Client Side News - November 2007
Merger and acquisition activity has dominated corporate growth in the GILT industry over the past year. One of the companies heavily involved in the M&A process has been Translations.com. Translations.com is actually the combination of nine different brands that all operate harmoniously. The company is financed from its own cash flows, meaning it has managed to sustain its growth without the aid of outside investors. The two founders, Liz Elting and Phil Shawe, manage day-to-day operations and own 100% of the stock in the firm. Working with Liz and Phil are a group of highly capable senior executives, many of whom are battle-tested entrepreneurs who have built companies, understand the localization business from the ground up, and are highly motivated to lead Translations.com to the next level. Unlike in traditional acquisitions, the companies involved have come together in a distinctive way that CSN wanted to learn more about.
Because most of us view M&A from the outside, we decided to delve into that world by talking to several insiders at Translations.com. Through M&A transactions, Translations.com has built a team of entrepreneur executives geared for profitability and growth. The company has grown top-line revenue from approximately $50 million in 2004 to $150 million (est.) in 2007.
We talked to Hans Fenstermacher (ArchiText), Marc Miller (Crimson), Martijn Heertje (iSP), and Bernie Cafulli (Adams) about why they made their decision to join, stay, and drive success within a larger organization. In our lively Q&A session with four of the entrepreneurs-turned-executives, we asked them about the experience.
CSN - The decision to make the leap from running your own business to joining up with a larger organization must not have been easy. For each of you, what was the main driver for the decision?
Fenstermacher (ArchiText) - When a firm reaches a certain size, the responsibilities of the CEO, which are outside the core services of the business, tend to expand. For example, ArchiText had grown to the point where, in order to bring the firm to the next level, time and energy needed to be focused on human resources, accounting, IT infrastructure, etc. While these are all noble pursuits, a love of language, content optimization, and localization services are what excite me. By joining up with a larger firm, I envisioned being able to truly focus my energies on our core competencies, which has occurred.
Miller (Crimson) - In Crimson's case there was no real pressure for an exit strategy, our decision really came down to thinking we'd found the right merger partner: First, given the high-risk nature of medical device work, we had found a partner with whom we shared a similar vision with respect to our risk management approach and quality management systems. Second, we had found a partner that would allow us enough autonomy post-close to continue to service our clients in the manner they've grown to expect.
Heertje (iSP) – Of course I think we all agree that finding the right partner is key. However, a big factor that drove our decision at iSP was diversification. Not diversification from a personal perspective (although diversifying my assets after 17 years was nice), but more from a corporate perspective. iSP performs work for the finest blue chip technology companies you can imagine. However, we found ourselves catering more and more to these clients only. There is inherent risk in deriving the vast majority of your revenue from a relatively small number of clients, so from that perspective we were excited to join a larger firm. Translations.com has an extensive sales force which we envisioned being able to leverage. As predicted, we are now servicing more customers, and this will help us keep our revenues stable. Even if one of our marquee customers delays a product release, we've still got other projects that allow us to maintain a stable income stream.
Cafulli (Adams) – I think I'm unique in that my true driver was that I had a partner, who owned a majority stake in the firm, who was ready for retirement (our founder, Allan Adams). While I'm sure I'll retire someday, it won't be any time soon. I still feel like there is tremendous opportunity in our industry.
CSN – Marc, since you've been with the firm the longest of anyone in this group, and closed your deal almost exactly 2 years ago today, we'll pick on you. What is the biggest frustration of working at a larger organization?
Miller (Crimson) – TDC mergers are structured like a partnership. And, with any partnership in life, there is going to be a little frustration. Naturally, there were small operational frustrations, like getting used to a new accounting system. I'd been the primary decision maker for so long, that working in a team environment took a little getting used to. However, I'd say that the positives of being constantly exposed to an extremely experienced and capable team, far outweigh any frustrations.
CSN – Hans, you are considered by many to be one of the most connected personalities in the localization industry. You co-founded GALA (the Globalization and Localization Association) and have had exposure to a very diverse group of business owners, operational models, and merger opportunities. Why Translations.com and why this model?
Fenstermacher (ArchiText) – Interestingly enough, a large reason for me personally was the lack of outside financial investors in the company. I reasoned that a management team who can achieve the scale and the growth that TDC has, without selling itself to investors, might be a good team to be on, for me anyway. We examined other options, including joining firms that were controlled by outside financial investors (private equity firms or venture capitalists), and we were not excited. When a firm is controlled by outside financial investors, those investors want to create an exit strategy for themselves on a timetable. Perhaps they want to go public, but more often than not, they want to build up enough revenue to be an interesting acquisition for a larger, typically public, company. Merging ArchiText with a company whose goal it would be to amass enough scale to sell itself seemed too risky for me and my team personally. We liked what Phil and Liz had to say about being in the business for the long term, and building an industry leader focused on clients and employees, without the distractions of outside investors.
CSN – Martijn, you mentioned before that diversification was a key consideration for you in your merger decision and that you were focused on serving several blue chip customers which was where the majority of your revenues were derived. How have those important customers taken the news?
