No. of Recommendations: 15
Great post.
This is just an out loud ramble really from a very much non expert about the company, or industry. But hey, we are hear to learn and test our thinking.
Clearly this is a fine business with its hooks in a lot of meat. I am not in the buying mood of late but do have this on my radar, if it got very cheap, which of course may never happen.
As I am not buying and do not own it, I can comfortably attempt to throw rocks at the idea.
My take is that the expectations for software quality have been raised incredibly high, with consumers enjoying great software from companies like Amazon, Microsoft, Google and Apple. And of course, the tools that now exist, to build better and better software are more accessible. I imagine Constellation’s software is largely in the commercial world and they operate in all kinds of little niches that make it less attractive to competitors due to lack of scale.
However, the expectations of end users have and are increasing. In my limited experience, there are a lot of software solutions in the marketplace today that are pretty awful.
Paying for the new systems that are possible, is a big barrier to progress. As is risk aversion and also leaders of companies not fit for purpose and sitting in leadership positions until they get their pension. It does take a fairly wide range of qualities in a CEO to completely rebuild an IT stack (as the kids call it). But I do wonder about the build up of these poorly performing legacy systems. Over time they will surely get replaced. No doubt Constellation will be there with the modern solutions and will get the technology advances to work for them.
But there may be organisations that are so tired of being squeezed, that they just want a fresh start with a new technology provider. Maybe the transition to cloud and AI is the moment of great change. Then again, that new provider increases the risk even more. They don’t understand the business processes the way the legacy provider does. The more I try to convince myself that Constellation could loose lots of customers, the less convinced I am that that is true. I suppose the rise of highly configurable systems is a threat, as that model can work well in some circumstances. But again, most of these little niches need bespoke solutions.
Another advantage as an investment, is that the revenue stream is so diversified, that even if they lost clients to new software providers, there is no concentration risk.
I would want to understand if the subsidiaries are innovating and bringing in new customers and riding the wave of new technologies.
I do wonder why they pay low multiples for their acquisitions and why I would think it attractive to pay double or triple what they themselves are paying for these little cash cows that could eventually die.
I am also a little sceptical of the idea that the original founders of the subs will stay motivated. Will they not tire of driving their businesses forward eventually, as they get older. I imagine it takes unusual determination and focus to run a software company and burn-out is always a risk. Will a salaried CEO of a subsidiary have the all round skill set to deal with the challenges and pressures. Then again, you can argue that an established subsidiary is much easier to run, than it was during the early years.
I guess I’m saying it could be an interesting sticky idea but I would like to pay 10 or 12 times owner earnings to have a great chance of a nice return. I haven’t looked at the numbers but imagine it’s a long way from that.
I have seen organisations with crappy systems, under the constellation umbrella, get tired of the costs of maintaining legacy systems and have stopped introducing new functionality due to what can seem like poor value for money for the improvements and then eventually start again with a new provider. But that is not a statistically sound survey.
I’m maybe less concerned about the acquisitions drying up. Buy of course, it gets harder to move the needle just like at Berkshire.
