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Michael's avatar

Constellation has 4-5% organic maintenance revenue growth quite steadily. I urge you to read this interview with the CFO, which should clarify a lot of your doubts/questions: https://www.csisoftware.com/docs/default-source/investor-relations/shareholder-q-a/april-6-2022---tegus-interview-with-cfo.pdf?sfvrsn=3b75814d_3/%20April-6-2022---Tegus-interview-with-CFO%20.pdf

A lot of the serial acquirers you show have very respectable and even impressive organic growth numbers, Constellation is a specific case. In a shareholder letter, Mark Leonard quite clearly stated that they do not care whether a company has organic growth or is even shrinking, they focus on the ROIC hurdle. If the price paid is low enough, returns could still be very attractive.

As they scaled, they pushed M&A responsibility down to the portfolio company level. There are very extensive training programmes within the firm and specific guidelines. Every acquisition is tracked, and extensively reviewed based on the initial assumptions at the time of takeover. This is truly their bread and butter. With over 40.000 potential takeover targets, they still have quite a lot of room to scale even further. The reason why it can be bought at attractive multiples (17x 2023e FCF) is because people always underestimate the runway.

Why you would argue that dilution would be a good thing is beyond me. I would not like my ownership stake to be diluted, even if they can buy a company. Buffett repeatedly said he regrets using Berkshire shares for the GenRe transaction.

Also disagree with the notion regarding value destructive M&A, as consistently pursuing smaller bolt-ons is a learned skill as opposed to the very large, empire building kind of transactions, which on average indeed destroy value. BCG had interesting results a few years back, suggested reading: https://www.bcg.com/publications/2017/corporate-strategy-value-creation-premium-conglomerates-sustain-success

To conclude, regarding valuation: it all depends on expected growth rates and holding periods. If you think 20% recurring growth of over 15 years suddenly slows to 4% and you look to sell within 1 year, these are not the companies for you.

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Hao's avatar

Another good piece of analysis! Thx Roiss

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