Most industry sectors saw a drop in dealmaking activity last year, driven by economic turmoil, soaring inflation and geopolitical upheaval in Europe. Language services was no exception, although it appeared somewhat more resilient than expected - one of the first signs of an imminent comeback.
According to language industry publication Slator, which compiles the annual Language Service Provider Index, the combined revenue of the nearly 350 language service firms tracked in the index increased by around 10 per cent to almost $10.4 billion (£8.7 billion), a rate it says was driven more by M&A consolidation than organic growth.
This showed the strength of M&A within the industry, in spite of a raft of headwinds, while figures also demonstrated that appetite for dealmaking actually increased during 2022, even if the conditions for getting deals done became more adverse.
Crucially, the sector remains highly fragmented in spite of several years of intense M&A activity. This, combined with the inherent strength of the industry’s M&A market, high dealmaking sentiment and major private equity interest means that 2023 could be a particularly strong year for language services M&A, especially if economic conditions improve.
The key sub-sectors within language services
Language services is comprised of four core sub sectors, each of which has an active M&A market driven by different trends and consolidators. The main sub sectors are: Translation and transcription; localisation and transcreation; subtitling and dubbing; interpretation.
Translation and transcription are the most widely used language services across most verticals and are particularly prominent in industries with high degrees of regulation in which content is required to adhere to stringent standards of compliance, accuracy, timing and quality.
This subsector is one of the most impacted by technology, with AI and machine learning having revolutionised translation and transcription over recent years through tools such as speech recognition and machine translation.
Localisation and transcreation services are most commonly used in media and marketing and involves translating a message from its native language into foreign languages while retaining its intended meaning and impact. A particularly large driver of activity in this market is video streaming, with the proliferation of non-English video content requiring a huge input from localisation talent to ensure subtitling and dubbing reflect the messages of shows.
Dubbing and subtitling itself, meanwhile, is similarly largely used across the media sector, primarily in gaming and entertainment.
Finally, interpretation is one of the most rapidly changing subsectors within language services. While it has historically been dominated by the public sector, in particular areas such as local government, healthcare and law enforcement, the interpretation market is seeing increasing interest from the private sector.
The subsector has been particularly impacted by COVID-19, which has caused a huge increase in demand for video remote and telephone interpreting. This has helped contribute to a backlog in areas such as health and law enforcement that has seen an increase in private sector involvement.
Green shoots amid a difficult environment
Language services was not immune from the global decline in M&A last year, with deal activity dropping, particularly due to declining private equity activity in a worsening economic landscape. However, 2022 was a year that also demonstrated the strength of M&A in language services.
In fact, while activity itself may have dropped, figures from 2022 actually show that appetite for dealmaking has rarely been higher than it was last year. According to investment banking firm Houlihan Lokey, which produces an annual mid-year report on trends in the language services sector, the number of language service providers (LSPs) actively looking for acquisitions stood at 47.6 per cent in Summer 2022, up from 33.6 per cent a year earlier, when dealmaking activity itself was higher.
On the sell-side meanwhile, the number of companies looking to attract offers from potential buyers rose from 23.9 per cent at the midpoint of 2021 to 25.5 per cent in 2022.
Furthermore, while private equity activity may have declined, private equity firms are still clearly planning M&A in the language services space, with the number of mid-cap funds raising capital last year rising to 290, compared to 195 in 2020.
Fundamentally, the key fact that points to the dealmaking boom reviving is the continued fragmentation of the market. Despite widespread dealmaking for several years now, huge amounts of private equity activity and the presence of several incumbent consolidators, Houlihan Lokey figures suggest that the top 100 firms in the industry only hold a market share of around 15 per cent.
The major trends in language services M&A
Technology
Technological transformation is prevalent across all language services sub-sectors, with new technologies driving advances throughout the industry and, in turn, prompting huge amounts of investment and M&A activity.
New technologies such as machine translation (MT), speech recognition and remote simultaneous interpreting (RSI) have made delivery of services faster and created language service capabilities that are flexible and efficient, even when delivered remotely.
The importance of such technologies ramped up massively during the COVID-19 pandemic, which saw remote delivery capabilities rigorously tested by the forced working conditions of lockdown and social distancing.
Technology has become vital to company operations, client acquisition and retention, growth plans and in attracting funding. The prevalence of technology is expected to continue even in the wake of the COVID-19 pandemic, as demonstrated, for example, by the continuing demand for telephone and video remote interpreting.
As a result, digitalisation and the acquisition of new technologies have become major drivers of M&A activity, with disruptive, tech-native firms becoming highly sought after acquisition targets across the language services industry, both for incumbent buyers and parties looking to enter the rapidly growing sector.
Fragmentation and revenue growth attracts M&A funding
The language services industry looks, on paper, to be the archetype for an industry that will attract funding from private equity and venture capital investors. Highly fragmented and with consistent revenue growth even in years, such as 2022, ravaged by economic uncertainty.
Despite the economic and geopolitical turmoil seen last year, private equity firms continued to target acquisitions and, as demonstrated by Houlihan Lokey’s figures regarding capital raised at mid-cap funds, were still planning M&A on a huge scale, even if activity itself was tempered by the uncertainty that afflicted 2022.
Typically, private equity firms will target established LSPs, rather than new startups, using these companies as platforms for buy-and-build acquisition strategies that seek to take advantage of the huge degree of fragmentation that remains in the industry.
Several of the biggest global consolidators in language services are backed by private equity firms, including US companies United Language Group and Big Language Solutions and European firms Ubiqus, Argos Multilingual and Acolad Group, among many others.
