We seem to be living through a period of great consolidation within the translation industry, as each new month brings with it a new major merger. At the same time, we are at the tail end of a considerable acquisition boom in the biotechnology industry. But what are the factors driving these extensive mergers? Most importantly, what does this mean for the prospective industries?
Given the right conditions, such as significant economy of scale advantages or natural monopolies, capitalism in certain industries tends to give companies competitive advantages until the point where a few major titans battle for dominance. As the battle for the number-one life science language service provider (LSP) is being played out, a parallel battle in the biotechnology sector for the largest and most innovative drug producer has similarly unraveled. The factors behind these congruent phenomena are fundamentally similar, yet appear quite different on the surface.
Senior management at growing firms have important decisions to make about the most efficient way to redeploy retained profits or investor capital to maximize future shareholder returns, regardless of the industry. To grow organically involves competing directly for existing clients. Resources and energy are invested in persuading clients to move, or improving current service levels to entice others to move. Or it means investing significant funds in high risk research and development into either new drug pipelines or disruptive technology. Both of which do not come with any certainty, and require extensive strategy and management.
Redeploying capital internally can have several advantages over acquisitions:
¯ Lower cost
¯ Lower single risk
¯ More control over strategy
¯ No need to source external opportunities
¯ Costs are set internally
The risks, however, include the fact that there are no guaranteed results of investment. It can take a long time for organic growth or strategy change to filter down to financial results, which requires longer-term thinking and management.
In growing industries, with developed smaller firms, an attractive way to deploy capital that can result in many benefits at a fixed price is to acquire other firms, either competitors or owners of intellectual property that will result in competitive advantages. The benefits are:
¯ Instant removal of a competitor from the market
¯ Increased economies of scale
¯ Known and instant revenue increase
¯ Known client base
¯ Staffing improvements
¯ Intellectual property acquisition
¯ Technology acquisition
¯ Fast results, following exchange
The risks are numerous, of course. There may be bumps associated with integration into an existing company, which may result in less flexibility in the long run, thanks to coordinating ever-larger numbers of staff. Multiple systems and branding will need to be merged into a single company. Additionally, it’s a high-cost transaction. The acquisition price may be especially high in a competitive merger environment.
In the current business climate, however, a guarantee seems to be an easier sell to shareholders than a lower cost risk. Biotechnology companies would rather pay more for a developed promising pipeline of drug developments rather than investing in their own high-risk research and development. Especially as drug development is inherently high risk — only one in up to 10,000 drug ideas pass all the hurdles and reach the actual US market. The risk gets passed down to those firms that believe strongly enough in their ideas to place their own capital at risk and reach a stage where a successful outcome looks promising.
Large biotechnology firms tend to make acquisitions in an attempt to fill upcoming patent expirations, and to improve their upcoming product pipeline. For smaller biotech firms, taking the risk of proving a drug has potential and selling to a larger firm is a standard exit strategy. Smaller firms look to be acquired by larger clients with management and marketing expertise to leverage intellectual property, while larger firms seek solid intellectual property and promising drug developments. The two-tier ecosystem relies, however, on new, smaller companies entering the market and taking a risk. In a similar vein, small translation agencies or translation technology businesses seek to become acquired by larger firms by way of an exit strategy. The recent spate of large LSPs acquiring tech firms with intellectual property in machine translation or neural learning is the equivalent of a pharmaceutical company filling its upcoming product expirations; they are all planning for the future as cost effectively as possible.
As the number of promising small biotech firms sell, it has slowly reached a point where firms may have to start looking at directly investing in their own research and development to improve the drug discovery rate. In a similar vein, as the number of promising, available life-science focused LSPs diminishes from being acquired, we may reach a stage over the coming decade where it finally becomes advantageous to reinvest capital in competition over acquisition due to the reduction in the number of potential targets.
The translation industry has been slowly moving toward an ecosystem of several thousand suppliers with greater than $1 million in turnover, and then a select few titans with over $100 million in turnover. We are currently in a transition phase from a fairly segmented market toward one that is much less so. Already, the year 2017 has seen an advancement of this consolidation.
What are the results on service? The impact in the end might stifle competition as the large company size required in order to get larger clients acts as a huge barrier to entry. One view is that given the decentralized nature of many buyers, there will always be some room for an opportunistic motivated smaller firm to work to gain some market share.
And as the two markets consolidate toward a peak, with the number of large LSPs reduced at the same time that the number of large clients is increased, is the life science translation world heading toward a select few giant clients dealing with a select few giant companies?
The answer remains to be seen, but the current path would indicate that this scenario is a possibility. Before we accept the industry’s fate, it is worth remembering that the rate of change in translation, technology and in the biotechnology world can be breathtaking.
Larger LSPs understand that small disruptive technologies can threaten their positions if they do not have their own developments in the pipeline, and this is currently obvious in how large LSPs are increasing their investments and interests in machine translation, neural machine translation and artificial intelligence. With great size can come complacency, and without the right rhythm of change, large firms could get left behind. Large is vulnerable to disruption. Large firms are aware of this and often have the balance sheet to back this change, as long as management keeps looking to the future.
The forces that drive a market to promote mergers can be similar across industries with similar benefits and consequences on stakeholders. Often this may be at the expense of the consumer or public, either through less actual investment in research and development, or in reduced competition in a market.
With no individual or institution in control of this process, it can feel unfair as the number of options decreases and the likelihood of free markets and management teams making the most efficient use of their capital to provide returns or not is open to debate.
Is the most efficient way to promote quality translation services and drug development through acquisition? With no central control, the debate is almost irrelevant as management teams are at the mercy of market forces as to how to best deploy capital to generate results.