Two translation firms are getting together. Can they speak the same language?
It’s a fact of stock market life that the partners to a merger often fail to bond. We look at the prospects for RWS and SDL
IT WAS swings and roundabouts for Questor when a rather unusual takeover deal was announced last week: shares in SDL, tipped here in July 2018, leapt by 30.8pc when RWS announced a bid for the firm, but shares in the latter, a Questor favourite since December 2016, slumped by 13.3pc on the news. Both firms are involved in translation but the striking aspect of the deal was that an Aim-quoted firm was bidding for one listed on the main market, a very rare occurrence. The all-share offer was worth £854m at the time it was announced so it is substantial indeed for RWS, which is worth £1.8bn.
Now Questor, and many fund managers too, get nervous about big acquisitions as they can prove harder to execute than to conceive and often knock previously excellent businesses off course. What are we to make of this one? We sought the views of Keith Ashworth-Lord, who has long held RWS in his Sanford DeLand UK Buffettology fund. “I put about another £1m into RWS shares when the price fell following the announcement,” he said.
“Whenever I see a mega-merger I worry but RWS has done three or four now and made them work.”
He said he was reassured that all the top jobs in the combined business would be done by RWS executives but added that “the really interesting thing is the rationale”.
“RWS has not so far been much involved in machine translation because it has specialised in using human translators,” he said.
“So being able to offer SDL’s software-based service represents a broadening of its offering. The two firms’ revenues are pretty comparable but RWS is twice as profitable.
Getting rid of head office costs and so on should save £15m or so but I think they have their eye on other things that will bring SDL’s profit margins up.”
He said that RWS offered the more “premium” service of the two thanks to its highly qualified translators and that having access to SDL’s clients would give it the opportunity to sell them that more expensive service.
“So far SDL’s clients have been happy with machine translation but now they can be offered the full RWS service, which is definitely the top of the market,” he said. “Those clients will need some convincing but I think it is achievable. I don’t know how quickly but this ‘cross-selling’ is the twinkle in the eye.”
He said the other thing that reassured him was the continued presence of Andrew Brode, RWS’s executive chairman, who owns about a third of the company. “I have a lot of confidence in Mr Brode and his team,” Mr Ashworth-Lord said. “They are not going to throw away the work of a lifetime.
“If I had to back anyone to pull this off it would be these guys.”
We advise readers who hold SDL shares to hold on and await conversion of those shares into RWS equity. We suggest that RWS holders stick with the firm.
Questor says: hold Tickers: RWS, SDL
Share prices at close: RWS: 645p, SDL: 772p
It’s no secret that lockdown has been good for Amazon as households have turned to online shopping. Less obvious is that firms everywhere have had to ensure that their IT can support home working and Amazon’s cloud computing service, AWS, has been an obvious choice for many. AWS also powers Netflix, a popular choice during lockdown. We tipped Amazon in May last year at $1,845 so are pleased to see the shares at about $3,500 now, for a gain of 89pc.
Time to take profits? That is what the fund manager behind our tip has done. Stephen Yiu told investors in his Blue Whale Growth fund last month that Amazon, “previously a mainstay of our top 10”, no longer appeared there. He said that while he still had a position in the stock, “we have decided to take some profit on the back of a strong run so far this year”. He added: “Amazon remains a great business. However, due to our valuation discipline, we believe there are better opportunities for growth, and our positioning reflects this.”
Readers could follow his lead and reduce their holding. Questor will however bite the bullet and sell.
Read Questor’s rules of investment before you follow our tips: telegraph.co.uk/go/ questorrules; twitter.com/DTquestor