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In this issue…
Money Talks
Big Time Money Brings Big Time Opportunities and Scrutiny to Localization
Investment in the localization, language technology and translation industries is now front page world news. The hi-tech press has annointed many LISA member companies as “companies to watch”. John Freivalds, industry marketing consultant, has been watching the inflow of millions of dollars into the localization industry and reports what he is seeing. Money does a lot of things. In the localization industry, it made all the following happen:
In other words, it was a year like no other. The entrance and disappearance of money has forever changed the business and will lead to further consolidation. A lot of the money came from investors and venture capitalists that wanted a return… sooner rather than later. With the IPO market dead at present, many new globalization firms will have to repay their investors by actually making money. We are seeing more than one case where management in a globalization firm has been abruptly changed, or booted out because of poor returns on capital. Companies that use localization services have benefited from these developments as competition has kept rates dwon and new technology has improved their ability to globalize. Some companies with complicated localization needs now have the luxury to outsource where they couldn’t before, as localization firms have come up with “robust scalable solutions”, as the like to call them.
1 Private equity financing for shares of stock—lead investor is Tail Wind Fund LTD. 2 Sales of shares to Bricoleur Management Capital Management LLC. 3 Capital raised was in Euros. We took a Euro exchange rate of € 1.401 to US dollar. Table 1: Venture capital and other funding raised by selected globalization related firms during 2000 (US$ millions). How different this is from just four years ago when I wrote my first article for the newsletter on money in the localization business. (“Language Fever,” vol. 4(2), May 1997.) But of the five leaders in aquisitions shown in Table 2, only Bowne and Berlitz are in reasonable financial shape—L&H will probably sell Mendez, LMI has sold out to Berlitz, and Alpnet is now considered a penny stock. And you could easily say that more money disappeared from localization and language technology firms this last year that had been raised in the last five!
Table 2: The feverish five. Five main groups (four publicly traded) have emerged as the leaders in trying to grow their localization and translation businesses in the past couple of years through acquisitions. Several have increased their acquisition activities substantially in the past couple of months, if not weeks or even days. On the client side, many telecommunications firms like Nortel Alcatel, Siemans and Ericsson, and medical technology firms like Beckman Instruments, shed their large in-house translation and localization groups. Lucent, however, retained its group and continues to improve upon it. Most localization company stocks are down, as are most technology stocks. Should that worry LISA members? Not according to Wall Street guru Louis Rukeyser: “Last time I looked, nobody ever told you that markets should continue going up at that stunning rate in perpetuity, with never a downward adjustment along the way. And, particularly if you want to hold the stocks that are the dominant performers of this era, you have to be ready for the periodic and inevitable tech instability that shake out the weakest holders and create buying opportunities for the rest.”
1 The NASDAQ stopped trading in Lernout & Hauspie shares when the company declared bankruptcy. The shares are now traded over the counter at about US $1.00 a share. At $72 a share, its market cap was $10 billion. 2 Pence and UK pounds 3 Euros Source: Bloomberg.com Table 3: Stock activity of leading publicly traded globalization companies. PUBLICLY TRADED COMPANIESSo how did localization’s publicly traded companies do during the last 52 weeks? Table 3 presents a summary. We should note that Systran, LioNBRIDGE, Alpnet, SDL are the only “pure plays” in the public localization market. Lernout and HauspieIf you want to know why the press and investors got so mad at Lernout and Hauspie during the last year (LHSP), look at what L&H said in its last annual report: “Our turnover increased from 4.3 billion BEF in 1998 to 6.9 billion BEF in 1999. Various major contracts have meanwhile been concluded and Korea may be regarded as a launch pad for other countries in the Asian Pacific.” Worse, on July 31, 2000, it issued a press release with the headliner, “L&H builds its successes in Korea, announces more contracts.” As it turns, out all that was fiction. You want angry? You want nasty from an L&H investor? Listen to what short seller Marc Cohodes, a general partner in the New in the New York Hedge fund Rocker Partners LP, told the Wall Street Journal about his opinion of L&H.
