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Constellation Software has become one of Canada’s biggest publicly traded technology companies by playing the acquisition game a very different way than most. Rather than seeking large deals that transform the company, chief executive officer Mark Leonard has built a business by constantly buying small software companies for a few million dollars apiece.Frank Gunn/The Canadian Press

In this age of zero privacy, Mark Leonard has managed to maintain a practically unthinkable level of anonymity for just about any individual—let alone an IT executive who runs one of Canada's most dynamic, fastest-growing and most acquisitive software companies, and who has been compared favourably with Warren Buffett and Prem Watsa. So it's no surprise that Leonard would probably prefer not to be the subject of a profile in this magazine. For that matter, he would prefer not to be the subject of a profile in any magazine. Or newspaper. Or trade publication. Or television show (you know, if there were a television show devoted to profiling Canadian business leaders). No, the founder, president and chairman of Constellation Software Inc.—a Toronto-based, publicly traded software company with a $5-billion-plus market cap and one of the best-performing stocks on the TSX—would prefer not to be profiled at all. And so far, in the nearly 20-year history of Constellation, he's done a pretty good job of staying out of the spotlight.

In fact, you could say he's done a strangely effective job of it. Search "Mark Leonard" on Google Images and you get nowhere. Scan the Web, or even the company's website, for basic biographical information and you'll find, well, not much. One source from England, where Leonard sits on corporate boards, says that he was born in 1956. A person close to Constellation says he was born in the United Kingdom; another seems to think he comes from South Africa, but "I really can't remember." The company's online bio-graphy (no photo) notes that "Mr. Leonard founded CSI in 1995," and before that worked in "the venture capital business for eleven years"; it also records that he has a BSc from the University of Guelph and "a MBA" from Western University. And that's about it. Social media? Well, he's on LinkedIn (no photo, of course), which duly notes his job title and that he attended Western's Ivey Business School from 1980 to 1982. At the time of this writing, he had 311 LinkedIn connections—so somebody knows him. And what do those people have to say? "He is probably the most intensely private individual in IT," says one long-time associate who, like nearly everybody else contacted for this article, spoke on condition of anonymity. "He's one of the smartest tech executives I've met in my entire career."

And there's an irony in that. Because if anyone is deserving of whatever celebrity the business pages can bestow on a Canadian corporate leader, then Leonard is probably the guy.

With an initial $25-million investment from OMERS and his old associates at Ventures West Capital in 1995, he has built Constellation into a world-leading consolidator of vertical market software (VMS) companies—firms that create products to help run businesses in specific industries. Over the years, Constellation has made scores of acquisitions and, through its six operating groups, now provides software to over 60 industries, from health care to law to public transit. For instance, Markham, Ontario-based Jonas Club Management makes the programs that run golf courses' payroll, tee-time reservations and food-and-beverage operations. Emphasys makes software for various public housing authorities. Constellation's customers need the kind of stuff that's too specialized to merit much attention from the big guns of enterprise software, and all these VMS firms under its umbrella give Constellation a strong competitive position in the North American marketplace—that is, there isn't much competition at all.

Typically, Constellation's acquisitions are small—in the $2-million to $4-million range—but add them all up, slip in a dose of Constellation's financial and oper-ational discipline, and you have a company with $1.2 billion (U.S.) in sales in 2013 and an EBITDA margin of 20%. A tidy proxy for Leonard's accomplishment lies in the company's stock performance: From its initial public offering in 2006 to the end of the first quarter of this year, CSI returned more than 1,300%. Add in dividends and that number soars to 1,535%. That's equivalent to a compound annual return of almost 43%.

Those kinds of results tend to get you noticed, like it or not. And now more than ever, the focus on Constellation and its enigmatic president is only likely to grow more intense. Two decades after its founding and eight years on from its IPO, Leonard's company has had a great run. At the end of the first quarter, the stock was trading at just under $270—double its price a year ago. Last year was one of the most acquisitive in its history: 30 acquisitions, including two uncharacteristically large fish. In June, through its subsidiary N. Harris Computer Corp., Constellation acquired Virginia-based health-care IT company QuadraMed Corp. for roughly $77 million (U.S.) in cash. Then, in December, Constellation bought Total Specific Solutions (TSS), kind of the Dutch version of Constellation Software, for ¤248 million (about $360 million at the time). For a company that traditionally makes 10 or 20 acquisitions a year for up to $4 million a pop, that's plenty of fish to swallow.

One beauty of Constellation's core model is that any cash its mom-and-pop acquisitions spin off is returned to Constellation for redeployment into new deals. (The cash flow, by the way, is quite healthy—Constellation generated $81 million [U.S.] of it in Q4 of 2013.) Leonard and his close-knit team at head office have two major responsibilities: bring acquired firms up-to-speed operationally by getting them used to the CSI way of doing things, as Leonard has called it, and put all that cash to work making smart acquisitions. That last bit, according to those who know him, is Leonard's real superpower. "He's an analytical guy who does mental math in his head," says one friend. "He can determine in about four seconds whether an acquisition would make sense and be accretive to his earnings."

