Globalization of IT still draws investors in, and from many parts of the world. Silicon Valley is not longer the only focal point. The July issue of Wired gave a rundown of 46 venture capital hotspots of the world: along with the usual suspects, we have Campinas, Brazil; Gauteng, South Africa; El Ghazala, Tunisia; Inchon, South Korea and Sophia Antipolis, France to mention but a few. The New York Times’ July 15th edition covered the venture market in China; venture capital is even beginning to flow into neglected markets like Latvia. And the cover of eCompany, a new Time Warner publication, proclaims “Europe-Startup Wunderland? Jawohl!” The biggest globalization news to hit the presses in the last couple of months was Spanish-based Terra Network’s acquisition of the Lycos portal which operates in 34 countries.

However, firms can’t just slap on the globalization label to get investment capital. There has to be another hook—another positioning mechanism. Translation and localization have been narrow categories which investment bankers and venture capitalists have had a hard time rating. A fascinating study done by GartnerGroup gives some clues as to how localization firms should position themselves. According to Gartner, timing is everything when it comes to adopting new technologies and you have to be aware of the hype cycle for each new trend.

The cycle begins when a new technology attracts media and investor interest and raises expectations. As the buzz increases, more companies jump on the bandwagon. Then the market really gets going and the first companies crash. But in the end, you have a profitable, mature industry.

OK, a year ago it was the Internet. What now? There is a rush of firms that are now calling themselves ASPs: application service providers. Lionbridge, which a year ago was ahead of the pack with the ecommerce label, has no problem positioning itself as an ASP today. RWS, which pushed its capabilities in globalization, has also adopted the ASP model.

Gartner says ASPs will reach their plateau in less than two years, as will such technologies as corporate portals, XML and Java. In two to five years, the buzz will be all about biometrics, the wireless Web, voice-enabled Web sites and speech recognition. And in five to ten years, all eyes will be on synthetic characters, digital ink and micropayments. Gartner’s predictions on where the investment money is going are heavily based on where the media devotes its attention.

The localization industry used to bemoan the lack of interest from both the investment community and securities analysts. This is no longer the case—as Lernout & Hauspie (LHSP) in particular is finding out. The industry is now being scrutinized like any other sector, and we are witnessing a lot of players shifting from “Internet service” firms to ASPs.

Both the Wall Street Journal (“Lernout shares fall amid disclosure” July 6, 2000) and Forbes (“Something lost in translation” July 24, 2000) wrote disparaging stores about L&H, querying its accounting and disclosure policies. The WSJ story questioned the value of L&H stock given that nearly all of its revenue growth in recent quarters came from Korea and Singapore.

The Forbes article questioned whether the company had shown any real growth at all or whether the latter had come purely from acquisitions. And then questions arose as to the accounting practices used during the acquisitions.

When L&H paid USD 58 million for Brussels-based BTG in 1999, BTG had no earnings and a negative tangible net worth. Yet the acquisition produced USD 62 million in goodwill to be amortized over 15 years—too long a time for the WSJ author. Forbes took a closer look at L&H’s relationship with BTG from the outset. In 1997, L&H won a contract from BTG. According to Forbes, L&H received USD 35 million in the transaction to develop software that facilitates translation over the Internet. L&H was to license the resulting technology and booked the USD 35 million as revenues over the two years. “Then in July 1999, L&H bought its customers, in effect putting back the intellectual property it developed.”

Given the circumstances, Forbes surmised that “the costs of this software research had a way of coming in rapidly on the revenue side but slowly leaking out on the expense side.” L&H disagrees with this characterization of its accounting practices.

The reaction on Wall Street has been mixed. L&H’s stock had fallen in mid-July to US $34.25, down from US $72.5 in March.

Lionbridge’s (LIOX) stock has suffered in the marketplace along with other Internet-orientated stocks, but neither in the mind of its customers in terms of new business nor in the investment community. On June 30, 2000, Lionbridge sold 1.5 million shares of its common stock to private investment management firms—1.3 million shares to Bricoleur Capital Management, LLC, and 0.2 million shares to Ultra Hermes Investment Advisors. Under the terms of the stock purchase agreement, Lionbridge sold the shares for USD 8.50 a share, raising a total of approximately USD 12.75 million. Upon completion of the sale and the share issue, Lionbridge will have 27 million shares of common stock outstanding.

Responding to the drop in the Lionbridge stock price, Rory Cowan recently told the Wall Street Transcript, “The reason I think we are undervalued is that American investors traditionally, have not appreciated the complexity of releasing and maintaining products outside of the US, and of all the traditional infrastructure activities that go along with running a company outside the US.”