His hedge fund began shorting L&H shares in 1998. The rising price of L&H stock made them buy into the market to cover their margin calls. What got Cohodes thinking that L&H stock would fall? While shopping for speech recognition software, he met a salesman who said retailers were flooded with the software. The Wall Street Journal got mad because it initially ran several favorable stories about L&H and then was lied to. After this they assigned a slew of writers to follow the company. The headlines from their stories appear in Table 4. The good news was that their localization business, Mendez, was always presented in a favorable light.
Table 4: Wall Street Journal headlines relating to Lernout & Hauspie. I will say the new L&H management is trying to make amends for their investors and customers. We listened in on their press conference of January 9, 2001. The three most asked questions:
John Duerden, L&H’s new President, said he is doing what he can to increase investors trust by “coming clean” with investors and SEC officials. He made the following points:
He announced a survival plan which featured refocusing on three core markets: 1) Voice recognition, 2) Text to speech, and 3) Language translation. They will withdraw from any direct retail market activity. They will cut costs wherever they can and announced a firing of 1200 employees from the 6000 they have now; Mendez was spared from any cuts. L&H has secured short-term financing and is working with the courts to identify where US $100 million had disappeared to. For those of you who are out of the loop, what did go on at L&H? In short, it invented sales, particularly from Singapore and Korea. As a result, the company declared bankruptcy in the U.S. and Belgium, putting thousands of investors in a position to lose all their many money from L&H stock. Among major investors were Microsoft with 5% of the company, Intel with US $30 million invested and Michael Dell with investments in L&H bonds. As for the future of Mendez, Duerden stated that in L&H’s new structure, Mendez will remain a stand alone position and that they are in negotiations with several companies over selling this “US $100 million a year company in a growing US $11 billion market.” As we go to press, no sale has been consummated and now might be the time for a major management consulting firm to buy into the industry. Finally, Duerden was asked if fraud was committed. He answered that mismanagement was committed and it was up to the courts to determine fraud. LioNBRIDGE TECHNOLOGIESLioNBRIDGE (LIOX) announced on December 14, 1999 that it would revise fourth quarter revenue estimated due to years-end chart project delays. According to its CEO Rory Cowan, “We ended our third quarter on a very positive note, with all forward-looking metrics—bookings, backlog, and work-in-progress—in place. However, we have encountered an increasing number of customer-initiated delays over the last three weeks, as many of these customers focus on making their fourth quarter numbers through cost deferral. While we are affected in the short term by these year-end projects delays, we expect to realize revenue from these projects during the first half of next year, as our customers must localize and test their products to maintain contractual commitments to their customers. The services we provide these customers are ‘must-have,’ rather than discretionary, ‘could-have’ services.” On January 11, 2001 LioNBRIDGE’s stock stood at US $3.5 per share down from a 52 week high of US $ 28 a share. At the same time, of the four analyst firms that closely follow LioNBRIDGE, Adams, Harkness & Hall Inc., CIBC World Markets Corp., Prudential Securities, and U.S. BanCorp Piper Jaffray, two recommend LioNBRIDGE as a strong buy, one as a buy, and one as a hold. The down side of being a public company is the volatility that a lot of investors bring to a stock. So what do the day traders say in looking at their message boards? “Braveone”, who predicts LioNBRIDGE will be US $6 by December 31, 2001 says “this one is a very nice looking ‘bounceback’ candidate, could get a quick 40 to 60%.” “Pyro” predicts that LioNBRIDGE will be US $30 by the same date. Berlitz GlobalNETBerlitz International (BTZ), whose stock has stayed around US $10 a share during the last year, has often seemed like the proverbial tortoise involved in a race with a hare. Berlitz International, owned 76% by the Japanese printing concern Benessee, may have seen all it wants to of the vicissitudes of Western stock markets. Benessee has made an offer to buy the shares of stock it doesn’t already own. “The proposal has been referred to a special committee of disinterested directors of Berlitz. The special committee has retained Bank of America Securities LLC to advise it in evaluating the proposal. Benessee Corporation is a public company in Japan and its shares are traded on the Tokyo Stock Exchange and the Osaka Securities Exchange. Benessee Holdings International is a wholly owned U.S. subsidiary of