But the big fish, to paraphrase Chief Brody, require bigger boats. For Constellation, the TSS acquisition meant drawings on its credit facilities stood at nearly half a billion dollars by the end of 2013. This is not at all to say that you hear from anyone who thinks Constellation is taking on too much debt. But the company has been growing so fast, for so long, that some observers are wondering: How long can it last?

For just about any other company, with any other guy at the top of the food chain, the answer to that question would be simpler: It can't. But Mark Leonard has his own way of doing things, and the future of Constellation and its remarkable trajectory are bound to depend a lot on him.

So, who exactly is this guy?

About the fullest, if not the most reliable, description of Mark Leonard's life before Constellation can be found in a bio prepared for one of his rare public appearances, as a speaker at last year's Ivey Leaders Forum at the Ivey Business School. The bio reads, in part, that before his stint in venture capital, "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."

How much of this is true, the world may never know. But it would obviously be a mistake to conclude that Leonard's lack of public profile translates into a lack of personality—far from it. Leonard is no Howard Hughes in a hermetically sealed hidey-hole. By all accounts, he is a sharp, focused, engaged leader—a bit eccentric, according to some, and a bit intimidating, at first. Part of that intimidation factor might be due to his physical presence: He stands 6 foot 4 or 6 foot 5, depending on whom you hear it from. He's a rugby enthusiast, and he keeps himself in tip-top shape for a man in his late 50s. The other intimidating thing is how sharp he is—like, really smart. "But once you get past the awe of how brilliant he is, he's very personable," says one person close to the company. "He'll walk into anybody's office and have a conversation with them." Friends say he is a devoted family man and note that he has a wicked sense of humour (see "gravedigger," above).

To be fair, Leonard is not the first, nor the only, notable Canadian business leader to shun the spotlight. Watsa, the wizard of Fairfax Financial, rarely makes public appearances and does interviews even more rarely. He only began to grant interviews—very selectively, mind you—in the mid-2000s, after an ugly, and ultimately unsuccessful, salvo from short-sellers trying to drive down the stock. Meanwhile, Daryl Katz, billionaire CEO of the Katz Group of Cos., which owns the Rexall/Pharma Plus drugstore empire, is so unused to talking to reporters that he once admitted to not knowing what a "presser" was. But those are just two examples of what many journalists see as Corporate Canada's avoidance issues, at least when it comes to interviews. They'll point to CEOs in the United States, who are far more open and available to the press than their Canuck counterparts, and wonder why Canadian leaders don't do more talking. Look at this magazine—three of the past five covers have featured Americans. Why the reticence? Well, some CEOs point to the Canadian plague of tall-poppy syndrome. For others, it's just not what they're good at, and they're smart enough to know it. For most, it's probably just that they don't have to.

But for Leonard, the reasons might have more to do with the company's approach to its shareholders and its share price than any natural disinclination to see his name in print. "Their focus is on long-term shareholders, and they run the business with a long-term focus," says one person who follows Constellation closely. "If you're out there doing marketing, that's more of a short-term focus." The observer also notes that Leonard has commented several times in analyst calls that he believes the stock is possibly overpriced. "Constellation would rather the stock be fairly valued than overvalued, so they don't want to go out there and push it up even higher than it already is." Leonard has no desire for Constellation to be a widely held stock—so why sell it to the masses?

The bonus structure for executive officers also works against "pushing up the share price." Like Buffett's Berkshire Hathaway, Constellation doesn't do option plans. Instead, executives are required to take 75% of their after-tax bonus and buy Constellation common shares on the open market, which are then held in escrow for an average of four years. "If the stock is overvalued, then they're buying overvalued stock," as one observer puts it. Leonard, too, reportedly has much of his net worth tied up in the company—he's one of the largest shareholders, with 6.76%, worth about $400 million as of early April. And he is very protective of shareholders. Since 2007, Constellation has not issued a single share. In fact, all the proceeds of its IPO went to CSI's institutional shareholders, OMERS and Birch Hill Equity Partners. Constellation didn't get a penny. About the only sop the company has offered equity markets came in 2012, when it doubled the dividend to $1 (U.S.) per quarter. The dividend was a form of appeasement—or, as Leonard has written, "a tactic, not a strategic move," which "broadened the appeal of our stock and thereby helped us find an exit for our private equity investors." (Birch Hill announced it had sold its remaining interest in 2012.)

Leonard dutifully participates in quarterly analysts' calls, and every year he writes a Buffett-esque letter to shareholders (and yes, by all accounts, it's actually him who does the writing). "He's indifferent to the whims of Bay Street, but as far as corporate stewardship goes, he's first-class," says Jason Donville, CEO of Donville Kent Asset Management, which has held Constellation stock in its fund since 2008. "He still writes a letter to shareholders like it's a private company with 22 investors."

Listening in on the calls or reading his letters, a couple things become clear: One is that he knows his stuff—Leonard answers questions in paragraphs, not in the scripted way many media-trained CEOs do, but in a way that demonstrates he is thinking on his feet. The other is that he marches to the beat of his own drummer, and that the CSI way of doing things is the way he is going to continue to do things, no matter what anyone else thinks.

