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RWS Absorbs SDL – The Business Story
September 02, 2020 | Donald A. DePalma | For LSPs, For Buyers, For Technology Vendors | Share
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In late August 2020, UK-based RWS Holdings announced that it would acquire fellow UK supplier SDL in an all-share deal that valued the latter at £809 million (US$1.07 billion). This transaction will merge the fourth- (SDL) and fifth-ranked (RWS Holdings) LSPs on CSA Research's list of 100 largest language service providers. It will shuffle the ranking of leading LSPs on our list (see Figure) – and has the potential to touch many industry participants – suppliers and buyers, both – in the language services and technology marketplace.
The Financial Details
First, let's do the numbers:
Ownership. With the deal, RWS shareholders will own 70.5% of the merged company, with SDL investors holding the balance. SDL top management is out, RWS executives are in. The RWS brand will prevail.
Resulting company. The new RWS will begin life with around US$959 million in 2019 revenue (SDL $480.63 million + RWS $459.98 million), 7,000 employees (SDL 4,479 + RWS 2,523), and 91 locations (SDL 63 + RWS 28). Results in COVID-19-ridden 2020 have been good so far for both firms, but the year still remains a crapshoot. RWS' mid-year 2020 report through March 31 showed a small revenue dip of -1.6% with a strong start to its second half (April through September). SDL's half-year report through June 30 showed a drop of -2% and a good pipeline for the second half of calendar year 2020.
Growth. Since 2005, RWS' 15.09% CAGR has outperformed SDL's 8.70% (versus an industry average of 14.23%). Their combined rate is 11.13%, three percent under the overall market. RWS – and SDL shareholders – see an opportunity to raise SDL's lesser performance to RWS' performance.
Market presence. The two companies accounted for just 2% of the highly fragmented US$49.6 billion market for language services and technology in 2019. While another M&A deal is never a surprise, the two parties in this one generated far more attention than any previous transactions because both are publicly traded on the London Stock Exchange and occupy premier positions in the global language outsourcing sector.
Efficiencies. Prior to the announcement, SDL had planned to cut £8 million in expenses in 2020 and boost gross margins slightly above 2019 levels. Post-acquisition, RWS expects £15 million in annual savings (that's just 1.6% of revenue), not a lot of cash given potential consolidation for a company with nearly US$1 billion in turnover. We expect some of the savings to come from the technology license fees it pays for SDL translation software as well as consolidating management, production, marketing, sales, and office overlap.
Market reaction. SDL shareholders will net a 52% premium over the closing share price on August 26 on the exchange of their shares for RWS paper. Seeing upside to the acquisition, investors on the day of the announcement bid up SDL shares from 598 to 782 pence – while they dropped RWS from 741 to 650. Several days later SDL settled in at 772 pence to RWS' 645. This isn't unusual – SDL shares benefit from the premium, thus increasing their value, while the market questions the value to RWS of such a major initiative.
This deal takes RWS into new territory: It adds several growing vertical markets and a substantial presence in the language technology market. Its earlier acquisitions boosted its presence in life sciences (Luz (2017) and Corporate Translations (2015)) and legal and IP (Alpha Translations (2019), Inovia (2013), and Article One Partners (2017)). Its acquisitions of Moravia Worldwide in 2017 supplemented its life sciences vertical, but also added a high-tech industry focus. Earlier this year it put Webdunia in India in its basket for geographic expansion as well as software localization and translation, and made its first technology buy, neural MT provider Iconic Translation. Iconic's e-discovery focus dovetails with RWS' work in patent and IP. SDL is a leap into a much broader market.
RWS expands its footprint on many fronts. Adding SDL's 63 offices increases RWS' geographic reach, but how many of these will be redundant? SDL's industry support complements RWS in life sciences and legal while enlarging it in government, financial services, aerospace and defense, manufacturing, and others. With some of these comes MT-based translation trained for regulated industries. It also elevates RWS to be a leading supplier of translation software such as machine translation, translation management, and translation memory.
RWS becomes the face of the industry. RWS will assume the Ichiban (#1) position long occupied by Lionbridge and then TransPerfect. As a publicly-traded company, the "outside" world will use its financial reports to gauge the importance, business value, and performance of the language sector.
For many buyers, RWS+SDL isn't big news. The nearly one-billion-dollar turnover of the new RWS will not have much of an impact on the buying community. Large buyers already know who's who in the industry and those buying for the first time will see a quote from the biggest provider (Lionbridge for a decade, TransPerfect, and now RWS) when they begin their search – and not before. Most procurement teams won't take notice unless they already have both RWS and SDL as preferred vendors.
