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Lionbridge And SDL Trying Capitalize On TransPerfect Shareholder Dispute

|Includes: Lionbridge Technologies, Inc. (LIOX), SDLLF

A court drama being played out may result in TransPerfect's two chief competitors in the translations services industry seeing increased revenue.

Lionbridge Technologies (NASDAQ:LIOX), based in Waltham, Mass., is the largest translation services company in the U.S., with revenue of $560 million last year. TransPerfect is the second largest in the U.S., with revenue last year of $505 million. London-based SDL (OTC:SDLLF) could also benefit.

While beating its rival handedly in growth and profits, TransPerfect is experiencing a serious power struggle in the executive suite that has ended up in the courtroom. Lionbridge has attempted to capitalize on this controversy and courtroom drama by planting seeds of doubt on the future of TransPerfect with its customers.

However, this may not be the boon LIOX is expecting. Although TransPerfect's power struggle began in 2013, it has shown no signs of slowing down the company. So far this year, sales are up more than 11% with May being the most successful month to date. Whatever the Delaware Chancery Court decides, there will inevitably be a lengthy appeal process and co-founder visionary Phil Shawe has made it clear that he is not going anywhere.

The Delaware state court's apparent willingness to step into the affairs of a private company has come under fire from many directions, including most-notably former New York City Mayor Rudolph Giuliani, who criticized Delaware's new Chief Chancellor Andre Bouchard (a Canadian) for an "un-American" decision that was overreaching, intrusive, and against American free-market principles.

Co-CEO and fellow shareholder Elizabeth Elting, who according to many employees has a very limited role in the day-to-day functions of the company, is suing for TransPerfect to be dissolved and force-sold to the highest bidder. When Elting co-founded the business with Shawe 24 years ago they had had a romantic relationship, but that ended years ago. She now claims the two cannot work together anymore and that the New York-based company should be auctioned off because she is upset with their personal relationship. It is also obvious that Elting is now using the court as a weapon to maximize her buyout price.

Shawe recently offered $300 million cash to buy her half of the company. In an attempt to extract more money from Shawe, Elting recently told Forbes Magazine that she intends to counter, but no offer has been forthcoming. It appears Elting believes the Delaware Court will give her a better exit strategy than she can achieve through negotiation, and thus, is content to wait it out until Bouchard's decision and all appeals, are rendered final.

TransPerfect is the largest privately-held company in the $35 billion translation services industry. With 4,000 employees in 100 cities on four continents TransPerfect is capable of translating more than 170 languages. It has a vast array of clientele, including almost every Fortune 500 company, such as USPS, IKEA, Johnson & Johnson, and Hilton Worldwide.

Elting has used a strategy of saying "no" to all routine decisions to create "deadlock" under Delaware law, and therefore wants the court to auction the company to the highest bidder. Unable to find a judge receptive to her case in New York , she filed a second lawsuit two years ago in Delaware. In the non-jury trial, despite the fact that Elting couldn't produce one witness to corroborate her testimony, while Shawe presented 10 witnesses on his behalf, the judge sided with Elting on dissolution, and appointed a custodian to oversee a sale process.

This means for the first time in U.S. history, a private, profitable company that has not been accused of any wrongdoing or impropriety is being put on the auction block. Although the harm caused by Chancellor Bouchard's use of the word "sale" has raised eyebrows with many TransPerfect employees and customers, Bouchard also said he believed that Shawe was the most logical buyer. In the meantime the court has put a middleman in charge of the company for the purpose of having it dissolved and force-sold against the wishes of two of its three shareholders. Elting owns half, while Shawe and his mother own the other 50%.

It appears the employees, TransPerfect's most important assets, are extremely upset with Bouchard and his apparent willingness to rely on the uncorroborated testimony of one witness who serves no meaningful role at the company. Hoping to save the company they work for, as well as their jobs, the employees wrote to the judge before he rules on the bizarre case currently before him.

On April 26, TransPerfect's employees sent two letters to Bouchard; Peter C. Schwartzkopf, the speaker of the Delaware House of Representatives; other members of the Delaware house; and the media to present their perspective before a final ruling in the case.

In order to inform the public of their situation, a group of 610 TransPerfect employees called Citizens for a Pro-Business Delaware ran radio ads on local Delaware stations. They also placed a two-page advertisement in the Delaware News Journal that reprinted the contents of each letter. So far, the employees have not received a response from Bouchard, who has issued a series of unprecedented decisions that are so unusual and blatantly one-sided that observers say they are not based on law and equity.

Shawe's lawyer Martin Russo of New York law firm Gusrae Kaplan Nusbaum told Slator.com, "Ms. Elting has the right now to sell her shares on the open market without interference from, or affecting Shawe's ownership rights; but that she chooses not to take the market price is an indicator as well. Shawe's $300 million offer is magnanimous, and is surely better than (what Ms Elting) would get as a 50% owner on the market." Russo told the website the value represents 10x the company's after-tax cash flow profits of 30 million and described the $300 million offer for Elting's 50% stake as "extremely generous."

However, if Elting refuses the offer and forces the sale, this could provide a big opportunity for either Lionbridge or SDL to purchase TransPerfect and become the undisputed leader of the translation industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.