Constellation Software (TSX:CSU, Financial) continues to scour the world for niche software companies, finding acquisitions in new verticals like crash/crime scene diagramming and new geographies like Brazil. The company has done a remarkable job scaling its acquisition strategy, but management realizes that to sop up its growing cash flows it will need to find new arenas to deploy capital. One such arena is larger acquisitions, where Constellation faces more competing bids from private equity firms and strategic buyers. In 2019, Constellation’s board approved a lower yet still attractive return hurdle for large acquisitions in order to participate more in this market. We look forward to seeing if this effort proves fruitful in 2020.
When we originally bought shares of Constellation, the rest of the market had not assigned them much value for continued growth by purchasing yet more vertical software companies. Over time, the company’s ability to make superior rates of return on these acquisitions seems to have become well-appreciated as the market has assigned higher and higher valuations to the stock.
At times, the shares in our estimation have traded too dearly unless the company can somehow shift acquisitions to an even higher gear. Management has signaled the difficulty of allocating ever-larger incoming cash flows while maintaining strict valuation discipline, most pointedly with a $20 special dividend issued in the first half of 2019.Though our preference is to take the full journey with this exceptional team, we have from time to time sold some shares to buyers with more exuberant expectations.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund mangement performance discussion for 2019.
