90% of business acquisitions fail.
But there are exceptions:
Mark Leonard, Founder of Constellation Software $CSU, is one of them.
He's acquired over 500 companies in the last 2 decades...
Turning $25 Million into $32 Billion.
Here's his "Growth by Acquisition" playbook:
But there are exceptions:
Mark Leonard, Founder of Constellation Software $CSU, is one of them.
He's acquired over 500 companies in the last 2 decades...
Turning $25 Million into $32 Billion.
Here's his "Growth by Acquisition" playbook:
To put things in context:
Every $1 you invested in Constellation Software in 2006...
Would have turned into $120 in 2021.
Over the last 15 years, its stock has compounded at over 35% a year.
What's the secret?
Every $1 you invested in Constellation Software in 2006...
Would have turned into $120 in 2021.
Over the last 15 years, its stock has compounded at over 35% a year.
What's the secret?
5 lessons from Mark's "Growth by Acquisition" Playbook:
1. Focus on niche players
2. Focus on sticky softwares
3. Buy companies that are founder led
4. Decentralization
5. Keep teams small
Lets go:
1. Focus on niche players
2. Focus on sticky softwares
3. Buy companies that are founder led
4. Decentralization
5. Keep teams small
Lets go:
1. Focus on niche players
Mark Leonard started constellation software in 1995...
With the goal to assemble a portfolio of vertical market software (VMS) companies.
Firstly, what is Vertical Market Software (VMS)?
Mark Leonard started constellation software in 1995...
With the goal to assemble a portfolio of vertical market software (VMS) companies.
Firstly, what is Vertical Market Software (VMS)?
VMS are softwares created specifically to meet a need in a particular industry.
For example:
A scheduling software built specifically for gyms to schedule the training slots for clients.
Or a software for restaurants to manage their inventory and orders.
For example:
A scheduling software built specifically for gyms to schedule the training slots for clients.
Or a software for restaurants to manage their inventory and orders.
Because of how narrow focused these businesses are...
They are not attractive to traditional VCs because of their small market.
But Leonard loved it.
He saw an untapped opportunity with little competition...
Allowing him to buy them at low price multiples.
They are not attractive to traditional VCs because of their small market.
But Leonard loved it.
He saw an untapped opportunity with little competition...
Allowing him to buy them at low price multiples.
2. Focus on sticky software
VMS has a number of benefits:
a. Recurring revenues
b. Cash collected upfront
c. Mission critical. High switching costs
d. Small share of wallet
VMS has a number of benefits:
a. Recurring revenues
b. Cash collected upfront
c. Mission critical. High switching costs
d. Small share of wallet
a. Recurring revenues because of subscription contracts
Given how important these softwares are to the customers...
The retention would be high.
Customers would "stick" and continue paying for it year after year.
Given how important these softwares are to the customers...
The retention would be high.
Customers would "stick" and continue paying for it year after year.
b. Cash can be collected upfront
Because some of these businesses sell annual contracts to their clients...
And clients usually pay upfront before they're able to use the software.
Hence it enjoys a strong cash fortress.
Because some of these businesses sell annual contracts to their clients...
And clients usually pay upfront before they're able to use the software.
Hence it enjoys a strong cash fortress.
c. They are mission critical to the customers.
High switching costs.
a gym cannot simply replace their scheduling software suddenly as all their staff use it daily.
a restaurant cannot suddenly replace its ordering software because it's needed for smooth running everyday.
High switching costs.
a gym cannot simply replace their scheduling software suddenly as all their staff use it daily.
a restaurant cannot suddenly replace its ordering software because it's needed for smooth running everyday.
d. Small share of wallet.
Many of these softwares are also a small part of the customer's total expenses per year.
So these businesses can gradually raise prices overtime, and customers would still accept it.
Hence they enjoy huge pricing power.
Many of these softwares are also a small part of the customer's total expenses per year.
So these businesses can gradually raise prices overtime, and customers would still accept it.
Hence they enjoy huge pricing power.
3. Mark likes to buy founder led companies
Because many of these companies are small in size...
He finds that a founder's values would heavily influence the DNA and culture of their team.
This makes it easier to steer the ship.
Because many of these companies are small in size...
He finds that a founder's values would heavily influence the DNA and culture of their team.
This makes it easier to steer the ship.
From Mark's 2013 shareholder letter:
โOur favourite and most frequent acquisitions are those we buy from founders.
When a founder invests the better part of a lifetime building a business...