With more private equity financing poised to enter the language services sector, the most attractive mid-size LSPs will become highly sought after assets for private equity firms looking to achieve rapid acquisitive growth, this will in turn help push valuations up, potentially prompting a growing number of owners to consider a PE acquisition.
In January 2023, language services provider The Translation People underwent an MBO backed by private equity firm Mobeus. As well as helping to increase its investment in new technology, the MBO will also provide The Translation People with the financing to target acquisitions in the fragmented language services industry, with several potential acquisitions already identified at the time of the MBO.
The Translation People MD Jasmin Schneider commented: “Moving forwards with Mobeus, we aspire to be one of the largest LSPs in the UK and to continue to develop our European operations, investing in the industry’s best technologies and acquiring strategically to improve the service we offer to clients. Mobeus’ experience in assisting companies to grow organically and through acquisition will be of great help to us in the future and will also enable us to expand into new sectors.”
Services vital for businesses targeting international growth
As companies seek to expand internationally, language is understandably one of the biggest barriers they face, so it’s no wonder that language services has been a major beneficiary as businesses look to build global scale.
Obviously, translation services are crucial to businesses moving into new territories in which different languages are spoken and this is particularly important for companies in highly regulated industries that need to ensure they adhere to strict compliance standards in other countries.
EVS Translations was founded in 1991 and specialises in translation for legal and financial companies. The company is headquartered in Germany and employs more than 150 employees – around half of which are in-house translators – across offices in Germany, England, the USA and Bulgaria.
In January 2023, the company was acquired by AI Agency Unbabel, with the acquisition representing the buyer’s second foray into the language services space, following its deal to buy Lingo24 in late 2021, as it seeks to build its language technology platform.
Announcing the acquisition, Unbabel described EVS as “recognized industry-leader for highly specialized financial content, the company’s services span document translation, legal translation, terminology management, multi-format file processing, media localization, international SEO, and copywriting, machine translation and engine customization, and interpreting.”
The buyer said that the acquisition would significantly expand its offering “at a time of high global demand for translation services by multinational corporations”, adding that the value of the global translation industry increased to $56.18 billion in 2021, with Europe comprising close to half of the industry.
Unbabel CEO and co-founder Vasco Pedro said: “We are committed to delivering the most comprehensive multilingual customer experiences, and our acquisition of a key player in the German market enhances our existing capabilities and expands our global footprint.”
“We’re proud to bring EVS Translations into the Unbabel family. With this new specialized content translation partner, Unbabel will have more data to train MT engines in new industry sectors and use cases — opening up new opportunities for growth and broadening capabilities for our customers.”
Arguably just as important, however, is bridging the cultural divide of language and this is something that has made localisation a key consideration for businesses seeking to ensure that their message and marketing have the intended impact and remain “on brand” in foreign markets.
Proliferation of foreign media drives major growth
Streaming sites and the growing interest in foreign media have been major drivers of growth in the language services sector. Across the world, streaming sites such as Netflix, Amazon Prime and Disney+ have created a far greater degree of access to foreign language media and this, in turn, has increased demand.
Looking at the English-speaking world, for example, foreign language shows such as Squid Game and Lupin have become hugely popular and lead to increased interest in non-English media. This demand has increased the need for dubbing, subtitling and localisation services.
According to Houlihan Lokey, the demand for localisation driven by the growth of streaming has created talent constraints for businesses working on non-England projects, causing firms to reassess their operational practices and adoption of technology.
While the cost-of-living crisis has recently impacted streaming sites, there is still expected to be ongoing growth in the global over-the-top (OTT) video market, with global revenue forecast to hit $236.1 billion (£196.3 billion) next year, compared to a projected $216.6 billion (£180.1 billion) this year.
Blu Digital Group is a California-based media services provider, which licenses cloud-based media software and offers media production and distribution. Last year, the company began to increase its localisation services, appointing Silviu Epure as its VP of Content Globalization and acquiring dubbing and audio firm Central Post LA.
Later in the year, the company acquired UK-based dubbing and subtitling firm Haymillian for an undisclosed amount, adding operational hubs in the UK and Greece, as well as a Mexico-based dubbing facility to Blu’s business.
The acquisition of Haymillian, which was previously a vendor to Blu, augmented the buyer’s access services capabilities and reflected its aim of capitalising on the increase in audio description. In particular, Haymillian’s Mexico dubbing facility will enable Blu to strengthen its Latin American presence, with Blu Digital CEO Paulette Pantoja saying that the firm had seen an “extraordinary rise of content distribution to and from Latin America to the world”.
As well as growing demand for audio description and closed captioning, Blu Digital’s M&A plans are also being driven by technological advances, with Pantoja commenting: “Considering the technological advances that the industry is heavily exploring in this space, we do expect to grow exponentially in 2023.”
Pantoja commented that the company would continue to target acquisitions, seeking firms that provide “technological innovation, high quality output, and consistent top-notch client experience” and adding that “Blu will continue its rapid global expansion seeking out like-minded proponents of these essential three elements in all key regions.”
Given the huge degree of fragmentation still present in the language services sector, the rapid pace of technological change across the industry, ongoing private equity interest and growing dealmaking appetite among industry firms, it seems certain dealmaking will continue strongly during 2023.
Such is the high level of dealmaking sentiment among key buyers – both industry firms and private equity entrants – it may even be the case that 2023 significantly outperforms 2022 in terms of deal volume and value, particularly if global economies begin to recover at some point in the year.
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