Our Analysts' Insights

With M&A a more frequent occurrence in the language sector, the type of ownership is changing. Traditionally four types have dominated the language services market: 1) privately-held agencies, many of them owner-operator; 2) firms owned by private equity groups (PEG); 3) publicly-traded LSPs; and 4) divisions of larger corporations, all of them with the majority of their revenue originating outside the language sector. With acquisitions in the language sector a regular occurrence, we can expect divestiture of non-strategic business units to complement M&A-driven changes in ownership. 

Consider ownership of an LSP by a large corporation that doesn’t have a strategic interest in language services. The first wave of such LSPs was created in the 1990s by HPE’s predecessor, largely as an internal translation unit that also serviced the company’s customer and partner ecosystem. Enterprise-owned LSPs have come into being more recently − Capita Group joined this club in 2011 with the purchase of interpreting provider Applied Language Solutions, and Publicis in 2018 with the acquisition of translate plus.

In our 2015 report on M&A we observed that the language service units of big corporations such as Capita Group, Donnelley Financial, HPE, ManpowerGroup, and Xerox benefited from access to corporate cash flow and access to their parents’ customers. We questioned how long these companies would continue with business as usual – or whether they would invest to transform their LSPs into full-service business process outsourcers, or sell them off to another firm that might have a more strategic use for these units and their services. 

What actually happened to these companies depended on the strategic focus of the parent company. Three years later, their intentions have become clearer as their language service divisions have gone off in three directions:
 

• Large non-language companies have begun selling off their LSP subsidiaries. Over the last 24 months several enterprises determined that language services wouldn’t be part of their long-term strategies. ABBYY, best known for its OCR, PDF, and now content intelligence products, recently spun off its Language Solutions subsidiary (#46 on our global list) as AWATERA. Earlier in 2018 it calved Smartcat, a translation ecosystem. In July 2018 Donnelley Financial (#17) sold its language service unit to SDL (#6), which bought the Donnelley unit to reinforce its own translation business. In 2017, HPE transferred its entire professional services division, including ACG (#4 on our 2017 global list) to Computer Sciences Corporation, a system integrator that repackaged itself as DXC Technology which offers localization as one of its outsourced business process offerings.
  
  What it means: Language services continue to be a strong business, but continuing market pressures including M&A have put a hard focus on strategic value and return on investment. Companies such as ABBYY, Donnelley, and HPE have determined that translation and localization don’t add shareholder value. Expect other firms with LSP business units to follow them to the exit.
   
• Content-centric enterprises became more involved in the language sector. Advertising, marketing communications, and public relations agencies have a large stake in conveying their clients’ messages to global audiences in the most accessible form. That led PR behemoths such as WPP to build out Hogarth Worldwide (#7) around transcreation, Omnicom Group to do the same with Mother Tongue, and Publicis in 2018 to merge its global content business with that of translate plus (#50 in 2017, #5 in 2018). Over time these created-for-transcreation units find themselves pulled into broader initiatives including plain old translation. Elsewhere in the sphere of global communications, customer experience specialist Teleperformance purchased LanguageLine Solutions (#3). 
  
  What it means: From our perspective, these marketing, content, and CX extensions move these offerings toward the creation of global content service providers (GCSPs) in support of digital transformation strategies. Companies that create global customer demand and support the customer experience see value in having an in-house unit offering a range of services including transcreation, analytics, content management, and content enrichment. Hogarth, Mother Tongue, and translate plus are in the vanguard of this movement. Meanwhile, the largest LSPs – Ampexor, Lionbridge, SDL, and TransPerfect among them – are pushing their own GCSP messaging around these same themes. Elsewhere, content-heavy platforms such as Amazon, Alibaba, and Facebook incorporate automated translation, but the The Hut Groupchose to buy an LSP for its in-house service.


• Several non-language corporations maintain their internal LSPs. A few companies with most of their revenue from other industries still maintain in-house language service providers with varying results. Capita’s Translation and Interpreting unit (#25) dropped a substantial amount of revenue with the end of the U.K.’s Ministry of Justice contract, but says it is rebuilding the revenue stream. Pactera (#18) periodically shows up in the business press as parent HNA Group continues its long effort to sell off its outsourcing unit. Other enterprises with language service units such as ManpowerGroup (#23) and Xerox Communications and Marketing Solutions operate but with little marketing and no M&A activity. 
  
  What it means: These captive LSPs still have to prove their value. Given the acquisition activity and competitive climate, their corporate bosses will be hard-pressed to justify business as usual. Expect changes in operations, management, or ownership.

What does all of this mean to the market? In our 2015 report, we speculated about the playbook that Publicis apparently followed in 2017 − “a large, cash-rich buyer from outside the sector would merge its newly purchased LSP capabilities with its existing content-related business as it seeks multilingual synergies. It would bring economies of scale, efficiency, operations, and especially sales to the operation. It would also introduce the skills and management philosophy to use technology to scale the business instead of just a tool to eliminate inefficiencies.” We expect a few more companies with lots of free cash flow, venture capitalists, and private equity groups to follow its lead.