The publicly held localization firm that has probably spent the most on magazine advertising in the last quarter, but whose stock price has not risen appreciably, is LanguageWare Net Co. Ltd. (LWNTF). With a mid-July stock price of USD 0.63, its shares are at a so-called penny stock level. L&H owns about 20% of LanguageWare, which reported sales of USD 1.7 million and net income of USD 1.4 million in 1999.

Berlitz GlobalNET continues a path separate from its other divisions, but the Berlitz stock fell to it its lowest in a year on July 13, hitting 8 3/16 down from 21 7/16 in October 1999.

The shares of Bowne (BNE), which owns Bowne Global Solutions, are trading at around USD 10 a share, down from USD 15 six months earlier, with little movement up or down anticipated by most analysts.

The printing side of Bowne just formed an alliance with the Israeli financial printer Zadok. With nearly 2,000 high-tech start-ups, Israel ranks second only to the US, and some 80 financial institutions are currently operating in Israel. It remains to be seen if this connection will prompt Bowie to acquire any Israeli-based language technology companies. LanguageWare, for example, started out its corporate existence as Accent, a well-regarded pioneer in raising venture capital.

The declining market also hit Alpnet’s shares (AILP) hard, which dropped to 2 9/16 on July 11 from their 52 week high of 10 1/2. However, this volatility did not affect the company’s ability to raise money. On July 10, Alpnet announced that it had secured private equity financing of USD 6.5 million from a consortium led by The Tail Wind Fund Ltd. The private placement consisted of 2.9 million newly issued unregistered shares of common stock and warrants for an additional 650,000 shares. At the completion of this transaction, ALPNET will have a total of 30.9 million shares of common stock issued and outstanding. The company said that the funds would be used for its ALPNETXchange technology, branding and the implementation of its ASP business model.

SDL International (LSE:SDL) was trading at around 300 pence per share, down considerably from its 52 week high of 902.50. However, one analyst said that this was a good range as it was trading against other ASPs with an average stock price of 225 pence a share.

Trados has had a good year. On July 3, it announced a new licensing contract with the EU; this news follows the USD 15 million in funding that Trados secured from First Union Equity Partners and Merrill Lynch Private Equity. Microsoft continues to hold an 18% stake in Trados.

Uniscape, which now also refers to itself as an ASP, was able to raise USD 10 million from Sequoia to further its development.

Although eTranslate was able to raise USD 43 million in new financing led by GE Equity in the hopes of expanding its customer base, some analysts were not so sure the company could make good on its promises. According to Preston Dodd, an analyst quoted by Forbes.com, “Aside from needing translation of the words on customer support capabilities […] this could present a problem for eTranslate if its customers begin to search for a more computer solution.”

The Italian firm LOGOS continues to reinvent itself—most recently with a new joint venture called LOGOSeDMN. Headquartered in Modena, LOGOSeDNM is jointly owned by LOGOS (85%) and DNM (15%). According to a DNM spokesperson, LOGOSeDNM “consolidates the incubator role that DNM has already filled with Soldionline and Double-click. It moves DNM further along our chosen path of forging strategic alliances with specialist providers offering value-added services that broaden our [range of] services.” LOGOS recently acquired the Zanfi publishing house as a means to further its activities in multimedia.

In a recent interview, LOGOS’s chairman Rodrigo Vergara told Dow Jones Newswire that the company would list on the Milan stock exchange next year and planned to expand in Europe, Latin America and Asia by buying up translation firms.

Those of you who attended the LISA Forum in Budapest last December probably remember a presentation on localization by Latvian-based AS Software House Technology. As a Wall Street Journal story put it, “The distance between Silicon Valley and Riga, the capital of Latvia, just got a little shorter.” Software House Technology has announced that it will become a subsidiary of the San Francisco-based Exigen group. The founder of Exigen also started the Genesys Group, which was later acquired by French phone giant Alcatel.

The companies wouldn’t disclose the terms of the all-stock deal, which is to be completed at the end of July 2000. According to the Wall Street Journal, this deal “is the latest in the series of investments linking Central and Eastern European information technology skills with Western capital and marketing know how” As Dan Murtha, CEO of Prague-based Globopolis, put it, “Something clicked at the end of the year […] Investors just flipped the switch and decided that Central and Eastern Europe was the new frontier.”

Sensing something in the air, Latvia’s Prime Minister is leading another investment tour of Silicon Valley this fall. He hopes to copy Israel’s success in creating a high tech base that will attract capital from all sources.

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