Benessee Corporation that acts as a holding company for the stock if Berlitz and other strategic investments. We couldn’t find a formal analyst commenting on Berlitz, but on a day trader board, we found “Old Toad” who wrote, “What’s wrong with a US $12 share? After the close Friday, [Berlitz] received a US $12 a share bid from majority shareholders for the rest of the stock they do not already own. Stock was around US $6 in mid-November. Would sound good to me if I was a minority shareholder!” AlpnetAlpnet (AILP), whose stock fell to US $.40 a share in the latter part of 2000, nonetheless announced that it expects a solid 2001. As part of its rebuilding plan, “Alpnet has completed a transaction to spin off its Swedish production center to one of its Scandinavian suppliers, Network Communications A/S, based in Denmark.” Although we couldn’t find an analyst for Alpnet, we found no fewer than ten reports you could buy on the Net. According to “Eurodollar Man” on Quotes.com, “AILP will be US $.60 by 1/12/01.” Unfortunately, not all message board predictions come true. “Rainman,” also a Quote.com day trader, predicted on March 7, 2000, that Alpnet would be US $19.50 by February 15, 2001. But you have to love his enthusiasm: “I have been watching AILP for a while. and when it held up today, with the broad market selloff, I decided it was time to buy.” He continues, “You can see that with new announcements every week, there is a lot going on with this company. I think Alpnet has their act together, and this price is cheap compared to their potential.” As of this writing Alpnet is now trading at $1.06. Renato Benninato, now Alpnet’s U.S. sales manager, put the prospect of investing in localization companies this way. “…I actually believe if investors leave aside the technology hype and look at the fundamentals of the localization companies, they will have better long term business. The biggest problem our industry has is that none of the players have reached the US $250 million mark that would justify the corporate structure required to manage companies with the global reach needed. Therefore there should be more consolidation our industry.” BowneBowne Global Solutions is part of Bowne (BNE), the world’s largest financial printer, yet still makes up less than 10% of Bowne’s sales. The logic of Bowne buying into the localization market seems to be working as it is offering a new web service via Immersant. BNE is rated a “hold” stock at present but its market capitalization gives it some leeway in further acquisitions in the localization field. SDL InternationalSDL International (SDL) raised interest on the whole issue of localization on the London Stock Exchange to the point that Teather & Greenwood Ltd, a leading broker, initiated coverage on December 13, 2000 with an illustrated and insightful analysis which can be downloaded free from SDL’s web site. This is part of what Teather & Greenwood wrote: “Speaking a Different LanguageLocalisation specialist SDL is a rare creature indeed. Unlike some of its sector peers, this company has consistently delivered. Why? Because management has created a product or service offering which is the solution today rather than a promise for tomorrow. English is no longer the dominant language of the net. If the Internet is to be used efficiently as a global commercial medium, businesses need to bridge every linguistic and cultural divide. SDL is well positioned to help them across. A lower risk way of playing the e-commerce boom. Buy.” Teather & Greenwood also note that “consolidation will become an increasing feature of the competitive environment. With its global service capability, SDL is more likely a predator than prey, but may still fall target to a service house looking to acquire product.” The report is rich with statistics and two of the best graphic competitor analyses I have ever seen. The reports note that “LioNBRIDGE Technologies is probably the nearest competitor to SDL in terms of scope and product/service offering.” And in its competitive analysis notes all its eight main competitors have financial strength. So what is SDL worth? According to Teather & Greenwood, “This is a difficult exercise where valuations are confused by sentiment…we have performed a discounted cash flow analyses which suggests that there is a considerable upside potential. Applying conservative growth ands margin expectations, we have derived an intrinsic range of 3.87 and 10.84. While this is a wide range, the low end still represents a 14% premium to its current share price.” SystranIn a surprise move to many people in the localization industry, Systran which runs the bulk of its operations out of picturesque La Jolla, California (the French do know where to set up headquarters) went public on September 14, 200 on the Paris Stock Exchange (Paris SICOVAM Code: 7729). According to Denis Gachot, Systran’s President Systran SA (parent company of Systran Luxembourg and Systran Software, Inc. in LaJolla) accomplished two things on that date.
