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Constellation Software: Deal Sourcing Moat

In April 2023, we published research on the increased competition to Constellation Software from upstart private software acquirers. In addition, most of the new acquirers were started by former Constellation M&A executives: 

Over the last 6 months, we have identified 34 private VMS consolidators competing with Constellation and 43 senior M&A executives that have left CSI in the last 3 years. The main takeaway is that CSI is materially less competitive buying faster-growing VMS companies over the last two years. Increased competition is outbidding CSI for the growing assets and pushing CSI to acquire more slow-growing and declining assets. - IP Research, April 2023

This month, from multiple separate credible sources, we've been told that over ~250 new software acquirers have been started over the last ~2 years globally. Although the majority of these have yet to acquire more than one company, the continued increase in competition led us to revisit Constellation’s moat. 

Two years ago, we suggested that part of Leonard’s genius was delegating M&A effectively down the organisation. This makes it possible to complete ~130 acquisitions at ~5-7x EBIT. The volume and size of acquisitions is unprecedented.

If Danaher has the DBS, Leonard has built an adaptive system that has institutionalized M&A principles all levels of the org. These M&A principles filter down from Leonard to Operating Group’s who train Portfolio Managers. The idea is that PMs can scale their BU’s into an Operating Group at CSU. Like Topicus, at a given scale, Operating Group's can then be spun into separate listed entities and the process repeats. - In Practise Analysis, 2023

But arguably, an even more subtle element to CSU's moat is its deal sourcing process. 

We published two interviews with a Former M&A Director of Constellation to explore how the company organises its business development team to source proprietary deals. CSU has over 60,000 software companies in Salesforce. This is likely the most complete database of software assets globally.

This is the greatest thing about Constellation. They have a database of around 60,000, 65,000, 70,000 or however many software companies. Basically, every software company in the world is included. - Former M&A Director at Constellation Software

Constellation's army of 200+ BD associates are responsible for nurturing these companies each year. Given the scale of Constellation, the cost to nurture each lead is the lowest in the industry. This provides an advantage in sourcing off-market deals. 

What most people need to understand is Constellation is seeing a lot of these opportunities before anyone else gets a look. They might have 150 to 200 BD professionals. If you divide 60,000 by 200, each BD professional covers 300 businesses. That's manageable. Paying BD professionals an average of 100k a year isn't that significant from a cost standpoint. - Former M&A Director at Constellation Software

If a CSU operating group fails to have a 'meaningful contact' with a target company in Salesforce within 365 days, it is open for all CSU BD associates to “win the lead”. While there may also be external competition, the greatest competition to CSU operating groups is from other CSU operating groups trying to capture your lead. 

Everyone's creating reports. Everyone's creating reports on which companies haven't had meaningful contact in close to a year. It's the most important metric that people track because it allows you to expand your coverage. Four million is a big enough purchase to move outside of your existing vertical coverage and maybe launch a portfolio or a platform. If someone from my group didn't cover it, it's February 15, 2026, and it's been 366 days. On that day, you can expect to receive probably 15 messages from various groups at Constellation. - Former M&A Director at Constellation Software

The quality and proprietary nature of Consellation's funnel largely determines its moat. These research walks through how the M&A and BD team is structured, how CSU manages Salesforce, and the potential risk from new entrants like Arcadea, Banyan, and Valsoft.

Netflix, The Trade Desk: Colgate Programmatic CTV Case Study

This interview is part of our Q1 internal research project on Netflix's advertising opportunity. We interviewed a Former Director at Colgate-Palmolive to understand how brands are allocating dollars to CTV. It still seems linear is an effective medium compared to CTV for much of a brand's ad budget:

In many cases, the linear buy was actually more efficient because the cost per point was lower due to the lower CPM. The trade-off is that you get better targeting with CTV. To simplify, from a broad reach standpoint, if you want to reach every adult in the United States, linear still provides the highest reach. CTV offers reach and targeting but at a higher cost. - Former Programmatic Media Director at Colgate-Palmolive

