Money – Mergers, Acquisitions, Investment

Although the industry has been consolidating for some time, it is highly fragmented by nature. This is partly due to low barriers to entry, low capital expenditure requirements, and the nature of the language services business, which is composed of highly dynamic firms operating in a market that is experiencing competing forces of consolidation and fragmentation (which Nimdzi has defined as the Jell-O effect). Thus, the industry keeps refreshing itself and is amenable to buy-and-build, a strategy dear in private equity’s (PE) playbook as one of the fastest ways to grow revenue and acquire capable teams to drive growth further. 

After a record year of deals, 2022 was slightly more restrained as macroeconomic factors, geopolitical challenges, and rising uncertainty put the brakes on and saw deal volume slightly contract. 2023 followed suit with a further decrease in the number of deals, down to 51, primarily due to the decline in in-trade transactions. Peaking interest rates undoubtedly contributed to the lower appetite for M&A activities. 

While the parties rarely disclose deal values, the limited available data indicate that EBITDA multipliers have not changed significantly from past years. Typical multipliers range between 5x and 12x, where the lower end is relevant for the more traditional players. The higher multipliers apply in transactions for innovative, top-profile, specialized companies with high growth potentials. 

2023 saw many noteworthy transactions, and we’re listing here the most impactful ones. 

• Early in the year, Unbabel acquired EVS Translations, one of the largest players in the German market, to expand their geographical footprint and access to language data, and later Bablic, a cloud-based provider of web localization technologies.
• Mobeus PE helped with the management buy-out for The Translation People in the UK as their first – likely not last – investment in the industry.
• Visual Data Media Services acquired in-trade EVA Localisation, expanding their footprint in Europe, focusing on multimedia localization.
• Cloudbreak, acquired by US private equity GTCR, is divesting from Uphealth. In this year’s ranking, they still appear as Uphealth-Martti.
• Transperfect made multiple acquisitions, primarily in the technology space, including Wordbee (a TMS company).
• RWS expanded with a South African LSP (ST Communications) and also made technology investments (Propylon, a legal and regulatory CMS provider).
• Globo, LanguageWire, ZOO Digital, and ElaN Languages also made multiple acquisitions.

Looking forward, 2024 is still a transition year when LSPs, investors, and buyers are still on the path to figuring out how disruptive generative AI is in the long term and how to utilize its capabilities best for high customer impact and revenue growth. Financial investors – venture capital and private equity alike – are keen on placing their bets on technology-forward companies. However, the rapid surfacing of LLMs made all previous predictions and trends obsolete. At the same time, several high-profile LSPs acquired by private equity in recent years are reaching their investment maturity, which predicts that further M&A transactions are imminent in the near future within the top 100 due to planned investment exits.

An early sign of this is the merging of Jonckers and Acclaro (#69 and #83 respectively in our ranking) under Mayfair Equity Partners’ financial umbrella in February this year to form an AI-enabled “new localization powerhouse,” only one year after Mayfair acquired Jonckers as their first investment in the language industry. Nimdzi reports these LSPs as separate entities this year, and the move puts the new formation in the top 50 for next year’s ranking.

Several other factors are also likely to contribute to stronger activity in mergers and acquisitions in 2024. Interest rates are likely to have reached their peak, which – through cheaper external funding – opens up opportunities for investments. Small mid- and small-size LSPs are under pressure to keep up with the tech-enabled LSPs in the race for the favor of potential clients, resulting in the exits of their founder-owners from business and fueling further consolidation. Diversification of services and accessible markets are traditional drivers for consolidation, and the potential threat of GenAI to revenues amplifies the inclination of mid-size and top-tier players to pursue diversification via in-trade M&A.

On the other hand, many industry players that have invested in machine translation technologies now have the opportunity to claim to be AI-driven companies, as, indeed, neural machine translation is the core of the new AI wave. While this “AI white-washing” is a marketing activity targeting customers, investors are more likely to disregard these claims in their due diligence efforts. 

Actual technology startups in the language industry are captivating in the imagination of investors, driven by the highest levels of attention to anything AI-related. As venture funding diverts into generative AI, language technology startups face the challenge of pivoting to this new trend or fading into obscurity. We would not be surprised if many companies and technologies listed in our Language Technology Atlas either turn their attention to LLMs or get divested and leave the field beaten and forgotten. That said, applying cutting-edge technologies alone is not a recipe for success – a recent example is that of Lengoo, a Germany-based AI translation provider with more than USD 25 million VC funding in the pocket, that filed for bankruptcy in March 2023.

Looking at this year’s survey results, the numbers add nuance to the above narrative. In this year's survey for the Nimdzi 100, 39.8% of respondents stated that they are looking for companies to acquire, which is a significant drop by 12.6 percentage points compared to last year’s results. In addition, 28.6% are looking to sell, which is a decrease of 5.7 percentage points compared to 2021. While this resonates with the trend that fewer companies want to sell than those who are looking to buy, acquisitions typically happen downwards, which means many of the potential buyers will be looking for targets smaller than those in the top 100. At the same time, the number of companies stating they are not thinking about M&A at all has increased by 8.1 percentage points compared to the previous period, indicating either a wait-and-see attitude or an increased level of comfort with the business outlooks for the year ahead.