Part I: Cutting-Edge Translation Techniques To Optimize Deals and Mitigate Risk
The Value of Translation for M&A Due Diligence
Foreign language translation for M&A due diligence is a critical success factor for cross-border deals. That’s because the process of due diligence for mergers and acquisitions, more than anything else, is about mitigating risk while working to optimize the value of the deal. For cross-border M&A deals that involve multiple countries and languages, the complications and risks can increase exponentially.
As a business leader, how do you properly identify and scrutinize the other party’s foreign risks and opportunities if you aren’t shown the precise meaning of all relevant foreign language content? It’s very risky to be missing essential insights simply because they’re hidden in non-English text.
In-House Advisors Under Pressure
Omissions of foreign data can occur for a few reasons. First, the task of translating all foreign language content is often daunting within the hoped-for timeline for the deal. Bilingual Advisors at major consulting firms are usually the trusted professionals who advise M&A clients on foreign language content. They’re also under tremendous pressure to help clients get to a decision while market conditions are still favorable. So, judgments are sometimes made to ignore whole swaths of documents when there is not enough time to review them all.
Second, while Bilingual Advisors are multi-talented — offering expertise in financial, legal, industry, and product matters in addition to language skills — they may not be fluent enough in certain languages. For example, if the languages in question are not the first or second language of the Bilingual Advisor, or if advisors are not native to the countries where those languages are spoken, they may miss important cultural, legal, or other nuances in the text.
Third, Bilingual Advisors may not be current in the use of best-in-class language translation processes and economics. So, to achieve decision-level accuracy within the timeframe allowed, it almost certainly will require a combination of sophisticated machine translation, human post-editing, full human translation, and custom language glossaries. Knowing which approaches to use, and for which document sets, is essential. The greatest risk to decision makers, and to their trusted advisors, is that they don’t know what they don’t know.
A More Collaborative Model
Comprehensive, reliable, foreign language translation for M&A due diligence, when provided by a trusted language services provider, can be an essential tool in uncovering each deal’s meaningful exposures and opportunities. If applied strategically, this optimized translation process can also enhance the value of the deal.
Bilingual Advisors are better supported by an optimized translation process, too. How much more effective can advisors be if they are provided with decision-level accuracy on all their foreign language document sets? And how much faster and less stressful would it be for advisors not to manage the translations themselves?
What is the value to a buyer if a multi-billion-dollar deal is closed two to three months earlier because of a speedier review process? How much will that increase share-value?
What is the value of a quarter-point lower interest rate because foreign risks are better understood and minimized? How much will that save in financing costs?
What is the value of achieving a one- to two-percent greater market share due to faster integration of product and market strategies, after the deal, because foreign synergies and pitfalls are better understood? How much incremental revenue does that equate to?
The monetary benefits can be enormous for all these situations, and they far surpass the incremental costs of optimizing the translation process with outside expertise. With so much at stake, doing the translations right becomes of paramount importance.
Due Diligence Challenges
The heaviest burden of due diligence is typically on the acquiring partner. Their management must ensure that the company they’re buying can meet or surpass financial expectations while qualifying that the risks — known and unknown — are manageable.
This due diligence process is further complicated when the company being acquired is private. They may not have in place the rigorous financial record keeping, reporting, forecasting, and market analysis required of public entities. And the seller’s ownership or management team may not be prepared to have all aspects of their company put under the microscope for several months, if not quarters.
A merger of equals also presents unique challenges. Both companies are put through the financial wringer. They must execute a careful nuanced dance to ensure that their opportunities are boldly promoted while potential risks are downplayed. This is to ensure the highest price or share value for their constituents.
Optimizing Translation for M&A Due Diligence
If a deal crosses multiple international borders, it most likely includes foreign language documents. The first thing you should expect is that all relevant documents go through a language identification analysis. This tells you how many languages are identified, and which ones (including dialects) are among the entire document pool.
Armed with this information, both buy-side and sell-side parties have a better idea of which document pools may require additional scrutiny and language translation. It also suggests where unknown risks may reside. If unknown, or unmitigated, these risks can significantly undermine the synergies and value of the deal.
