Constellation Software Inc. CSU-T is no longer on track to reach a $1 billion “unicorn” valuation, sending a message to Canadian venture capital-backed software companies struggling to raise funding. “Join our galaxy.”
One of Canada’s most valuable companies, this acquisition machine typically buys businesses from founders and large corporations. However, the firm is now “also looking for venture capital-backed businesses that have not met the expectations of investors and founders, and companies that have run out of options,” said Farley, senior vice president of Constellation’s large-scale investment group. Noble said. interview. “We want to help them.”
He said the ideal goal is to generate more than US$20 million in annual revenue and raise more than US$50 million in venture capital. Now we can’t continue to foster that growth. These will be difficult businesses that are either breaking even or not making a profit. ”
This is a new initiative for Constellation, which has acquired nearly 1,000 small businesses since its founding in 1995. The targets are providers of “mission-critical” software serving niche subsectors, or vertical industries, such as golf courses or public transportation. The company’s six subsidiaries typically acquire companies with annual sales between $2 million and $10 million, moderate growth, high recurring revenues, solid cash flow and operating profits, and preferably few competitors. It never sells.
Constellation’s long track record has earned recognition reputation as Leading capital allocatorand the media-shy President Mark Leonard. Comparison with Warren Buffett. The company’s stock price has risen an average of 38% a year over the past 15 years, and is up another 14% through 2024. His remaining shares are worth his $1.6 billion. )
The company is currently Canada’s 13th most valuable publicly traded company, more valuable than Canadian Imperial Bank of Commerce CM-T and Suncor Energy Inc. SU-T’s free cash revenue reached USD 8.4 billion last year, an increase of 27% compared to 2022. Flow he increased by 36% to US$ 1.16 billion. Net profit increased by 10% to US$565 million.
But some investors are wondering how long Constellation can maintain its pace. Last year, it spent $2.6 billion on deals, up from $477 million in 2020. Ernest Wong, head of research at Baskin Wealth Management, estimates that Constellation will need to increase to $8.2 billion by 2029 to maintain $30. Growth of cents.
“Despite its size, the company remains a company with strong and respectable cash flow and operating profit growth,” said BMO Capital Markets analyst Thanos Moshopoulos. “The main risk investors need to consider is at what point will growth slow as it expands.”
By the late 2010s, Constellation was already struggling to find enough acquisition funds and paid out excess free cash in special dividends.some directors Constellation felt it could earn higher returns than investors by deploying its surplus funds. itself.
So in 2021, it eliminated special dividends, expanded its scope, and brought in Noble, a Constellation veteran who left the company in 2018, to lead a new large-scale acquisition group. Constellation has lowered its expected return on invested capital for large transactions in order to be more competitive in the auction.
Constellation has made several big acquisitions since then, paying up to $700 million to acquire sizable companies and divisions carved out of giants such as Nokia. The company has spun out two companies into TSX Venture Exchange-listed companies Topicus.com Inc. TOI-X and Lumine Group Inc. LMN-X, each valued in the billions of dollars.
Now, Noble is also hoping to persuade venture capitalists to sell to Constellation. When interest rates rose in 2022, many fast-growing software startups hit a wall and cut costs to preserve cash. In addition, economic uncertainty hampered revenue growth. Valuations plummeted, public markets were all but closed to new issuance, and many venture-backed companies struggled to raise capital to fuel expansion.
Venture capitalists now have several zombie companies in their portfolios, and they won’t be able to expect the big-money exits they once expected. Constellation sees an opportunity there.
Noble said the company is considering all of North America, but wants to make its first deal in Canada, and believes several Canadian business-to-business software vendors may be a good fit. Ta. Constellation will begin contacting potential customers this month. He said Constellation does not expect to pay the high multiples required by healthier, faster-growing companies.
“Let’s go out and see what fits and what the appetite is,” he said. “Some founders will say, ‘Okay, I tried this and this isn’t for me because I’m chasing IPO and unicorn status.’ , I think there are many people who will say, “It turned out to be a good home not only for business, but also for owners who can bring culture and inject learning.”
“We want to see Canadian companies succeed, and we think we can help them achieve that with the Constellation family.” Noble added that acquired companies “will never be sold again. , will continue to exist indefinitely. That’s a positive story.” Brookfield Asset Management and Sequoia Heritage are also looking to buy stalled tech companies through their joint ownership, Pinegrove Capital Partners.
Noble stressed that this is still an “experiment” rather than a strategy, as Constellation continues to acquire primarily small and medium-sized companies at a brisk pace. This isn’t the only way Constellation has ventured beyond its core focus. Mr. Leonard has expressed an interest in seeking deals outside his company’s comfort zone, even considering pumping $1 billion into the oil industry during the price crash a few years ago.
Mr. Leonard, a former venture capitalist, was also keen to increase Constellation’s organic growth rate, which is currently in the mid-single digits. He said the company’s trading capabilities were at the expense of organic growth as talented employees were attracted to pursuing deals.
So in 2021, Constellation launched VMS Ventures, a US$200 million venture capital fund that will provide capital to entrepreneurial employees who aspire to launch high-growth startups managed by Constellation. Ta. His Volaris subsidiary also supports external startups through its Venstra Ventures division. Together, the two units are supporting 20 startups.
