Lionbridge Technologies

The biggest news in the last three months was the launching of Lionbridge Technologies’ (LIOX) IPO (Initial Public Offering), which sought to sell up to 4 million shares. Lionbridge is classified as an “Internet stock” by a number of investor services; this follows Lionbridge’s efforts to repackage itself as an “Internet service provider”. By doing so it was able to take advantage of the investor interest surrounding Internet stocks. For companies seeking finance these days, the correct “positioning” is essential to raising money, be it from public or private offerings.

The Thomson Investor Network uses the following capsule description of Lionbridge: a “provider of globalization services to technology companies worldwide. Its software, test, Web and linguistic engineering groups create and maintain multilingual versions of its clients software and hardware, as well as Web-based technical support.” The initial offering of stock was at US $10 a share with the price rising to US $31. Day traders are now involved in speculating with the stock and its price has been trading downward with occasional upward bursts. All this when no major announcements, favorable or unfavorable, have been occurring. In day trade parlance “the stock is in play.”

One analyst’s report described Lionbridge’s appeal as follows. This is presented below not so much to extol Lionbridge, but rather so that everyone can be aware of the language which investment bankers are using to describe a relatively new area of underwriting to him or her:

• “Leading provider of globalization services; creating, testing, and maintaining foreign language versions of client software, Internet sites and support materials.
• Positioned in the center of several powerful economic trends, including overall growth of the information technology (IT) industry, increasing sales of technology products globally, widespread acceptance of outsourcing and most importantly, explosive growth of the Internet.
• Pioneering development of exciting new multilingual e-services industry; opportunity spans multiple Internet-related target markets, offers exceptional growth potential and strengthens Lionbridge’s business model.
• Trusted business partner to expanding list of blue chip customers.
• Significant first mover advantage in potentially enormous Internet service category; initiating coverage with Buy rating and US $35 price target.” (As we go to Press on October 1, LIOX was at US $16.00 a share, down from a high of US $31.00 when it was first offered in mid-August).

Lernout and Hauspie (LHSP)

Lernout and Hauspie continues to maintain a significant market capitalization (US $1.9 billion as at September 30, 1999) and a reputation for introducing and developing high-end language technologies. This “market cap” will continue to allow it to make new acquisitions in the language field. CBS MarketWatch describes Lernout as a Belgium-based company that “provides speech and language solutions, including software products for speech recognition, language translation, speech synthesis and compression.” On September 8, L&H’s shares rose 8 percent to 34 3/4 when it announced a deal with Yahoo to provide features and services in foreign languages. Yahoo’s stock (YHOO) rose 1 7/8 to 162 5/8.

During the first quarter of this year, L&H also announced the purchase of the Brussels Translation Group that had earlier invested in the development of the company’s iTranslator Services. The purchase was made for approximately US $42 million in cash and the assumption of US $17 million in debt. It was also a sure sign that L&H will continue to invest in the translation and localization side of its business.

Berlitz

Berlitz’s stock (BTZ) has shown signs of resurgence. Thomson Investor Services refers to Berlitz as “the world’s premier language services firm.” About 25% of its revenue comes from translation services, so Berlitz is classified as a “education and training services firm”. Berlitz’ growth rate (8.7%) lags far behind that industry’s average (41.9%). However, to give its translation services business a more appealing look, Berlitz now calls its translation service Berlitz GlobalNET. One informed source would not be surprised to see this spun off eventually as a separate company. With translation sales of $US 84 million in 1998, Berlitz GlobalNET is the world’s largest translation and localization firm. A Japanese publishing group, Benesse, has a major interest. Berlitz’s growth is truly global—the company started out as a German firm and was then controlled by North Americans before passing to Japanese interests.

