LIOX - Lionbridge Technologies

[glorysk87]

There are multiple writeups on VIC on this company, but the most recent one by Cuyler is where this idea came from.  I did my own research in order to get my head wrapped around the story, and I think that there is a real opportunity here.

 

Lionbridge is a company that provides translation outsourcing services to other companies. They have some really huge companies as clients, and they appear to be one of very few companies that can handle translation outsourcing to the degree that is required by their clients.  Their financials are mediocre, but I'm not going to go into too much detail because the thesis is driven by an external catalyst, not by virtue of the company's fundamentals.

 

The real thesis in my opinion is that the company is being set up to be acquired (or possibly taken private).  Here's the rundown.

 

1) In October 2014, a fund called Glen Capital took a 3.3mm share position. Glen capital was founded by Greg Summe, who was previously the Vice Chairman of Carlyle's Global Buyouts Group.  Prior to that he was a Partner at McKinsey, a Sr. Advisor at Goldman Sachs Capital Partners, and CEO of PerkinElmer where he generated massive shareholder returns.  The stated investment strategy of Glen Capital is to find small caps and help them implement operational, cap structure, or strategic change.

 

2) October 2015 - Leon Cooperman purchases 0.7mm shares.  Cooperman agrees not to dispose of any shares for at least one year (unless Glen Capital does first).  Cooperman grants Glen Capital proxy power to vote his shares.  And finally, Cooperman agrees to pay Glen Capital a 10% performance fee on net realized profits (provided he achieves an annual 8% IRR).  This IRR hurdle is important, and part of the reason why I think that the end goal is an acquisition instead of operational improvement. Glen Capital doesn't get paid unless value realization occurs with some haste, since the longer it takes the lower the IRR will be.  An acquisition is the quickest way to provide Cooperman with significant returns.

 

3) November 2015 - The board appoints (at Glen Capitals recommendation) James Quella.  Quella was formerly a Sr. Managing Director of Blackstone's Private Equity group.  If you do research on Quella's background, he's well known for his ability to seriously cut costs. He's well known as a hardball negotiator and has a lot of experience in consolidating functions across companies to reduce costs.  Quella was also appointed to the compensation committee, where I'd expect he'll attempt to seriously reduce the stock based comp and SG&A that's historically been a problem for the company.

 

4) Significant insider purchasing - starting in April 2015, there has been significant insider purchasing.  However, it isn't simply open market purchases.  Much of the time insiders have been exercising options early and holding the shares.  I don't see this very often, and I agree with Cuyler's conclusion in the VIC thread - this appears to be done in an attempt to start the long-term capital gains clock as early as possible. This is another strong indicator that a catalyst (acquisition) will occur sooner rather than later.

 

5) On today's earnings call, the company made a surprise announcement that they have implemented a company-wide structural reorganization.  They previously operated with a functional sales structure, with everything standardized and centralized.  The new structure was to create 9 independent business units, and put GM's at the head of each one. The GM's are personally responsible for their own business unit's P&L, all the way from top line to bottom.  This, to me, smells of activism.  It came pretty much out of no where, and happened very very quickly.  My assumption is that Quella/Summe have been pushing management to reorganize in this way, as it incentivizes the GM's to squeeze costs out of their individual business units.  It also compartmentalizes various parts of the business so that in an acquisition it would be relatively easy for the new parent company to either integrate or dispose of individual parts of the business without too much of a mess.

 

 

In terms of valuation, the company trades at a serious discount both to the market and to peers, by virtue of the fact that management has created essentially zero value over an extended period of time.  This provides some defense on the downside.

 

In terms of risks, I don't think there are too many.  First and foremost is the company's customer concentration.  They have almost half their revenue from their top 10 clients.  So if one major client were to leave, it would have seriously detrimental effects. But the company has been diversifying this slowly over time, and have made material progress over the past few years (58% to 47% in 2 years).  The other risk is that this business reorganization goes horribly and really fucks with the company's ability to do business as they're used to.

 

Otherwise this seems pretty straightforward.  For disclosure purposes we own a large slug of this.  But I'd welcome any other feedback, positive or negative. If I'm missing something definitely let me know.

[benhacker]

Lionbridge is a company that provides translation outsourcing services to other companies.

 

Don't you think this is an area (have done zero work on this co, so please educate me if my assumption is not right) where technology is going to remove the entire business?

 

Google translate now does OFFLINE text to text translation in like >100 languages, and ONLINE it does real time speech to speech translation.  It's not perfect, but good.

 

I've seen how much school districts pay for translation services and it's worse on average (when measured for time and quality) than just using google translate, and I have been in foreign countries where cab drivers now just use a tablet with 3G access to talk to you.  It works.

 

I really appreciated all the detail you gave on the catalysts, but this one just struct me as a dead business within 10 years... so not sure who buys it etc... again, did 0 work here.

[glorysk87]

Possibly, but it's unlikely.  In fact, Google is Lionbridge's 2nd largest customer. I guess I should have explained their business in a little more detail. Lionbridge doesn't just do simple text translation.  They handle translation for big complex projects.  For example, if a company (like Microsoft) wants to release, say, Microsoft Access in Romania, they outsource that work to Lionbridge.  So Lionbridge then handles the translation of all text, menu options, dialogue boxes, user manuals, etc.  It's more complex than just simple translation, because contextually everything needs to be correct in order for the product to be up to par.  Microsoft doesn't want to release a product in a foreign language that's full of half-translations and weird contextual mistakes.

 

Another example - Lionbridge helps translate complex engineering schematics.  If there were errors, even small ones, it could create a huge problem for whatever was being built (infrastructure, machinery, whatever, etc).

 

Similarly, Lionbridge will work *with* companies on entire marketing campaigns.  Advertisements, brand messaging, web copy, etc.  The company needs to create a marketing campaign that is relevant to the local market they're trying to sell to.  Since cultures are vastly different around the world, generally speaking you don't want to just copy/translate/paste your marketing campaign to a different country.  So Lionbridge comes in, they have long term contracts with local language speakers, and they use these to help a company craft a locally/culturally relevant marketing campaign.

 

Just a few examples.  While I don't think this business is booming, per se, I also see very little risk of technological obsoletion. Hope that helps.

[ratiman]

I looked at this and seem to remember the CEO saying that millennial corporate buyers were increasingly using credit cards and not requiring a long, personal sales cycle. If it becomes more like buying pencils that could reduce the substantial sales expense. Also the SaaS service (whatever that means for translation) could be interesting. Otherwise it looks like a business with low margins and poor management, imo.

[benhacker]

Glory, thank you for some added color. Will look in a bit more to this.

 

Thanks.

[glorysk87]

LIOX entered a pact to be acquired by HIG Capital for $5.75 a share. Lower takeout price that I had anticipated but still a very nice IRR on this investment. There's a 45-day "go-shop" period, thus I plan on holding my shares to see if a higher bid materializes.