What is the best way for foreign language translation for M&A to occur? Which translation methods should be used in each area? And who should conduct the translation effort? Let’s explore.
Today, most translations in M&A deals are conducted or commissioned by in-house Bilingual Advisors within major consulting firms. It is part of their remit and commitment to their clients (either the buyer or seller in the transaction) to have reviewed all relevant documents within their language or legal proficiency and then to supply decision-quality information to their clients.
But this in-house approach is fraught with potential risks. In most cases, the Bilingual Advisors are experts in the law (for one country, but not usually for others). Although they may be bilingual or multilingual, they may not be native speakers or have native cultural experience in the languages they oversee.
In-house legal advisors also may not be expert in language science, translation best practices, or the capabilities of technology now available for certain aspects of the translation job. It’s not their fault. They’re studying the law and how to optimize financial transactions, not the translation business.
This could leave senior management in M&A buyer and seller roles at a disadvantage. What are they missing by not having all foreign language insights available to them?
First, it puts them, their companies, their investors, and the entire deal at risk. Second, it does not give them their best opportunity to optimize the deal. Significant upside potential can be missed if language translations are not done to a decision-level standard, or not done at all.
A Better Method
There are several options to improve quality when performing translation for M&A due diligence. Like tools in a toolbox, they can be uniquely applied to each set of documents to support deal decision-making, depending on the document type, subject matter, and anticipated use of the materials.
Ai Translate by LSI™ is a unique, secure, SaaS translation solution that works in that way. Users can select from five embedded translation levels representing different quality (and cost) options. A sixth level is available as a custom service: the creation of a customized, topic-focused, custom language glossary or custom MT engine.
Ai Translate by LSI™ provides three ways to access its services. These are the Ai Translate online portal, Ai Translate APIs, and the Ai Translate Plugin for Relativity. The latter allows Relativity users to access translation services seamlessly within the Relativity interface without the need to export or import data. Ai Translate supports all active versions of Relativity.
Here are the capabilities you would want in your language translation solution, and from your language translation partner. All of these are available with Ai Translate by LSI™.
- Automatic language detection — this is an advanced feature embedded within each of Ai Translate’s five translation options. Clients can select the source language for a set of documents (if they know it) or let Ai Translate automatically detect it. Content is ideally fed into the language translation software via API. It generates a list of identified languages along with the file count, word count, and other relevant metadata. This step will produce fast language detection at minimal expense.
- Machine Translation (MT) — raw machine translation (either Statistical or Neural) can be used to quickly translate documents within a specific language pair (e.g.: Japanese to English, German to English, English to Spanish). The purpose of machine translation is to quickly understand the general gist of what’s in each set of documents. From that, strategic decisions can be made on which document sets will require additional scrutiny.
- Machine Translation + Light Post-Edit — for needs beyond MT, skilled human translators can be used to review and improve the comprehension of machine translation output and to clarify general meaning. This step, and all human translation, is orderable directly within Ai Translate. It draws on skilled, certified translators from the Linguistic Systems (LSI) network of 7,500 translators. More than 120 languages are available via this network.
- Machine Translation + Full Post-Edit — in this option, performed by the same network of LSI certified translators, machine translation output is rigorously edited to more noticeably improve comprehension and readability. For certain content types, this thorough but affordable method is all that is needed for decision-making.
- Full Human Translation — In this method, still orderable via Ai Translate, there is no machine translation editing. Translators work from the original foreign language source files (although they may have been flagged and categorized via MT). This produces an output that is very close to the original text. It is also more expensive, so technology should be used first to identify and help sort specific document sets for this method.
- Human Translation + Editing — For uses where the translation must appear in published reports or as evidence in court, it makes sense to choose this option. A second skilled translator reviews and edits the human translation. This is the highest quality possible in translation. This step, too, is orderable within Ai Translate.