Heertje (iSP) – Of course they were immediately concerned about any change that might occur in their core team of project managers, with whom they have relationships. Fortunately, we were open with our customers and we discussed Translations.com's goal of 100% retention and philosophy of inclusion for merger-related employees. As my colleagues here can attest, the Translations.com track-record in the area of post-close employee retention
is unparalleled and this helped both me, and my customers, get comfortable with the idea of a merger. Recently some customers have even expressed interest in actually increasing their business with us based on our larger size,
greater financial stability, and global footprint.
CSN – Bernie, I understand you and your office were given the option of keeping the "Adams Globalization" brand after closing, which you did. What drove your decision? And what would you tell someone who felt you were in need of brand consolidation?
Cafulli (Adams) – Our decision to keep the Adams brand name was purely motivated by what we thought our customers would want to know us as going forward. Adams has been in business for 25 years. We felt that there is a
certain brand equity and reputation we've worked hard to build up. We're glad we're not being forced to discard that. Of course, we're now the Austin office of Translations.com, but you can still call us Adams. Being the new kid on the block (our deal just closed at the beginning of October), it's refreshing to see that these decisions are business-driven, rather than ego-driven. To answer your question regarding what I would tell someone who felt all our brands needed to be consolidated: I would tell them that based on our growth rate and our retention rate, our customers and our employees seem to be satisfied with our current strategy.
CSN – Hans, speaking about the Adams team; I noticed in a recent press release that you will be heading this team. Would you tell us about this new responsibility and the company's growth plans in general? Will we find you managing other divisions as well?
Fenstermacher (ArchiText) – Currently, I'm focused on ArchiText's growth and helping Bernie bring the Adams team into the family. While I can't comment about future divisions I may be entrusted to manage, I can say that Translations.com is run like a true meritocracy. If you are successful in your current role and you are up for a challenge, you'll get the opportunity. For me, if my career path includes working with other talented entrepreneurs like Bernie to help their divisions achieve the post-merger success that ArchiText has enjoyed, I'd be excited about that direction.
CSN – Marc, you mentioned before that Translations.com mergers are set up like partnerships. Did you mean financially? What can you tell us about deal structure?
Miller (Crimson) – I meant "partnership" in every sense of the word, including financially. Without going into detail, TDC's deal model is not 100% cash at close. Part of the deal compensation is based on the post-close performance of the division. Since the parent company has the same goals as the entrepreneur after the merger is complete, everyone's interests are aligned, and everything is approached like a partnership. While I admit I was slightly skeptical about this methodology, with hindsight, I wouldn't have it any other way. The Crimson division has grown and been successful, and my team and I have had the opportunity to share in that success. Financially, the payout is on pace to exceed the forecast at closing.
CSN – Earlier Martijn mentioned a client's interest in increasing their business with iSP based on the larger size, greater financial stability, and global footprint of the merged entity. Does anyone else have a specific example of a client realizing a direct tangible benefit as a result of merging with Translations.com?
Fenstermacher (ArchiText) – We have a client who had been performing diligence on various GMS solutions, and we were considering bringing in a technology partner. But we never really understood the end game for these technology-only providers, who currently are dependent upon VC money for survival and who furthermore, may wind up pursuing an exit strategy that involves selling out to a service provider that competes against us, all of which seems risky. The merger was welcome news for our client in this regard, as Translations.com's GlobalLink technology has provided an internal solution.
CSN – Last question, to everyone: What makes this model work so well for driving growth and profitability?
Miller (Crimson) – Trust and mutual respect. You are never going to be able to pen out every contingency in a deal. However, I operate with the knowledge that Phil, Liz, and the rest of the management team are reasonable, professional business people. If there's ever an issue, we confront it directly and work through it with a spirit of cooperation.
Fenstermacher (ArchiText) – Translations.com promotes stability, financial responsibility, and long-term focus.
Heertje (iSP) – Striking a balance. I think the Translations.com model gives entrepreneurs the right mix of autonomy and control, as well as motivation and opportunity to collaborate with others and be a team player.
Cafulli (Adams) – Work hard and play hard. Again, I'm new here. But everyone seems to be making it happen in the business, and having fun along the way.
While we favored the idea of confining the Q&A to the individuals who have joined Translations.com, without the interjections of their new bosses, we did also speak to Phil Shawe and Liz Elting to get their perspective on continued growth, on when they see the M&A of the parent company slowing down, and on their long term growth goals.
According to Shawe: "With the knowledge that our deal model appears to be working well for merger partners and allowing them to prosper as internal divisions, we'd like to continue to supplement our organic growth by joining forces with more great companies. We love to work with fellow entrepreneurs who understand our business from all angles, and with whom we have a cultural fit and a shared vision."
Elting added: "Regarding our long-term growth plan, it's hard to make concrete predictions about future revenues. However, it's safe to say that we'll continue to pursue aggressive but manageable growth, both organically and through strategic M&A transactions."