In June of this year, BerlitzGlobalNET “acquired certain assets, operating subsidiaries and personnel of Language Management International. The purchase price was US $7.8 million plus a contingent payment based on gross revenues for the period ending June 30, 2000.” What makes this interesting is that just two years ago LMI was beginning to establish its own international network. Robert Schwab of the Denver Post noted in May of 1997 that at that time an official with Golden State Financial Group, one of three venture capital investors in LMI, stated they would invest up to US$ 16 million in acquiring companies. LMI’s chief investor turned out to be Bank of Boston, whose spokesperson stated that they were attracted to the industry because “you don’t have to compete against Microsoft and Lotus, yet they could become your customers.”

This is not the venue to discuss why LMI decided to sell the majority of its assets so soon after acquiring them. However, it does demonstrate the fact that rapid changes in the industry mean some managers who started out three years ago with one company, found themselves bought by another only to be bought be a third.

ALPNET (AILP)

While ALPNET’s sales have been increasingly steadily (from US$ 20.5 million in 1994 to US$ 48.5 million in 1998) it has been marginally profitable. As a result, its stock has stayed in a low trading range (around US$ 2 per share), despite the fact that its value almost doubled in the last year. ALPNET was really the first publicly traded pure translation services company. It is listed in three business software and service categories and in its own words “is the largest publicly owned dedicated supplier of worldwide global information services.” ALPNET made numerous acquisitions during 1999 and its VP of Finance notes “growth and expansion is the name of our business.” It has taken a serious approach to getting as many costs out of the system as possible. This is hardly a cause for wonder as one of its major clients, General Motors, stated at the last LISA Forum that it had a goal to get translation costs down to US 1 cent per word!

Bowne (BNE)

One of the largest companies in today’s language business is Bowne, with total 1998 sales of US$ 847 million. However, its translation group accounts for only about 6% of sales and no profit. Bowne seems to be following the business model of RR Donnelley in building a translation and localization business (in the latter case Stream) as yet a further way to serve its printing client; Bowne joins Bennesse as one of two publishing houses in the localization business.

Bowne’s description of itself is interesting; “Information Empowerment Company serving major corporations and professional firms, helping them apply the latest technologies to manage their flows of information worldwide.” Bowne, the United States oldest printer, is considered a business service company in an industry with a 20% growth rate. Looking through Bowne’s information now, you only see the names of professional managers brought in to run the business after it purchased five translation companies in various parts of the world to create Bowne Global Solutions. Bowne counts some 230 salespeople who presumably can raise the issue of localization with printing clients.

The five localization companies that Bowne purchased in 1997 and then folded into Bowne Global Solutions still seem to play a key role in Bowne’s overall globalization strategy. This is despite the fact that they are still money losers (for accounting purposes), as Bowne continues to write off their purchase price of US$ 40 million. During the first six months of this year, Bowne Global Solutions recorded losses of US$3.6 million compared to US$8.8 million for the same period the year before.

The acquisition of the localization firms was one reason why Bowne decided to launch a new advertising campaign that began on September 10 and will continue well into the year 2000. Its advertising agency picked four themes:

• Focus Your Information in a World of Chaos
• Prepare your Information for the Ways of the World
• Accelerate your Information to the Speed of Enlightenment
• Secure Your Information by Placing it in Fewer Hands

In running its campaign, Bowne hopes to gain not only customers but also a more favorable reaction from stock analysts. Being a public company, Bowne provides a real helpful service on its Web site, i.e., a glossary of terms to help explain the language and localization industries and their terminology. It also came up with a new one: “g-commerce” for “global commerce”, playing on the common interest in e-commerce.

Figure 1. Translation stocks

DCC plc ( DCC)

One unusual publicly traded home for a localization firm is DCC plc, the parent company of ITP. DCC plc is a true Irish conglomerate with positions in energy, healthcare, foods and computers. The company group in which ITP finds itself, computers and services, contributes almost half of DCC’s annual sales of a little over US$ 1 billion. DCC is in a low-margin business, however, as it earned US$68 million on 1998 sales of US $1.138 billion. Another interesting feature of DCC’s 90% stake in ITP is that the other 10% is held by the Irish Government. Lernout & Hauspie followed the same strategy in raising capital, making extensive use of the Belgian government’s interest in developing the Flanders region into a “language valley” as a means to seek government funds for expansion.