As should be obvious by now, Leonard declined this magazine's request for an interview, but at least he was prompt in declining. "Kind of you to offer," he replied by e-mail within about half an hour of the request being made, "but I discovered when I was in the venture business that interviews aren't for me. What little I have to say, I generally put in my letters to shareholders. I do occasionally speak with students, but usually in the vain hope that I can distract them from pursuing careers in investment banking and private equity."

It's a gracious no, and it's more instructive than it might first appear. The jibe at investment banking and private equity is not wholly a joke—because as smart, analytical and financially erudite as people say Mark Leonard is, he is first and foremost an entrepreneur, with an entrepreneur's distaste for short-term thinking and impatient investors. Part of that comes from the very origins of the company, when Leonard the venture capitalist continually encountered great companies that were too small to get the notice of private equity firms or VCs. He came up with the idea of buying them, supplying them with capital and improving operations—but not with the VC's MO of exiting once the company was in shape. Leonard's goal is to hold them for life. As he put it in a March analysts' call in reference to TSS, "I'd much rather see them build the business as opposed to milk the business."

Making that model work relies on two things: finding the right targets, and having the operational and managerial skill to improve the businesses. On the operational side, Constellation brings a rigorous focus on return on invested capital (ROIC) to everything it does, and manages to eke out organic growth in the 5% range from its core acquisitions. How that works in practice depends on the company. At essence, what Constellation buys are customer relationships—and in these vertical markets, relationships with customers tend to be sticky because they can't get their software anywhere else. But that can also lead to inefficiencies, particularly on price. For instance, a long-time customer might be paying the same maintenance fees on software that he's been paying for years, while a new customer is paying far more.

Some insight into the highly analytical, returns-based approach inherent in the CSI way can be found in his 2013 letter to shareholders. Leonard writes about how Constellation approaches spending on research and development and sales and marketing (RDSM), and especially "initiatives"—Leonard's term for "significant long-term investments required to create new products, enter new markets" and so on. "The ethos of software companies requires the regular launching of visionary new products by steely-eyed tenacious developers," he wrote. "Initiatives grew to account for over half of our combined RDSM expenditures by 2005." But in 2004, Leonard and his team had begun measuring the internal rate of return on RDSM initiatives and found that it was pretty much going down every quarter.

CSI started running RDSM through the same ROIC gauntlet as it does potential acquisitions. Spending plummeted, along with the number of new initiatives. It's a development that Leonard seems to take some pride in. "We believe that CSI is one of the few software companies that takes a somewhat rational approach to long-term RDSM investments," Leonard wrote. "It took six years, but we have fundamentally changed the mental models of a generation of our managers and employees (though perhaps not of all the steely-eyed visionaries)."

Because Leonard and his team are so good at finding and "fixing" software companies, and if Constellation were only going to buy small software firms forever, Leonard's reluctance to sell more stock would not be much of a problem. But nothing lasts forever. At a certain point, you run out of things to buy. No one believes Constellation is anywhere near that terminus yet—the company says it has a database of 10,000 acquisition targets. Leonard also downplays the impact of the large acquisitions made last year on Constellation's business model. "I wouldn't see us touching this large levered transaction market until we felt we'd exhausted the small business acquisition market," he said during a recent analysts' call. "I'd say it's a much less attractive model than our core business model." He has described the TSS acquisition, in fact, as a toe in the water. Some observers point out, however, that as Constellation grows, meeting its financial targets through small acquisitions will become more challenging. "They like to buy the dominant market player in a small silo, so the business development group gets broader and broader," says Donville. "But they're going to have no choice but to move up in scale. I think they're going to look at larger companies."

Even to fund current growth rates, Constellation could need new capital. (Leonard has noted that Constellation can't continue to maintain growth in so-called maintenance revenue—which includes customer support fees on existing software licences—"without changes to our capital and/or dividend structure.") Where are they going to find it?

The most obvious place seems to be the buck Constellation pays out every quarter. In the March dividend announcement, Leonard said that "we would not hesitate to reduce or even eliminate the current quarterly dividend" if circumstances presented it with a "larger" investment opportunity. Leonard might not want to make that move, but he doesn't have a lot of options. What he would really like, he wrote last year, would be to finance growth through debt that was "long term, non-callable and the interest payments could be deferred for short periods….Unfortunately, investment bankers tell me that this sort of debt doesn't exist. If you are a long-term lender.…and are willing to work with us to design a novel lending instrument, please give me a call."

Another option would be to issue new stock. With a share price in the upper half of the $200-to-$300 range, a track record of growth and strong returns, and plenty of buzz about the Constellation story, it might be easy enough to raise $1 billion or more. It might be easy enough to get Mark Leonard into the media a bit, get in a few investor road shows, have him kiss a few babies and shake a few hands. Maybe he'll even end up on the cover of this magazine one day, articulating his grand vision for the future of the software industry.

Yup, that could happen. But it won't.

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