While attention has shifted to Martha Stewart, Tyco, Global Crossing, Enron and other scandals, we can be amused, if not proud, that the first really big corporate scandal started in the language technology business and is still not over. You might remember that it was The Wall Street Journal that vigorously exposed the scandal in the first place, when it found out that L&H people had been lying to the paper about the true nature of their financial results.

The other WSJ story is that a company called Digital River has begun buying quarter page ads in the paper’s national edition for US $50,000 per ad. We all have to think carefully about the ROI issue when selling or using localization services, but Digital River is clearly confident its ad campaign is worth the price.

Now we have an industry with several substantially sized firms, the ones in the middle are out on the prowl to buy smaller firms so they too can grow larger.

There is plenty of acquisition interest in the marketplace. Now we have an industry with several substantially sized firms, the ones in the middle are out on the prowl to buy smaller firms so they too can grow larger. It is hard to grow organically once you have reached a certain size; you just have to go out and buy someone else. There is a lot of talk going around about how much you should pay for a firm. In the last month, we have heard that one should pay from.5 to 2 times sales and as much as 7 times earnings. The next question is how you should get paid. One firm has been offering something like 30% in cash, 30% earn as you go and the rest in stock.

RWS is a company that recently used its own variation of this formula when it carried out a management buyout on its holding company, Watertone Limited. Watertone was going to do an IPO in the UK since owning a translation and localization business was no longer a “strategic fit.” So RWS’ CEO Lyra Sprat Manning, CFO Diane Pierce, and several private investors decided to operate the buyout.

Turning to market demand, the US Federal government is still financing a lot of Middle Eastern languages, but this is now being overshadowed by what is happening in China. The situation in many ways resembles the period of the dotcom bubble, when the localization industry also did well. Within the last two years, the CEO’s of Microsoft, HP and Oracle have both visited China. And why not? Look at these growth rates in China:

Since much of this growth is coming from the US, all the products involved need to be localized. I am impressed by how localization vendors like Beyondsoft and Magellan are marketing themselves well and growing strongly. Although India is getting all the publicity for outsourcers, I think China will catch up very soon. After all, it is now ranked as the world’s second largest economy.

The Chinese will soon stop working for Western firms… and go directly to clients to offer a wide variety of IT services. We had all better start learning Chinese.

We must remember that the Chinese have always prided themselves on their own capabilities. They will work together with Western firms to provide localization, but I feel that soon they will soon no longer be happy working through Western firms and will choose to go directly to clients to offer a wide variety of IT services. We had all better start learning Chinese.

Finally, there is one strategic growth factor to consider. Rory Cowan, CEO of Lionbridge, notes that companies want to buy their IT software and such like already localized. They don’t want to buy something and then have it localized. The “versionated” package has to be complete. Lionbridge’s acquisition strategy of late has reflected this approach. Not surprisingly, Lionbridge, along with PH Brink and Trados, have become partners to Documentum which then offers a “versionated” package to its clients.

Digital River is a perfect example of this. Its ad reads: “Translation: There’s a growing appetite for buying online.” It goes on to say that people buy more when the products are in their language. It almost looks as if a LISA vendor member designed the ad. But Digital River’s real business is ‘e-commerce outsourcing’. They use localization vendors to cover all markets; and the client just has to sign the purchase order.

Public Firms

It has been a good year for all the publicly-traded localization firms. Since our last Globalization Insider column, their 2003 results have come in.

Bowne Global Solutions (part of Bowne, BNE) is now by far the world’s largest localization provider with 2003 sales at US$ 219 million and a profit of US$ 13.1 million. BGS now generates a full 25% of the parent’s sales and is something that Bowne now takes very seriously. For 2004, BGS predicts sales of US$ 240 to US$ 250 million and profits of US$ 18 - 23 million. BGS notes that its Q4 2003 activities included signing a new US Justice Department contract for US$ 100 million over 5 years, a US$ 4.5 million technical writing contract with a division of a leading US auto manufacturer (Daimler Chrysler) and a two-year US$ 2 million preferred vendor contract with a leading US medical products company.

Lionbridge had an interesting year. Its stock reached a low of US$ 1.81, a high of 11.440 and is currently around US$ 9.00 a share. While the current goal is to achieve US$ 300 million in sales, 2003 saw Lionbridge’s revenues reach US$ 141 million. Net income for the year was US$ 2.5 million. According to Rory Cowan, “2003 was a remarkable year. We grew revenue by 16% organically,…we paid off our debt… and expanded our off shore capabilities with the addition of our Indian operations.”

You can tell Lionbridge’s operations are near the sea, as the company combines “global onshore, near shore and off shore resources.” Its operations in India are expanding rapidly, with employment expected to reach 1,300 by mid 2004.

SDL also had a good 2003. Turnover was up 11% to £64 million with a pre-tax profit of _ 4.1 million. However since it wrote off a lot of investment costs, it had a loss on ordinary activities of £0.8 million. The share price has held steady at around 120 pence.

Systran reported a good year, with sales reaching €11 million and net income €2.6 million. Sales were up 34% compared to the previous year. Perhaps more importantly, a French agency ANVAR ( Agence Nationale de Valorisation de la Recherche) awarded Systran the title of “Innovative Company”. This qualifies Systran for funding from a French venture capital fund dedicated to making investments in innovative companies. Its shares are trading at around €5 a piece.

Chinadotcom (Nasdaq:China) is on a buying spree and already owns one localization firm, Ion-Global. It remains to be seen whether the firm will expand its activities to gain new business.

Private Companies

Welocalize joined the trend towards higher sales trend by reporting sales that grew by 43% in 2003 with positive earnings. Its testing practice has grown to 20% of total revenue. It is actively looking for acquisitions and has called a number of companies we know of. The larger you get, the harder it is to grow organically.

Trados moved West and now reports record revenue. It sold products to 150 new enterprise customers and collected 1,600 licenses. Revenues for the entire fiscal year grew by nearly 30%. They will hire an additional 40 people during this coming year to keep up with the demand. With results like these, Trados is probably thinking it is time to go public. And both Idiom and Global Sight are offering stock options to potential employees.