On January 11 the share price Systran was trading at 4.26 Euros or 27.94F. During the previous 52 month period the share price high was 4.85/31.81 F and low 4.10/26.89F. Market capitalization as of January 11, 2001 was 45.2 million/F297 million. So with its new money how will Systran grow. Here is what they say in their outlook section: “Outlook: 40% Annual Growth of Revenues by 2002 “For the full year 2000, Sytran is anticipating revenues of FRF 60 million and is aiming at a net income of 10% of sales. “With the encouraging performance registered in the first half of 2000, Systran is confirming the development plan that was presented on the occasion of its listing on the Nouveau Marché of the Paris Stock Exchange… this development plan is forecasting a 40% annual growth rate by 2002. Its recognized technological know-how and its new financial means will enable the Group to fully benefit from the acceleration of demand for automatic translation and to keep its work leadership.” InSageInSage formally the Translation Group (OTCBB:THEO) which encompasses the former Bureau of Translation and Word House has seen its share prices fall from a 52 month price of US $10.51 to US $.081. Its current market cap is US $3.4 million. While Lernout & Hauspie got in trouble for hiding the facts as an operating company InSage’s underwriter got into trouble for hiding certain facts during its IPO. The year 2000 also saw a long-standing securities violation involving an InSage underwriter crop up. According to Judy Mathewson at Bloomberg.com: “The NASD alleged that before public trading in Translation Company stock began, Millennium, a co-underwriter of the offering, distributed more than half of its allocation of the company’s common shares and warrants to a small group of retail customers. Sitomer and Rome controlled some of those accounts, the NASD said. “Millennium then bought these shares back within 90 seconds of the start of public trading, the NASD said. Because Sitomer and Rome controlled some of the accounts from which these shares were bought, the public trading in the company didn’t really start on fair terms, the NASD said. “Within 13 minutes, Millennium began selling the shares to retail investors at a “significantly” higher price without disclosing their source, the NASD said. “In effect, the firm took on two conflicting roles at the same time, NASD’s Sherman said. It was acting as an underwriter, whose duty it was to fairly distribute the stock before public trading began. Yet it also was acting as a market maker—a type of dealer who continually buys and sells shares in a given stock and can affect the price.” During 2000, InSage noted that it “raised an additional US $6 million in new financing, comprised of four separate common stock private placements in the amounts of US $900,000, US $2.5 million, and two at US $500,000 each. An additional US $1.6 million was raised by the conversion of some of the Company’s publicly traded warrants. ”
LanguageWareThis company (LWNTF), which conducts all of its business operations through its wholly owned subsidiary WholeTree.com, announced on January 8, 2001 that unless it can raise additional capital by mid-January, it will close operations. According to David Algeo on LocalBusiness.com, “Colorado Springs-based LanguageWare has been trying unsuccessfully to obtain operating funds through a US $3 million credit agreement reached last fall with Technology Fund II, a Singapore-based venture fund that holds an equity stake in LanguageWare.net.” The venture fund has loaned LanguageWare $1.1 million of the $3 million; but isn’t lending more, because the Colorado Springs company hasn’t met agreed-upon business objectives. LanguageWare stock fell to US $.06 cents a share compared to a 52 month high of US $3.62. For the first nine months of last year, Wholetree.com lost US $10.3 million on revenue of US $1.9 million. It reportedly spent US $4 million on an advertising campaign which reached most major magazines. LogisoftLogisoft (LGST) is another over the counter traded company. Its stock is currently at US $0.625 (January 15, 2001). Logisoft plans to move to either AMEX or NASDAQ in early 2001. During the nine months ended Sept. 30, a 2000 reported sales of US $4.5 million and a net income of US $1.4 million. This compares to 1999 when its sales were US $4.2 million and it lost US $293,000. Logisoft received funding of US $6.2 million in March 2000 and an additional $500,000 later that year. All this so that it can push an aggressive plan to be a major player in the internet globalization market. GlidesLate in 2000, Glides, a Bellevue, Washington-based start-up that helps companies manage the content of Websites, secured US $3.5 million in first round financing. The funding was led by Seattle-based Timberline Venture Partners and a PSINet Ventures LTD, the wholly owned ventures unit of PSINet Inc. Since 1999, Glides has raised $5.4 million overall funding. Angel investors chipped in $1.9 million in an earlier round. A Glides spokesperson said that funding will go towards development of