The Short Version:

A niche company buys into the mainstream. A mainstream company buys into a niche. That is the major new news in the “localization money markets” in recent weeks.

The Longer Version:

Merrill Translations, through its parent Merrill Corporation, acquired P.H. Brink International. And Transware plc, through its venture capital firm Trident Capital, acquired GlobalSight Corporation. These were the two big money transactions over the last couple of months.

Though private, Merrill continues to file earnings reports because of exposure in the corporate bond market. With headquarters in St. Paul, Minnesota (USA), it had 2004 revenues of US $582 million. Bowne’s (BNE), with 2004 revenues of around US $880 million, is a printing competitor of Merrill’s and parent of Bowne Global Solutions. The origins of Merrill Translations stem from the acquisition of NXTEXT, a legal and financial translation company. That business grew to over US $10 million and now plans to enter the wider mainstream translation field through the acquisition of P.H. Brink.

When Merrill first approached P.H. Brink, also based in Minnesota, it appeared that there would not be a fit. Paul Brink, the company’s founder, liked to show visitors the Fedex and UPS boxes at headquarters and point out that they were like dinosaurs, as almost all content now arrived and left digitally. While his company was largely digital, the legal and financial translations done by Merrill were paper-oriented. However, Brink had developed OTTO™, a workflow processing software that could help Merrill handle its thousands of small jobs. And, voilà, Merrill Brink International was born.

The new company has set its sights on competing with Bowne, Lionbridge, SDL, TRADOS and the other big firms in this business. The purchase price was not revealed; it was a combination of cash and buyout. For Rory Cowan’s take on the acquisition, please read my column from last month.

Transware plc is a Dublin-based localization firm with major funding from Trident Capital, a venture capital firm in California. Trident includes Transware in its business outsourcing portfolio and describes it as a “leading content globalization company, transforming existing content or creating new multilingual content for its clients in virtually any language and any media format.” GlobalSight had been looking for a buyer and a means to reach more European customers. Trident put the deal together. GlobalSight had about 40 employees and 2004 estimated revenues of US $4.1 million.

Not only does Transware acquire a new globalization software company, it also gets a new CEO, Tom Kelly, who has a Trident connection. Kelly comes from a Trident program called “Entrepreneurs in Residence.” I asked my friend Don DePalma of Common Sense Advisory, an expert on the topic, what that meant. He explained it this way: “An entrepreneur in residence (EIR) is often an unpaid seat at a venture capital firm. The EIR reviews business plans and looks for an opportunity that might match his skills. It is typically a reward for someone who has had a successful run at a company funded by that VC (venture capital) firm. It gives him first choice on a leadership role in new deals . From people whom I know in this role, they usually set some sort of outside limit on the tenure, e.g., a year or so.”

I spoke with Tom Kelly this week. He sees the combination of GlobalSight and Transware as a great opportunity, as each Transware client will be approached about implementing globalization software, and every GlobalSight client will be approached about using the Transware business process. The major market for the combined companies will be in California, and that is why the headquarters will be located here.

Kelly notes that Trident, along with another venture capital firm, Oyster, are commiting "major resources" to the combined company. He believes that this, along with the combined selling approach, will allow the new company to compete on an even playing field with all of its competitors.

Kelly also eventually sees a globalization standard emerging, which portends well for the combined companies. However, he is also aware that success will depend on gaining the trust of major clients."

Elsewhere in the U.S., next year’s new U.S. Government Defense budget gives the Pentagon something like US $350 million for translation and interpretation. However, the majority will continue to go to firms like Titan and CACI who are in the defense contracting business.

Public Companies – Swirling Rumors

Lionbridge (LIOX) whose shares are selling at a little less than US $6.00 a share, issued its annual report for 2004, which reported revenues at US $154 million, with a net income of US $7.1 million.