Other Companies

A number of publicly traded firms have sizeable and efficient in-house translation and localization groups which also do some outside work (Lucent Global Translations and Xerox Language Services, for example). However, given the size of the parent company in each case in comparison to the translation and localization operations, it would not really be relevant to follow and list the parent company stock as a barometer of how or what the translation and localization group is doing.

Venture Capital Activity

At the last LISA Forum, numerous Silicon Valley firms involved in the language business (and Web site localization in particular) were in the second round of financing. Some firms were also positioning themselves for a future IPO, and paying close attention to the Lionbridge situation. This is an interesting development since previously, in order to grow, a firm had to consider a merger with a larger organization; there simply wasn’t enough interest in the language industries. The Internet has changed that.

With the stock market paying closer attention to the language industry, launching an IPO becomes a real possibility. And, as in the case of Lionbridge, the market is valuing potential, not present, earnings (1998 earnings per share were US$-2.99). It has become readily apparent that the venture capital community has discovered the language industries and that, increasingly, successful future financing will depend on how firms seeking capital can align themselves with the Internet.

What makes the current crop of venture capitalist startups unique is that they all have strategic alliances with other firms, which is much the standard now in Silicon Valley. The old business model used to include doing everything in-house, but today, if you can find someone to do Siam better, you set up an alliance. One study I saw on the profitability of Silicon Valley firms showed that the ones that had the most strategic alliances were the most profitable as well.

By aligning themselves in relation to the Internet, the new wave of venture capital localization firms have no immediate need to make or even show a profit. Global Sight started in 1998 with US$3 million in initial funding; its business purpose is to create software that can create and manage large-scale, multilingual Web sites and it is far from profitable. A problem? Not really, as Red Herring—a leading hi-tech business magazine—voted Global Sight one of its “ten companies to watch.” It just missed the Red Herring 100. As Red Herring’s editors noted: “We like these ten companies a lot, but they are either so young, have such unproven ideas, or are targeting markets so nascent they cannot be fairly included among the Red Herring 100. Nevertheless, we believe that each has the potential to change the way in which we do business, and we hope to see them all on next year’s cover.”

Idiom and Uniscape were two start-ups left out by Red Herring, but they don’t seem to be missing any sleep over the exclusion. In its presentations, Idiom highlights its funding as much as its business model. Greylock, North Bridge Venture Partners and Sigma Partners have all made successful investments before, and Idiom uses this derivative fame to its advantage.

eTRanslate was formed at the end of 1998 and raised US$8 million in a second round of funding in July from a variety of international investors. These included New Enterprise Associates, Alloy Ventures Allen & Co., Boots & Co of the UK and the Crimson Global Internet Fund of Japan. Former investors have included Hiroshi Mikitani, founder and CEO of Magical Digital Market, and Muneaki Masuda, president of DirecTV Japan Management. CEO Charlie Baxter of eTRanslate has been on the road seeking funds and was in London in June of this year looking for capital from attendees at Red Herring’s Fourth Venture Capital European seminar. According to Red Herring: “Mr. Baxter said the start-up already had US and Japanese investors and business contacts, but needed to develop strategic and financial alliances in Europe to provide the “third pillar” of its international strategy.”

However, while there is a favorable venture capital market for any Internet stock that will bring financing, eventually you have to make a profit. Accent Software International (ACNTF) started out with financing but it has not made money in its existence and its stock is now trading at less than 20 cents a share.

John Freivalds
JFA Associates
5160 Colonial Drive
Minneapolis, MN 55416 USA
Tel +1-612-525-0731
Fax +1-612-525-0659
E-mail: JFA@worldnet.att.net