Following the Constellation Software playbook to a 11,293% return - The Average Joe

    Following the Constellation Software playbook to a 11,293% return

    Victor Lei — Head of Research

    October 5, 2021

    Constellation Software

    October 5, 2021

    Today, we study 100-baggers, just for research purposes. Constellation Software, a Canadian holding company that acquires smaller software companies, returned investors 11,293% (112x-bagger) over the past 17 years. Such a beautiful company deserves a second look — Plus, which emerging companies are following a similar playbook?

    The acquisition playbook

    In a standard business, the playbook is: sell products, grow sales, make profits. But “buy and hold” companies like Constellation require a different skillset:

    • Identify good acquisition targets and buy them for a decent price.
    • Add value and help these companies grow post-acquisition.

    And Constellation has become really good at this — with specialized teams identifying acquisition targets and helping them grow afterwards — having bought over 500 businesses since 1996.

    The key to Constellation’s success? A disciplined approach to buying businesses — keeping to its expertise, and not overpaying. Other successful companies have also taken this approach:

    • Berkshire Hathaway (NYSE:BRK) — run by famous investor Warren Buffett; owns a diverse range of companies.
    • IAC Interactive (NASDAQ:IAC) — known for building Match.com, Vimeo, and Angi (NASDAQ:ANGI).

    Squeezing returns out of Constellation

    15 years after going public and with a $44B market cap, Constellation is much larger and finding acquisitions at a cheap price is much harder. While Constellation sees a large run rate of 40,000 potential acquisition targets, in 2019, it had to lower minimum target returns on its acquisitions.

    • According to Ernest Wong of Baskin Wealth, by 2029, Constellation would need to buy 160 companies every 3 weeks to maintain its current growth.
    • Moving forward, finding businesses will become more competitive and investors will likely see lower returns moving forward.

    CSU is up 25% in 2021 — a good return but lower than the monster returns it showed in its early days. With growth slowing, it may be time to evaluate other emerging companies using a similar strategy.

    Investors: Copying the Constellation playbook

    Smaller companies are taking a similar approach with their own expertise:

    • Evercommerce (NASDAQ:EVCM — $3.4B mkt cap) — acquires software businesses in service industries (i.e. healthcare, home and fitness).
    • Wecommerce (CVE:WE — $407M mkt cap) acquires companies building apps on Shopify’s marketplace.
    • Topicus (CVE:TOI — $5.3B mkt cap), which was spun out of Constellation, acquires software companies in Europe.

    The companies listed above focus on tech companies but there are other ones specializing in traditional industries like BBX Capital (OTC:BBXIA) and Seaboard Corporation (NYSE:SEB).

    But not every company deploying this “buy and hold” strategy is successful. Buying businesses with the right strategy is crucial for high returns.

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