CSI: Software Santa eating the VMS market

Note: I also appeared on a podcast to discuss Constellation Software. You can find the podcast here.

Disclosure: I am long CSU.TO/CNSWF shares

Mark Leonard is bit of a mythical character. There is perhaps not too many billionaire CEOs out there with only three/four images available on the internet. Speaking of images, if you didn’t know what Mr. Leonard looks like, click here and you’ll see why some Constellation Software (CSI) shareholders affectionately call him “Software Santa”. Unlike Santa, however, Mark Leonard is very much real, and he gifted the shareholders some incredible goodies so far. And while Marc Andreessen explained “why software is eating the world” in 2011, Mark Leonard was diligently eating away the Vertical Market Software (VMS).

Since IPO in 2006, CSI (ticker is CSU in Canada, and CNSWF in the US) compounded its market cap at ~34%, a ~100-bagger in just ~15 years. While there might be stocks out there which generated higher return over the same period, what I personally find even more remarkable is it never experienced even a 30% drawdown during this time (Source: KoyFin). On a rolling one-year basis, it never even experienced worse than -10% return since IPO (Source: KoyFin). Since almost all highflying stocks go through severe drawdowns on their way to eventual glory, I wonder whether CSI had been the easiest mega-winner to hold for its shareholders. Even during this recent carnage in tech/growth, CSI is only down ~10% from its 52-week high.

I know, I know unfortunately the past success cannot predict the future return. As one of the less fortunate investors who hadn’t been riding the Mark Leonard’s millionaire factory, I laid my fresh eyes on the company over the last month and came out sufficiently impressed.

Here’s the outline for this month’s deep dive:

Section 1 Understanding the basics of a serial acquirer: I discussed lessons on rollups from the book “Billion Dollar Lessons” and outlined the basics on serial acquirers based on my readings of Gustaf Hakansson’s “The Serial Acquirer Book”, and Scott Management on “Serial Acquirers”.

Section 2 The system of CSI: I outlined a brief overview of the CSI’s operating structure and how the CSI system works in this section.

Section 3 Acquisition engine and runway for CSI: Given the significance of the acquisition engine, I dissected this section in four segments: a) the acquisition process and the operating philosophy of CSI for the acquired companies, b) growth runway for future acquisitions, c) bear concerns on terminal value questions on acquired VMS companies, and d) c) benchmarking CSI against other serial acquirers.

Section 4 Management and culture: I elaborated on CSI’s incentive structure and management in this section.

Section 5 Valuation and model assumptions: Model/implied expectations are discussed here.

Section 6 Final Words: Concluding remarks on CSI, and disclosure of my overall portfolio.