- Custom Language Glossaries — One way to further improve the translation result is to augment MT engines with bilingual glossaries containing special terminology, rare words, industry acronyms, product names, local slang, and other words that aren’t in the MT engine database. Sometimes you don’t want these things translated. By working in advance with a skilled language services provider, a custom language glossary can be built to instruct the language translation software on how to process all of these outlier terms. Once created, it becomes a valuable asset that speeds each subsequent translation pass while reducing cost.
- ISO Certifications — Linguistic Systems (LSI) has earned and maintains four ISO certifications to ensure the highest quality processes and security. These are extremely important for doing M&A work, and they are a starting point for many clients. They are:
- ISO 9001 — Quality Management Systems;
- ISO 17100 — Translation Quality Management Systems;
- ISO 18587 — Post-Editing of Machine Translation Output;
- ISO 27001 — Information Security Systems.
- Relevant Experience — Linguistic Systems has been serving clients with exceptional translation services for more than 50 years. Our client list includes top Government law enforcement agencies, most of the AmLaw 100 and Fortune 100, and thousands of other legal firms and businesses.
Linguistic Systems and the Ai Translate by LSI™ consulting team have assisted with some of the largest M&A deals ever. The company is headquartered in Boston, MA, and is ready to assist your foreign language translation for M&A.
Part II: The Intersection of Translation and M&A Due Diligence
In what areas of M&A due diligence is foreign language translation most needed?
This segment of our “Foreign Language Translation for M&A Due Diligence: The 2020 Ultimate Guide” examines 20 significant areas of due diligence. They are inspired from multiple sources but perhaps best organized in the article, “A Comprehensive Guide to Due Diligence Issues in Mergers And Acquisitions” published by Forbes in December 2014 and updated in March 2019.
With acknowledgement and appreciation, we have overlayed where language translation fits within the due diligence process best outlined by Forbes, and why it is so important. We identify the types of documents in each area that may contain foreign language content vital to a deal decision. These are the areas and document types most critical to foreign language translation for M&A due diligence.
This area of due diligence concerns the seller’s or each merger partners’ historical financial statements — typically three years. In addition, the seller’s future financial forecasts are under scrutiny as well. Many types of financial records and metrics are in play here. But the ones that deserve translation attention if coming from a non-English speaking country include:
- Financial officers’ or auditors’ notes;
- Descriptions of any unusual revenue recognition issues related to the company, industry, or country;
- Audit reports;
- Auditor and Counsel letters;
- Quality of Earnings reports;
- Foreign restrictions on cash or repatriation.
2) Technology & Intellectual Property
Evaluating the seller’s products, patents, technology, and other intellectual property may have the most impact on the deal’s upside opportunities. Among the many areas of examination here, those deserving translation attention if coming from a non-English speaking country include:
- Foreign patents and patents pending;
- Confidentiality agreements;
- Invention Assignment Agreements, including any material exceptions to employees or consultants;
- Trademark approvals;
- Trade secrets (and any related protections);
- Infringement on intellectual property rights of seller or any other party;
- Intellectual property litigation in process;
- Offers to License;
- Demand letters;
- Technology in-licenses or restrictions;
- Royalty agreements;
- Technology licenses to third parties;
- IP indemnity agreements;
- Any liens or encumbrances on intellectual property;
- Government or university subsidy agreements.
3) Customers & Sales
This area of inquiry relates to the seller’s customer base and the sales communications to/from them. It is important to surface any critical product flaws, competitive threats, or hidden opportunities among the dialog — typically buried in CRM system call notes. Among the non-English-speaking countries, the following document types may call for translation:
- Sales call reports and call notes, in particular to discover customer sentiment related to the seller’s products, market performance, competitive threats, and their opinions about the potential new buyer;
- Customer warranty issues or obligations;
- Sales return/refund policies and unusual exchange levels;
- Sales compensation and financial incentives.
4) Buyer Strategic Fit
Buyers not only want to ensure that the business they’re buying can prosper on its own, but that synergies between the seller and the buyer’s other businesses could result in “1 + 1 =3.” As part of this process, a number of questions are posed. The following are areas where translation of any foreign language content can significantly assist the process.
