Many of the venture capital globalization firms created in the last two years are struggling with imminent mergers. According to one financial urban legend, you are given 18 months to show that you have a business model that works. We have reached that point and we saw what happened with the hi-tech press created specially for the Internet. The original Business 2.0 and Industry Standard went out of business, Red Herring is for sale alongside Fast Company, but no buyers are to be found. Upside magazine, which was being criticized for being too stodgy in the Internet furioso, survived and is becoming a prominent publication once again. And while Berlitz GlobalNet states that one good reason for a company to do business with it is the vendor's financial stability, a certain California localization firm still claims that one reason you should go work for it is "the presence of Dot the Cosmopolitan cat, our live mascot."

This whole episode has shown that it is far easier to raise money from venture capitalists who lend money so they can cash out via an IPO, and to get editors of magazines and newsletters to write about you, than it is to get sophisticated clients to hire you. One major problem with venture capital raised by localization firms is that they had to spend it before the market could absorb it—you can't simply put it into a savings account. And it wasn't just localization firms who were guilty of this: Look at the destitute online grocer Webvan, which lost US $1 billion trying to sell groceries on line; it had to invest in numerous locations before it got one working properly.

Thus, during the dot.com madness, offices were leased, equipment bought and people hired only to be disposed of a few months later. And as we have mentioned before, it hasn't helped these firms that they have been unable to maintain a focus and strategy. The first rule of marketing is you can only be one thing in the eye of the consumer; you can't be both an apple and an orange at the same time.

In the face of all this, Bowne Global Solutions, part of Bowne (BNE), is showing profits and won Mendez in an auction for US $44.5 million. Mendez had been courted by Lionbridge and had tentatively accepted an offer from them for US $26 million, plus US $6 million to be paid upon completion of the deal. So Bowne can now be considered the largest, and certainly most profitable publicly held localization firm. Now to the specifics.

Lernout and Hauspie, as we know, declared bankruptcy on two continents and was delisted from trading when it was learnt that large portions of its sales were fictitious. Several of its top management people were sent to jail and others will undoubtedly be joining them. L&H shares are being traded in a secondary market called pink sheets and as we were going to press were being traded at US 15 cents a share. This represents a capitalization of US $21 million, when at one time it had a market cap of over US $10 billion! Yet the tragedy of all this is that the company had good and valuable constituent parts like Mendez.

It was long known that Mendez was to be sold off to satisfy creditors. As we go to press, L&H will be filing a recovery and repayment plan and presenting a reorganization plan to both Belgian and US bankruptcy courts by September 25th. No date has, however, been given for the release date for the book and the movie rights detailing this saga.

Before it declared bankruptcy, L&H's management thought the sale of Mendez could bring as much as US $150 million. L&H had bought Mendez for US $16.9 million in 1996. But the sagging localization market didn't net anywhere near that amount, even though Mendez is profitable. According to Reuters, its year 2000 revenue was US $92.1 million, and 2001 earnings before interest, depreciation and amortization (EBITDA) were expected to reach US $22.9 million.

When it appeared that Lionbridge won the right to acquire Mendez in an auction, Brent Manderfield of US Bancorp, one of Lionbridge's investment bankers, noted, "Lionbridge was going to get a company worth US $90 million in sales and 12 million in profit for a price of US $33 million. Not bad!"

This purchase would have given Lionbridge a welcome boost. As one trader noted, "Mendez is profitable and sitting on millions in cash, which was the reason Lionbridge was attempting to buy it. With declining revenues and increasing losses, this looked like an answer to Lionbridge's needs that just didn't happen." Its losses were mounting from US $4.3 million in 1998 to US $20.3 in 2000. Creditors are now given partial payment. Its stock has plummeted to below US $1 and Lionbridge is being sued by at least three firms seeking class action suits against the vendor and its investment bankers. Talking about the lawsuits, Rory Cowan said, "You'll note that they (the law firms) have even included investment banks which weren't part of the original IPO, misspelled directors' names, and all subsequent lawyers have cut and pasted the same errors! And they didn't even know that our IPO took place during a terrible market when no one wanted IPO shares. All in all, this is the stupid and dark side of America."

Lionbridge has been savaged in investor chat rooms. One trader commented, "Does anyone find it interesting that in response to LIOX's bid for Mendez, the stock price fell. And then in response to LIOX's failure to win the bid, the stock price also falls."

But an insider looked at all this and stated: "If LIOX was doing $%#^! work they will fail. However I hear otherwise; for the most part they do good work. If this is true, they will make it through this slowdown and be positioned to at least get back to the quality of work that the pieces of the puzzle enjoyed before the roll-up of the last few years."

As for Lionbridge's financials, the firm lost US $7.7 million in the second quarter of 2001 on sales of US $22.6 million. Or as Paul Brink of Brink International put it, "for every dollar of service they sell, they lose 30 cents. You can't keep that up." For the first six months, it reported sales of US $50 million, down from US $57 million the year before.

But while Lionbridge is going through some pain, Bowne not only ended up with Mendez but also reported a profit for the period ended June 30, 20001. Bowne Global Solutions posted revenues of US 22.4 million and EBITDA of US $1.4 million. Revenues and EBITDA for the six months ended June 30, 2001 were US $42,217,000 and 25,518,000 respectively, with 12 months' revenues of US $82 million and EBITDA of US $5.2 million. Reflecting on the conundrum facing many firms, whether to be an apple or an orange—or both—Robert M. Johnson CEO, of the parent Bowne noted, "Bowne is perhaps the best positioned company in its industry."

Jaap van der Meer, president of Alpnet (AILP) stated that he was fairly satisfied: "We have reached break-even in a down market, we are not being sued and no one in our company is going to jail." On June 28 of this year Alpnet got notification that it was delisted from NASDAQ. However, the company is still trading on the OTC Bulletin Board and the Alpnet posted second quarter sales of US $13.1 million, with a net loss of US $950,000. For the first six months sales reached US $24.2 million with a net loss of US $1.3 million. Alpnet's stock has been trading around 40 cent a share.

Shares in SDL International have tumbled from 300 pence in March to a current 70 pence. One London analyst wrote, "The slump has been driven by fears of a slowdown in the US, where SDL has 60% of its sales. This could force the group to issue profit warnings. In fact, SDL's core service business, which covers fees from translation services, is understood to be performing better than ever." Six monthly figures for 2001 show sales of £16.7 million ( compared to £11.6 million in 2000) and a pretax loss of £2.7 million ( compared to a profit of £0.27 in 2000).

Systran continues to promote what it calls "e-services." For the first six months Systran had sales of €4.37 million (we need to start getting used to that Euro symbol) and a net income of €0.27 million. Its sales broke down as follows: software publishing 32.1%, e-services 27.2%, development contracts 13.2% and other services 27.5%. Its stock has been trading around €2.30 down from a year high of €6.80.

Basis Technology received US $5 million in funding during 2001 to expand sales and develop new products for its globalization software. In Europe, the Latvian software developer Vide Infra Grupa received funding from the Estonian Venture Fund, LHV Enterprises. Vide Infra Grupa put this to good use when it won a contract from British Airways to develop a set of B2B platforms for British Airways for Mediterranean and Eastern European countries involving a total of sixteen languages. British Airways was so impressed by the site that Vide Infra had developed in Latvia that it awarded the 15 other country sites to them as well.

John Freivalds (JFA@worldnet.att.net) is a long-time contributor to the LISA Newsletter and market analyst. His Money Talks column has regularly appeared in the LISA Newsletter for more than two years. He is currently with JFA International.