Acquisition machine Constellation Software Inc. plans to spin out its European division as a newly minted public company, a move that positions one of Canada’s largest technology companies for further expansion through takeovers.
Toronto-based Constellation, which spent $155-million on more than 25 small acquisitions in the first three months of the year in the face of the COVID-19 pandemic, announced plans on Wednesday to acquire Dutch education, finance and health care software company Topicus.com BV from a private equity fund.
When the acquisition closes later this year, Constellation plans to merge the unit with its existing European businesses, known as Total Specific Solutions or TSS, and list the combined businesses on a stock exchange.
Constellation, which has a $32-billion market capitalization and a proven ability to buy and build software businesses, would remain the controlling shareholder in the new public company, which will be branded as Topicus.com.
“The plan to create a publicly listed operating group made up of Topicus and TSS was a key part of our discussions with the Topicus founders. They didn’t want their legacy disappearing into the craw of an omnivorous conglomerate,” said Constellation chief executive Mark Leonard in a press release.
“The public listing is expected to afford our Netherlands-based businesses a platform from which to celebrate their culture and achievements.”
The Canadian parent is expected to use capital raised from an initial public offering, along with shares in the new Dutch company, to pay for more acquisitions. Constellation did not disclose the price it paid for Topicus.com, but said the company posted sales of €101-million ($154-million) last year and has 1,000 employees. TSS has 3,000 employees in 80 different business units.
Constellation acquired TSS seven years ago for €248-million. The Topicus.com takeover needs to be approved by Dutch regulators.
“We view the Topicus.com acquisition as having the potential to be one of the firm’s more transformational acquisitions since Constellation’s purchase of TSS in late 2013,” analyst Paul Steep at Scotia Capital Inc. said in a report.
“This transaction aligns with comments made by Constellation CEO Mark Leonard at its recent annual meeting, regarding the firm exploring alternate options in deploying capital (e.g., use of minority interests in public companies) and efforts to complete larger M&A transactions."
The low-profile and unconventional Mr. Leonard – who hasn’t taken salary or a bonus since 2016 and is known for riding his bike to work – founded Constellation in 1996 after a stint in venture capital. In a speech to his alma mater, Western University’s Ivy Business School, Mr. Leonard provided a bio that said: “He worked as a banker, valuator, mason, gravedigger, dog handler, bouncer, sapper, and wind energy researcher. He particularly enjoyed the bouncing, but early retirement was necessary.”
Constellation went public at $17 a share in 2006, and has never split its stock, which closed Wednesday at $1,533.77, up 3 per cent and just below its historic high. Mr. Leonard and his family own a stake worth more than $2.2-billion.
Constellation is a consolidator, using its cash and shares to snap up smaller companies, then backing their growth. Its European offspring is expected to take the same approach. As Constellation expands, analysts say, the number of potential takeover targets is soaring. Paul Treiber at RBC Dominion Securities Inc. said in a report that in 2006, Constellation estimated 1,200 software businesses fit the bill as potential acquisitions. Now that list runs to 40,000 companies, valued at $180-billion.
Constellation executives have the confidence to make acquisitions during a global health crisis, analysts say, because its clients, which include hospitals, governments and financial institutions, have the resources to keep paying licensing fees on the company’s software.
“Our analysis shows that 83 per cent of Constellation’s revenue stems from verticals, which are likely to be resilient to COVID-19,” Mr. Treiber said. He estimates Constellation will spend more than $600-million on acquisitions this year, compared with $565-million last year.
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