- Documents related to potential integration of products;
- Documents in support of human capital integration including financials, employee and stakeholder interviews, operational performance, and corporate governance;
- Third party consents;
- Market research studies.
Contracts review is an extremely important aspect of foreign language translation for M&A due diligence. It documents any of the seller’s obligations to third parties, before and after the M&A agreement is signed. When some of those documents are in foreign languages, as is expected with cross-border M&A deals, translation is critical to understanding. Here are examples of important contracts to be translated:
- Customer, reseller, and supplier contracts;
- Partnership or joint venture agreements;
- Settlement agreements;
- Past acquisition agreements;
- Employment agreements;
- Indemnification agreements;
- Exclusivity agreements;
- Restrictive agreements;
- Real estate lease/purchase agreements;
- License agreements;
- Franchise agreements;
- Distribution agreements;
- Union contracts and collective bargaining agreements;
- Government contracts.
6) Employee/Management Issues
When a corporation acquires another company, they’re not only purchasing their products and customers, they’re acquiring their employees and management team. In some cases, particularly in technology dependent industries, this can be as valuable as the other assets, or more so. Foreign language documents related to any of the following should be translated:
- Sexual harassment or discrimination policies, allegations, litigations, and employee cultural issues;
- Labor agreements or pending work stoppages;
- Compensation and loan agreements, particularly to management;
- Employee manuals and policies;
- Involvement of key employees in criminal or civil litigation;
- Severance agreements;
- Change of Control agreements;
- Non-compete and Non-solicit agreements;
- Employee retention and incentives agreements;
- Deferred compensation agreements.
7) Other Litigation
In addition to any aforementioned (and subsequent) litigation, a review would be performed of any pending, threatened, or settled litigation involving the seller. All of these, if in foreign language, should be settled, including:
- Filed, pending, or settled litigation;
- Insurance claims;
- Pending governmental proceedings;
- Attorneys letters to auditors.
8) Cybersecurity and Data Privacy
With the enormous damage that a data breach can have on a company’s financials and reputation, a thorough examination of cybersecurity policies, protections, containment efforts, and vulnerabilities is essential. So, despite all the hardened cybersecurity best practices the buyer may have developed, they are potentially buying all the vulnerabilities of a less evolved seller. Forbes has devoted considerable new attention to this area in its 2019 update. Here is just a sampling of the foreign language documents that should be translated:
- Customer Privacy Policies and any documentation related to the sharing of customers’ personal information;
- Seller responses to any prior data breaches;
- Information Security Policies;
- Acceptable Use Policies;
- Data Classification Policies;
- Customer Contracts;
- Contracts with vendors, suppliers, and providers;
- Privacy and information security training materials;
- Employee background and onboarding policies;
- GDPR compliance materials;
- Software development processes and documentation;
- Cybersecurity insurance policies;
- Risk assessments;
- Incidence Response Plans;
- Cybersecurity forensic audits;
- Third-party vulnerability scans and penetration tests.
9) Tax Matters
Tax matters typically produce financial documents which are numbers- versus text-based. But to the extent that there are important tax issues in foreign markets discussed in foreign languages, here are a few examples that may require translation:
- Correspondence with tax authorities;
- Tax indemnity agreements.
10) Antitrust and Regulatory Issues
Antitrust and regulatory scrutiny can significantly delay the consummation of a potential merger or acquisition. Department of Justice Second Requests can last months and incur millions of dollars in incremental legal fees. When these Second Requests occur, speed is of the utmost priority. In addition, the highest quality of translation is required in order to receive DOJ acceptance. Here are examples of documents typically translated in this area:
- Prior antitrust or regulatory inquiries or investigations;
- Any preparatory document submissions required of a Hart-Scott-Rodino filing;
- Any documents in support of a Foreign Corrupt Practices Act filing;
- Any relevant documents from countries subject to U.S. sanctions on embargoed countries.
Due diligence should include an examination of the seller’s insurance coverages and claims history under those policies. If in foreign languages, translation might be required for any of the following documents:
- General Liability insurance policies;
- Cybersecurity insurance policies;
- Directors & Officers Liability insurance policies;
- Intellectual Property insurance policies;
- Health Insurance policies;
- Errors & Omissions insurance policies;
- Employee Liability insurance policies.
