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Our Analysts' Insights

11Nov

Global BPO to Buy Lionbridge Data Annotation Business

TELUS International announced that it would buy Lionbridge’s artificial intelligence business unit in a deal worth US$935 million that is expected to close by December 31st. Let’s first explain what Lionbridge AI does, review the deal, analyze what it means to the language services and technology sector, and show what it represents to investors. Here’s a quick synopsis: Lionbridge’s private equity investor will sell a non-core business unit for a sizeable return on its 2017 purchase price, thus allowing it to position the core language service business as a pureplay LSP - and maximize the value of its remaining asset in one of several ways.

What TELUS Is Buying

Lionbridge AI is a business unit of Lionbridge Technologies (#2 in CSA Research’s 2020 global list of leading LSPs) that processes multilingual data used in training artificial intelligence algorithms – that is, human-annotated data for text (for example, semantic, sentiment, intent, named entities like places, company names, and phone numbers), images (captions, keywords), audio (transcription and time stamps), videos (outlining objects – think of the incessant reCAPTCHA challenges to prove you’re not a robot). 

“Processing” takes a variety of forms. For example, Lionbridge AI collects or receives client data, organizes it, and enriches it. In other cases, it tests AI algorithms and give scores for relevance and accuracy. In the course of delivering any of these services, the company creates, transforms, and tests data – with humans in the loop. Lionbridge AI does this for 200+ languages and dialects, using a proprietary data annotation platform. Its main competitor is Appen (#6 on our 2020 Top 10 list). Smaller hyper-specialized LSPs such as e2f and Pangeanic also collect, transform, and annotate high-quality multilingual data, but on a smaller scale.

The Principals

Besides the buyer and seller, three other entities are involved – a publicly-traded company and two private equity groups (PEGs): 

  • TELUS International, based in Vancouver, British Columbia, is a subsidiary of Canadian telecommunications company Telus Corporation (traded as TU on the NYSE) and minority-owned by Baring Private Equity Asia. It is a business process outsourcer (BPO) that provides multilingual customer service and IT services to global companies. The acquisition will supply it with multilingual training data that it will use in delivering digital solutions to global customers in its technology, travel and hospitality, fintech, games, telecom, and healthcare industries. According to TELUS’ CEO, the company is targeting an initial public offering in the first quarter of 2021. 
     
  • Lionbridge AI is a business unit of Lionbridge Technologies, which is owned by H.I.G. Capital. According to TELUS, the AI unit earned Lionbridge around US$200 million in 2019, about 28% of the company’s US$705 million turnover. What’s not being sold is Lionbridge’s language service business – translation, localization, interpreting among them – and most of its platforms (with the exception of the AI annotation part of its crowd platform).

What the Deal Means to the Language Sector

This transaction will take another step in reshaping CSA Research’s annual “Who’s Who in the Language Services and Technology Market”: 

  • The Top 10 reshuffle again. Lionbridge without its AI annotation unit retains its perennial spot among the 10 largest firms, but moves down the list. Factoring in transactions announced earlier this year and assuming no major surprises in revenue, the new top five will be the conjoined RWS-SDL in the top spot, followed by TransPerfect, LanguageLine Solutions, Lionbridge, and Appen. 

2020-Acquisition-Shu...

  • Lionbridge reemerges as an AI-savvy pureplay LSP. Lionbridge will bring its expertise in language and linguistics to AI-powered spoken-language applications (omnilingual chatbots, transcriptions), written-language services (MT training services, content optimization), marketing operations (sentiment analysis, global SEO), and enhancements based on its rich data flows and machine learning (“Small AI for Language Technology”). 

With the non-core data annotation unit divested, H.I.G. Capital can position Lionbridge as a pureplay language service provider ready for another run at LSP consolidation using some of the proceeds from the TELUS sale – or selling it or going public with a simpler story about what the company does. Lionbridge management can focus on optimizing its language business while it accelerates its work on next-generation global content services – on its journey to being more competitive, sellable, or IPO-able (“The Future of Language Services”). We’ll discuss below the various approaches that H.I.G. and Lionbridge can take.

  • Big BPOs touch the language sector by bulking up with language capabilities. Classic outsourcers have always offered some language services, often as part of bigger development or support deals. The pattern continues. The TELUS acquisition will bring multilingual knowledge and capabilities to its business services such as customer service improvements, chatbot training, and other global enterprise applications. Earlier this year AMN Healthcare bought Stratus Video to help it support its virtual workforce and improve communication between patients and providers. In 2016 Paris-based Teleperformance acquired LanguageLine Solutions and has since integrated spoken-language capabilities into some of its BPO services. 

But Wait – Let’s Discuss Private Equity Exit Strategies

The biggest immediate impact will be on H.I.G. Capital’s investment portfolio. It acquired Lionbridge Technologies in early 2017 in a transaction valued at US$360 million – and now has a deal to sell a non-core business unit for 2.6 times what it paid for the whole. Lionbridge’s core LSP business remains with about a half-billion dollars in revenue (based on 2019) – but as a pureplay LSP with a clean title, ready for a roll-up, sale, or IPO. What H.I.G. Capital did was instructive and illustrates three ways that private equity groups can profit from language services and technology:

  • Carve-out. Given the different business models and services, it was only a matter of time before the investors executed on their PEG playbook and split the company as they did. Selling off the AI unit gives it a 260% return on that outlay – and it still owns a company with more than a half-billion dollars in turnover. In short, the valuation of the parts is greater than that of the whole - that's a classic PEG goal. H.I.G. Capital can better position Lionbridge-as-LSP for an IPO or sale if it can continue growing revenue in language services while improving efficiency and profitability. 
     
  • Nurture for eventual sale. Investors can sell their stake or the whole company. Last year PEG-backed Acolad acquired Livewords from the PEG that bought it several years prior and this year announced its acquisition of Amplexor. Two years ago, Clarion Capital sold Moravia Worldwide to RWS after purchasing a controlling stake in the company in 2015. In a few cases, PEG-backed LSPs are on long-term paths to growth – Welocalize, for example, in 2015 graduated to its third private equity group since its founding in 1997.
     
  • Hold out for an IPO. Investors might wait it out for a public offering. Several PEG-backed LSPs have set public offerings as their mission, but few have reached that target. Among the IPO-targeting companies are LSPs such as Acolad, BIG Language Solutions, and United Language Group. Most would quickly sell to the right buyer and abandon their journey to the stock market – and their investors would happily pocket their profits sooner rather than later. 

No matter which approach they take, this deal highlights the importance and valuation of anything tagged as AI. Data annotation isn’t for every LSP, but the language and linguistic enhancement enabled by machine learning is (“Augmented Translation: Are We There Yet?”). 
 

About the Author

Donald A. DePalma

Donald A. DePalma

Chief Research Officer

Focuses on market trends, business models, and business strategy

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