its application service provider-based product UniSite 2000. Launched in September, UniSite 2000 is designed for companies to create and manage changes to a Website in multiple languages eliminating the need for maintaining separate sites for each language. TradosTrados, in what might foretell future investments in localization, announced equity investments from Arthur Andersen and Deutsche Bank on January 3, 2001. In an equity-for-services arrangement, Arthur Andersen will provide consulting and integration services that will advance Trados in the ASP and e-business markets. In a separate agreement, Trados received a $ 1 million investment from Deutsche Bank to further enhance Trados’ position as a multilingual e-business infrastructure provider. “These new relationships will open many opportunities for Trados,” said Trados’ CEO. “Arthur Anderson brings its ASP experience and resources to the table, both geographically and in terms of functionality. This relationship will allow us to work with Arthur Anderson to help their clients take their products to foreign markets efficiently and quickly, potentially increasing their market share. We’re also delighted to have Deutsche Bank-with its strong international presence-invest in Trados. Their commitment demonstrates their confidence in our strategy going forward.” This latest round of financing follows $21.5 million in equity financing from HypoVereinsbank affiliate, AdAstra Erste Beteiligungs GmbH, Mercury Private Equity, an affiliate of Merrill Lynch & Co., First Union Capital Partners of Charlotte, NC, and Microsoft Corporation. WeLocalizeWelocalize.com, announced in the late summer of 2000 that it had secured US $6 million in venture capital funding led by Philadelphia based LLR Equity Partners. Welocalize plans to use the fresh venture capital to hire additional translators and engineers to help build the company’s planned Web-based workflow product. GlobalSightThis last December GlobalSight announced it had closed US $29 million in third round funding, bringing the company’s cumulative investment capital to US $45 million. The round was led by Deutsche Bank Capital Partners and includes current investors Draper Fisher Jurvetson, Whitney& Company and 3I Group, along with Draper Fisher Jurvetson ePlanetVentures, Protégé and Osprey Ventures. AS Software House TechnologyThe distance between Silicon Valley and Riga Latvia just got a little shorter. One of Eastern Europe’s leading software developers, Riga-based AS Software House Technology, said that it would become a subsidiary of the Exigen Group, an information technology-solutions venture led by former San Francisco telecom executive Greg Shenkman. It is the latest in a series of investments linking Central and Eastern European information technology skills with Western capital and marketing know-how. eTranslateAlthough eTranslate has been able to raise US $43 million in the last year, it still has not focused on one business strategy. An industry observer noted it was the “best financed but the least focused” company. A new CEO was just brought in, replacing the one that was on the job for 18 months; in today’s corporate environment, this seems to be the maximum amount of time venture capitalists or stockholders will give CEOs to prove themselves. In addition, as in many dot.coms, spending has been refocused; the company reportedly cancelled its move to larger quarters which would have included an employee gym. One problem seems to have been a total misunderstanding of the business. The outgoing CEO of eTranslate told an investor conference in Europe that if the 6000 translators they had listed in their network were to work full time for their company, they would collectively earn US $1 billion. If you do the math (1 billion divided by 6,000) this comes out to US $166,000 per translator! MORE MONEY WILL COMEIdiom announced that it began the industry’s first globalization initiative in the wireless marketplace. Wireless technology will be a boon to many regions of the world where PC’s are rare. The World Bank is already involved in opening up its information with its Gateway project. Politicians have come to call this situation the digital divide—half the world’s population have no telephone access and 95% of all households lack internet access. But not just the localization industry, but the entire corporate world, must ask itself—is there any money in this? Hewlett Packard seems to think so in something they call “World e-Inclusion”. “It’s a tactical move by HP to see if they can invest appropriately and garner a return down the line” noted analyst from A.G. Edwards. A spokesman for the World Resources Institute stated “they’re getting out way ahead of any other digital company. It’s high risk, but if they can pull it off, it’s high gain. If they succeed, they’re going to make lots of money.” As the scale of the localiztion industry increase we can be sure we will see more and more of the corporate world find home for investment dollars in globalization. |
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