Another interesting insight shows how critical Youtube is for DV360 to win programmatic ad dollars:

There are pros and cons with Google. If you use DV360, you're able to manage frequency better across your YouTube buys and your off-YouTube buys, such as owned and operated inventory and video inventory in the exchanges. You can consolidate those, which is a strong reason why running through DV360 is like a one-stop shop. Many brands either go all-in with Google or all-in with The Trade Desk and buy their YouTube content a la carte. Amazon hasn't made a compelling enough argument to be a one-stop shop because they don't have YouTube. When you consider the total video universe, it's everything you can buy through The Trade Desk and YouTube, which is about 90% of the video universe. - Former Programmatic Media Director at Colgate-Palmolive

We plan to continue our study of Netflix's advertising opportunity and aim to publish more research over the next few months.

Perimeter Solutions, Conair, & Aerial Tanker Operations

Perimeter Solutions is the global leader in aerial fire retardant. The mission criticality of its red retardant products was evident during the catastrophic LA fires last month:

Airtanker dropping Perimeter's PHOS-CHEK on LA Fires
Airtanker dropping Perimeter's PHOS-CHEK on LA Fires

Perimeter manufactures and sells retardant but also invests in equipment and runs air bases for the Forest Service. The air bases are situated close to wildfire zones and fuel airtankers with retardant to combat wildfires. 

Perimeter's LA airbase infrastructure
Perimeter's LA airbase infrastructure

We discussed PRMs potential operational moat in our research last year. 

Specifying a formulation is difficult, but delivering retardant on-time and at scale across the US is arguably more difficult. Perimeter’s scale and operational knowhow seems a deeper moat than its formulation. Perimeter carries over $100m of inventory throughout the year to ensure availability of retardant at any moment. USFS also requires approved suppliers to build ~$1-3m of air base infrastructure to store and mix retardant. This is not a simple bulk chemical business; it’s a full-service offering. Not only does the product need to pass the specification process, suppliers need to guarantee just-in-time delivery of retardant within hours of a reported fire across the US. - IP Research, 2024

This interview with a Former Conair President, a leading US airtanker aerial firefighting business, explores how Perimeter works with airtanker firms to efficiently fight wildfires. 

The number of airtankers available to drop retardant is a key driver of PHOS-CHEK volume growth. This seems to be growing steadily YoY:

In total, based on the number of aircraft available to be contracted in the United States, the current market need is in the middle 30s of aircraft. Conair is continuing to add aircraft to the mix with the Q400 and the RJ85 to both the Canadian and US markets. Coulson is adding some 737s. The number increases by one or two each year, but the demand is meeting that. - Former President at Conair

However, the USFS is pressuring airtanker contract prices. The government ‘always chooses the cheapest price’. 

The government usually covers the cost of fuel and retardant as part of our contract. We essentially cover our incremental costs plus some profit. The pricing for Next Generation 3.0, which is the latest exclusive use, is around $30,000 a day for a large air tanker and $10,000 an hour. We evaluate our costs and consider what our competitors are doing to make the best decision to secure a contract. The government almost always chooses the cheapest available option, although they may have preferred vendors. - Former President at Conair

One risk to Perimeter is that the USFS encourages a new QPL-approved aerial retardant to compete with PHOS-CHEK. If the government shows this contracting behaviour in airtanker contracting, how might it deal with retardant contracting in the future? If, or arguably when, an additional phosphate product is approved, Perimeter’s true level of pricing power and its operational moat will be tested. 

Primary Research Methods: Vetting Executives

This free IP Fieldwork podcast provides a glimpse into our executive sourcing operation and how how we vet the quality and competence of executives before we interview them. Listen here (Apple / Spotify). We cover:

  • What we've learned from 1000s of executive vetting calls
  • How to analyse an executive profile
  • Mistakes we've made selecting the wrong executive
  • How to avoid mistakes vetting executives