Constellation Software
inpractise.com/articles/constellation-software
Constellation Software
Why is this company interesting?
Constellation Software is a vertical market software (VMS) serial acquirer. Founded by Mark Leonard, the company has several notable attributes: its 21 million shares outstanding have not changed since inception. It has compounded free cash flow at a 29% clip since its IPO in 2006. It has no debt, high returns on capital and maintains a rational, return-based corporate culture.
Leonard and his team are widely regarded as among the best corporate capital allocators in the world. The business itself consists of hundreds of software companies, dominant in their niches with pricing power and sticky customers.
We first came across CSI in 2015/16 and have produced this learning journey from 20+ hours of interviews with Former CSI executives and competitors. We cover:
- How private VMS consolidators are competing with CSI
- The impact of increased competition on CSI business quality and ROIIC
- How CSI operates VMS assets post-acquisition and 5 core metrics to manage costs
- CSI M&A Philosophy, how it models cash flows, and target hurdle rates
- How CSI reprices contracts post-acquisition
- CSI org structure relative to other acquirers
- How CSI restructured Allscripts and potential IRR
Competition
A core part of our research on Constellation centers around the impact of increased VMS competition on CSI’s ROIIC. A common thread from a number of the interviews on CSI in the In Practise interview library is the increasing amount of competition from private VMS consolidators trying to replicate CSI's success. And, more specifically, how many Former Constellation M&A Executives left to start or join these competitors.
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