Inside the language services community, it is a big deal. LSPs and their backers respond with outsized moves to any M&A activity because it eliminates potential acquisitions and amplifies their own growth anxiety. Private equity partners of LSPs – Acolad, Amplexor, Lionbridge, Memsource, Semantix, Ubiqus, and United Language Group – and venture capitalists behind langtech-centric companies – Lilt, Smartcat, and Smartling – will make their own decisions to double down with more investment or decide if it's time to exit the market. Meanwhile, companies owned by corporations in other sectors (LanguageLine and Stratus Video, for example) may decide it's time to act. And, of course, reportage about the RWS acquisition benefits smaller companies looking for an investment.
Deals keep on happening. Several are in process – some in the initial stages, others to close before 2021. Further down in the market, we expect smaller LSPs to think they need to reach US$30 or 40 million in revenue to have a better chance of competing. Size anxiety may drive some of them to merge or to be more receptive to the entreaties of Acolad, Lionbridge, Semantix, TransPerfect, and ULG, et al.
Will this large acquisition transform the industry? RWS has done the easy part of this deal in convincing SDL shareholders they'd rather have a share in a bigger vision than in SDL's game plan of the last decade. Once it closes the deal, RWS has to make it happen on a variety of fronts.
RWS will follow the standard post-acquisition playbook for a service industry – it will start spreading the news to its own clients and, most importantly, to SDL's. Joint RWS-SDL account executives will fan out to reassure existing SDL customers that the deal will benefit them greatly through access to more language services and that they'll be able to handle more of the translation needs across various horizontal functions in big enterprises. At the same time, account teams representing SDL's strengths in regulated industries such as financial services and life sciences will call on RWS accounts pitching offerings such as its SLATE MT self-service portal backed by vertically trained MT and emphasize the role of SDL's technology as the "glue" behind the scenes.
Meanwhile, SDL clients will take calls from – and meetings with – rival large and medium-sized LSPs telling them the exact opposite. The next year will be a free-fire zone with LSPs and translation technology software vendors taking every opportunity to trumpet their story to beat or displace the new RWS in services and technology. SDL's translation technology buyers will pose a bigger problem for the RWS-SDL joint account team. We address the langtech side of the RWS-SDL combination in a separate post, "RWSDL – The Newest Translation Technology Provider."
All quibbles aside, this is a big deal between two large players whose combination will have a downstream impact on the market, and at the same time, it increases the visibility of the language sector. So, what are their strengths, weakness, opportunities, and threats?
Management. RWS' senior leadership will bring a disciplined financial approach to the combined entity and stands a good chance of making sure that the sum of the parts is greater than the whole (that is, the classic 1+1>2 M&A conundrum).
Sales. RWS needs to keep its own and SDL's top salespeople, especially in the heavy-duty regulated sectors where knowledge and process outsourcing (KPO) is a major differentiator. If it succeeds in keeping all hands on deck, RWS will develop a sales cadre that can rival TransPerfect.
Technology. SDL has invested heavily in neural MT and AI, while RWS has some strong service offerings in the space. Smart and sustained investment in AI could pull the new RWS into a market-leading position in AI-driven language services and technology ("The Future of Language Services").
Brand awareness. SDL has strong brand awareness in the industry. Merging the entities risks losing some of that to RWS's more understated brand approach.
Ability to sell integrated offerings. If RWS is able to combine technology and services more efficiently, it will have a better sales proposition for large enterprise buyers.
TransPerfect and Lionbridge won't play second fiddle. They will shift to more aggressive marketing and may renew their on-again-off-again idea of merging TransPerfect and Lionbridge to reclaim the Ichiban crown.
Time spent on integration. If RWS intends to absorb the SDL brand and operations, it will take time and provide a chance for nimbler competitors to pull off customers and nip at the company's heels.
Technology. SDL's technology stack still needs remediation and de-duplication. Pulling this off without losing customers will be a major accomplishment.
Conclusion – the Net-Net
The language industry has long been far more fragmented than most others. This sort of high-level consolidation helps boost the ability of leading players to engage with enterprise clients and indicates a growing level of maturity in the sector. However, RWS' management will have its work cut out for itself over the next few years if it is to realize the potential offered by this deal.
Are there any losers? Not yet, but much depends on how RWS will handle SDL's technology stack and, more importantly, whether it can continue the process of streamlining, rationalizing, and migrating to its Language Cloud that SDL had started. If this falters, companies dependent on Trados and SDL TMSes may need to find other options.
For now, it makes sense for most clients of either RWS or SDL to hold tight until RWS shows all its cards. Nothing will change in the near to mid-term. Both companies are public – and transparency, stability, and service are essential to their success. Do not expect any precipitous changes.
Donald A. DePalma
Focuses on market trends, business models, and business strategy
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