A long term orientation tends to permeate all aspects of the enterprise"
โOur favourite and most frequent acquisitions are those we buy from founders.
When a founder invests the better part of a lifetime building a business...
A long term orientation tends to permeate all aspects of the enterprise"
4. Decentralization
Constellation lets the existing founders of these companies manage the company...
Rather than stepping in to cut costs or increase profits (think of 3G Capital).
They allow that company to continue operating as if it had never been sold.
Constellation lets the existing founders of these companies manage the company...
Rather than stepping in to cut costs or increase profits (think of 3G Capital).
They allow that company to continue operating as if it had never been sold.
They also push decisions down to the Business Unit (BU) level.
The individual BUs are allowed to do M&A with deals up to $20 million.
This is unlike Berkshire's playbook where all the cash is sent back to HQ and the main decisions are made by Buffett and his generals.
The individual BUs are allowed to do M&A with deals up to $20 million.
This is unlike Berkshire's playbook where all the cash is sent back to HQ and the main decisions are made by Buffett and his generals.
Mark:
โIf we can train a couple of hundred BU managers to be competent part-time capital allocators and provide them with acquisition analysis and structuring support when they need it...
Then I can foresee the day when we are doing 100 acquisitions per annum, instead of 30โ
โIf we can train a couple of hundred BU managers to be competent part-time capital allocators and provide them with acquisition analysis and structuring support when they need it...
Then I can foresee the day when we are doing 100 acquisitions per annum, instead of 30โ
5. Keep teams small
Mark organizes the company according to business units.
Each BU serves a single specific industry (eg. education, fitness)
And each BU has a manager that operates independently of other BU heads.
So they have full autonomy over their own decision making
Mark organizes the company according to business units.
Each BU serves a single specific industry (eg. education, fitness)
And each BU has a manager that operates independently of other BU heads.
So they have full autonomy over their own decision making
When a BU gets too large (more than 100 people)...
They will break it up into a new, separate BU.
Mark has the belief that "size breeds complacency and bureaucracy".
So by keeping teams small, he maintains the entrepreneurial spirit.
They will break it up into a new, separate BU.
Mark has the belief that "size breeds complacency and bureaucracy".
So by keeping teams small, he maintains the entrepreneurial spirit.
Career progression:
Having many different BUs also gives the employees in these companies more mobility.
They can move across units if they want a change.
And also enjoy better opportunities for career advancement.
Having many different BUs also gives the employees in these companies more mobility.
They can move across units if they want a change.
And also enjoy better opportunities for career advancement.
Mark:
โSomething wonderful happens when you spin off a new business unit...
With a clean sheet of paper, the leader only takes those he needs.
They set up in an open office with good communication and no overheads.
They leave all the bureaucracy and the crap behindโ.
โSomething wonderful happens when you spin off a new business unit...
With a clean sheet of paper, the leader only takes those he needs.
They set up in an open office with good communication and no overheads.
They leave all the bureaucracy and the crap behindโ.
That's it!
Thank you to Colin Keely.
I learnt a ton about Constellation from both his blog article and podcast.
Make sure you read it here:
colinkeeley.com
Thank you to Colin Keely.
I learnt a ton about Constellation from both his blog article and podcast.
Make sure you read it here:
colinkeeley.com
Also check out Eagle Point Capital's writeup.
It's helped me to understand both Mark and Constellation better:
eaglepointcap.com
It's helped me to understand both Mark and Constellation better:
eaglepointcap.com
Most importantly, read the actual set of Mark Leonard's shareholder letters here.
They are a goldmine for any investor who wants to understand how to grow by acquisition:
csisoftware.com
They are a goldmine for any investor who wants to understand how to grow by acquisition:
csisoftware.com
Recap of 5 lessons from Mark's "Growth by Acquisition" Playbook:
1. Focus on niche players
2. Focus on sticky softwares
3. Buy companies that are founder led
4. Decentralization
5. Keep teams small
1. Focus on niche players
2. Focus on sticky softwares
3. Buy companies that are founder led
4. Decentralization
5. Keep teams small
If you enjoyed this, then follow me here at @heymaxkoh
I tweet about how I attained financial freedom before 30 through investing.
Also check out my thread on this concept called ROIIC
ROIIC is the metric that Mark Leonard evaluates his BU managers on:
I tweet about how I attained financial freedom before 30 through investing.
Also check out my thread on this concept called ROIIC
ROIIC is the metric that Mark Leonard evaluates his BU managers on:
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