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.
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.
The 4-5% organic growth seem to also be a thing of the past. In Q1 the company had just 1% organic growth, while it was negative in the last one. As this is revenue, it means that including inflation the companies shrunk a lot and don't seem to have pricing power.
Given that ROIC is so important it is even more important to issue stock.
If you can buy a company at 3x EV/EBIT and your own stock trades at more than 30x EV/EBIT dilution would be a good thing. It would increase the ROIC.
I think that Warren Buffett's acquisition of General Re was brilliant, as it tripled the float while only diluting shareholders by 22%. The return for shareholders increased, not decreased.
The problem is that a lot of acquisitions can destroy value. Given how big CSU is, they either run out of small companies they can acquire cheap - or they need to do a big acquisition. You can have all the targets you want, if they are not cheap enough. The company acquired nearly one company a day in the first half of 2022. Do you really think that they give you all great ROIC? Given their size, how many acquisitions can they realistically pull off without paying more for the companies, as competition increases.
The biggest problem tho is the valuation. Marc Leonard said several times, that he regrets introducing a dividend. Let's assume 20% growth for 10 years and that the company trades at 25x EV/EBIT. To get the same return as historically an index has done (10%), the company NPV would be $2100. But there is no margin of safety. If we require 15% return (and I usually require more than 20%), the NPV would drop to $1300. Assuming that the growth declines to 10% (which is still very good for such a big company then) in year 5-10 the NPV is now $886.
So how do you expect to make a decent return given the high price today?
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.
The 4-5% organic growth seem to also be a thing of the past. In Q1 the company had just 1% organic growth, while it was negative in the last one. As this is revenue, it means that including inflation the companies shrunk a lot and don't seem to have pricing power.
Given that ROIC is so important it is even more important to issue stock.
If you can buy a company at 3x EV/EBIT and your own stock trades at more than 30x EV/EBIT dilution would be a good thing. It would increase the ROIC.
I think that Warren Buffett's acquisition of General Re was brilliant, as it tripled the float while only diluting shareholders by 22%. The return for shareholders increased, not decreased.
https://twitter.com/ChrisBloomstran/status/1543983041915265027
The problem is that a lot of acquisitions can destroy value. Given how big CSU is, they either run out of small companies they can acquire cheap - or they need to do a big acquisition. You can have all the targets you want, if they are not cheap enough. The company acquired nearly one company a day in the first half of 2022. Do you really think that they give you all great ROIC? Given their size, how many acquisitions can they realistically pull off without paying more for the companies, as competition increases.
The biggest problem tho is the valuation. Marc Leonard said several times, that he regrets introducing a dividend. Let's assume 20% growth for 10 years and that the company trades at 25x EV/EBIT. To get the same return as historically an index has done (10%), the company NPV would be $2100. But there is no margin of safety. If we require 15% return (and I usually require more than 20%), the NPV would drop to $1300. Assuming that the growth declines to 10% (which is still very good for such a big company then) in year 5-10 the NPV is now $886.
So how do you expect to make a decent return given the high price today?
Another good piece of analysis! Thx Roiss
how come you deleted your reddit account? i enjoyed your comments
Spam was becoming unbearable, and I don't want to auto block all people - as I like to communicate with people. u/DartFanatic is my new user.