and demanded by the market.

In the early 1990’s, the US Banking market was filled with many local and regional companies all competing for the same customers. Specialization was the marketing strategy, and each bank pursued specific and unique markets. However, as each adopted and introduced similar features and services (online banking, free checks, etc), the overall market growth slowed. To make up for this, larger banks that were growing, started a rapid M&A streak of acquiring the smaller players and formed the large nationwide banks that exist today. The earnings growth continued through reduced costs, improved efficiencies, and the addition of new customers from the acquisitions.

For the business owners, M&A means Opportunity: Opportunity for value, opportunity for professional growth, and opportunity for competitive differentiation. When consolidation ignites, the best companies in the industry will be quickly sought out and courted. Business owners will have the opportunity to determine: where can I maximize the value of my company, how well will my operation integrate into the whole, and how will my value increase post-merger?

When considering the benefits of jumping on the consolidation train, business owners need to consider what will happen over the next two years. As consolidation begins, the larger medium-size vendors and key specialist vendors will be selected and proposed to first. M&A with these vendors will bring in key clients, establish revenue, and possibly bring new service offerings. Customers, in turn, will direct their business to these emerging suppliers, perpetuating the need for further acquisitions that will expand solution offerings and better support these customers. For companies who choose to bypass the consolidation process, the options are limited. Independents will have more trouble finding business growth in existing markets. In turn, the sheer numbers of the staff in larger companies (with more sales teams) will run into more business opportunities, thus expanding their market faster than the smaller remaining vendors who go at it alone. They will also find limited value for their companies as the M&A options are exhausted and the top players are acquired. The smaller companies will simply not be as attractive for M&A late in the game.

In the past, M&A in the localization industry has been frowned upon, simply because there have not been as many successes as failures. In the service business, M&A is not adding revenue together, but instead is the careful integration of offerings, vision, and talent into a combined whole – which we all know is stronger than the sum of its parts. This requires a great deal of work, planning and energy from both sides of the transaction. In this period of consolidation, this increased focus on integration and compatibility will be key in ensuring that the merger is successful for the business owners, staff, and customers alike.

The next two years will be a time of great opportunity and growth for buyers and sellers in the localization industry. It will be a chance for each company to decide what its future holds, and the best way it can continue to grow and provide the maximum value to business owners and customers. For the companies who make the right choices in selecting partners, the results will be very lucrative. For companies who make the wrong choices, the marketplace and those company’s business values will be very different come 2009.

ClientSide News Magazine - www.clientsidenews.com

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