12) General Corporate Matters
This area looks at the general corporate records of the seller. If in foreign language, these documents might include:
- Charter documents;
- Stock option agreements;
- Stock appreciation rights plans and grants;
- Restricted stock agreements;
- Recapitalization or restructuring documents;
- Agreements related to sales or purchases of other businesses;
- Rights of first refusal related to the sale of the seller’s business;
- Board of Directors meeting minutes.
13) Environmental Issues
Environmental reviews and regulations can significantly delay a proposed M&A deal. Avoiding these delays by translating any relevant foreign language communications to/from governmental agencies is essential. Related documents might include:
- Environmental audits and reports;
- Environmental permits and licenses;
- Correspondence with government agencies;
- Any environmental litigation, claims, or investigations;
- Any contingent or continuing environmental liabilities;
- Any contractual obligations related to environmental issues.
14) Related Party Transactions
This area of due diligence includes any agreements between the seller and current or former employees, officers, or shareholders. Relevant foreign language documents might include:
- Agreements between current or former employees, officers, or shareholders and any businesses that compete with the seller;
- Compensation agreements;
- Real estate or intellectual property agreements.
15) Other Governmental Regulations, Filings, and Compliance
In addition to the governmental regulations, documents, and communications already cited, the following foreign language documents may require translation:
- Pending or threatened investigations;
- Reports and communications to/from government agencies;
- Documents describing compliance or deficiencies with government regulations;
- Governmental permits and licenses.
This area relates to real property (real estate) owned or leased by the seller. Potential documents to be translated would include:
- Deeds, leases, trusts, mortgages, title reports, conditional sale agreements, and more;
- Zoning requirements.
17) Production Matters
If the seller is involved in manufacturing or the production of goods, it is often required to examine production methods and agreements. If in foreign languages, the following may require translations:
- Supplier and subcontractor agreements;
- Inventory reports;
- Materials and supplies lists;
- R&D, testing, development, and manufacturing agreements.
Marketing strategies and agreements for foreign markets may include any of the following that may require translation:
- Sales rep, distributor, agency, and franchise agreements;
- Product catalogs, documentation, and price lists;
- Advertising agreements;
- Market research reports;
- Press announcements.
19) Competitive Landscape
Market analysis to show the seller’s competitive market position is an essential part of due diligence. For those non-English-speaking markets where the seller competes, the following documents may require translation:
- Strengths, Weaknesses, Opportunities, Threats (SWOT Analysis);
- Propensity for litigation by foreign competitors;
- Advantages/disadvantages of the seller’s technology, products, and market approach within foreign markets;
- Market penetration reports.
20) Data Room Assembly
Before a deal can be properly analyzed, there is the setup process to populate the Virtual Deal Room with relevant documents that are available for examination by all authorized parties. This environment serves as the workspace for deal evaluators.
Because of the enormous volume of documents that flow into a Virtual Deal Room, more and more buyers are relying on artificial intelligence software to help sort, categorize, and prioritize documents and enable a speedier due diligence review process.
With respect to the translation of foreign language documents that may emerge within the Virtual Deal Room, Ai Translate by LSI™ offers an Artificial Intelligence-infused solution. It allows for 5 translation quality (and cost) levels and 84 language pair selections — all accessible from a single interface. In addition, users can order full human translation and support for as many as 120 languages from the same interface. Human translators are secured from a curated network of 7,500 certified translators from Linguistic Systems Inc. (LSI).
EDITOR’S NOTE: Ai Translate by LSI™ is a translation solution from Linguistic Systems. The solution uses a combination of advanced proprietary machine translation technology, ISO-certified processes and security, and Linguistic Systems' network of 7,500 skilled, certified translators to deliver high-quality translations in up to 120+ languages. Linguistic Systems offers 50+ years and billions of words of experience serving 25,000 clients, including many Fortune 100 and AmLaw100 firms.