All sorts of rumors are circulating regarding Bowne Global Solutions, a division of Bowne (BNE). In releasing its 2004 report, Bowne President David J. Shane stated, “Concerning BGS, the 2004 results were not in line with our original plans, as the expected rebound in spending by the IT sector failed to materialize as significant projects were delayed until 2005. We took action in the fourth quarter to rebalance our cost structure within BGS. The cost savings from these expense reductions, as well as a strong revenue backlog, will help us achieve our targets for 2005.” In 2004, BGS sales were US $223 million with a net income of US $9.6 million. Projections for 2005 are US $225 million to US $265 million with annual income of US $19 to US $24 million.”

The ultimate speculation about BGS comes from a person that calls himself “ w_bars”on the Yahoo Finance Message boards (a sort of financial blog), posted March 28. I repeat verbatim:

“Re: Speculation that BGS is on the block

-BGS failed to meet most of 04 financial targets

-Bowne Inc. is desperate to sell BGS and is looking into a few different options (Management buy out included)

- Lionbridge has recently issued shares (US $120 million) and cashed out some credits and to date should be having US $180 million in bank waiting for something.

- CEO of Lionbridge said he’s willing to make Lionbridge a US $500 million company in 3 years. There is no way LIOX could make this trick without another acquisition.

- There is a rumor that Bowne Inc. is talking to another potential buyer as well

- April would be the month when something is going to be announced

- Nothing is certain.”

There you have it from "w_bars!" who is saying all these things, of course, to create “buzz” to help his own positions in the market.

Note: Blogs are a time-honored tactic of someone with a position in the market to make stock prices go up or down. When I worked for a commodities trading firm, we did this at The Chicago Board of Trade. Everyday before the open, we would go around and give our view of the world, which naturally matched our exposure in the market. So when I add blogging commentary to Money Talks, I do so with the caution that the blogger has a position in the market.

Meanwhile, BGS announced a whole series of moves that any ongoing business would make, i.e., alliances with TRADOS, Asian localization work for Macromedia, and a seminar in Chelsea, one of the “funkiest” parts of New York.

2004 was a good year for SDL International, as we have reported, with pre-tax profits up 29% from the year before. Shares are now trading at around 188 pence. CEO Mark Lancaster’s comment on all of the merger activity is that “SDL will participate in M&A (merger and acquisition) activity only when it is appropriate, and primarily when it improves our strategic position and provides long-term value to SDL.”

If getting your financial information from “w_bars” bores you, Investec, a London analyst, offers this about SDL stock. “The stock is trading at 15 times our 2005 EPS (earnings per share) forecast (78p, based on adjusted PBT of £6.4 m), representing a discount to the sector of around 16x 2005 EPS. We believe that the price undervalues the group’s long-term prospects and over-emphasizes short term risk, notably currency.” Or, in other words, “We reiterate our buy recommendation.”

By the way, we did some math and learned that among these latter three firms and Merrill Brink, you now over 135 sales people combing the world for business. Lyra Spratt-Manning visited me here in the Shenandoah Mountains last week. She is the former CEO of ENLASO and co-author of Tribal Knowledge, to be published this summer. She notes that in her experience, it is almost more effective to buy a small firm, along with its customer relationships, than to expand your sales force. It’s immediate revenue, versus the six- to twelve-month investment in additional salaries waiting for new business to develop. And today, the sales cycle seems to be lengthening, as everyone targets the same big accounts, which are reluctant to change. Her conclusion: more acquisitions are on the way, as it is harder to grow organically.

Ever since I started writing Money Talks, publishers have started sending me business books to review. I just received Jack Welch’s book, Winning (Harper Business). If you recall, Welch was the former CEO of General Electric and considered one of his generation’s best managers. He is also credited with starting the move to outsourcing to India. It’s a good, lively read. I looked up what he had to say about mergers since he took part in some 1,000 of them. Our industry is going to have many more mergers, and Welch warns “not to focus too intently on strategic fit, so that you fail to asses cultural fit, which is just as important to a merger’s success, if not more.” Welch states the “pre-deal heat gets in the way of any cultural analysis.”

Private Firms

We scoured the web and found that TRADOS announced a 54% revenue growth in sales in language services over the previous year. It notes that it is now the fastest growing company in the globalization market.

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John Freivalds is Managing Director of JFA Marketing and publisher of The Periodic Tables (Languages, Money, First Class and Toasts). He can be reached at jfa@direcway.com.