Constellation Software has already had a banner year in M&A, spending $146-million on 28 deals so farBrent Lewin/Bloomberg
Constellation Software Inc. is ramping up its mergers and acquisitions (M&A) team, and giving more freedom to those lower down the food chain to execute on deals. Analysts expect the changes to drive even more M&A at the already very acquisitive company.
Earlier this week, alongside its second quarter financial results, Constellation revealed it had doubled the size of its M&A team to 60 people over the past year. The Toronto-based software company, which specializes in so-called vertical market software (tailored software for specific industries), said it is also planning to build out the deal-making team by an additional 25 per cent by year-end. The company also promoted Bernard Anzarouth to chief investment officer.
Constellation said it is also further "decentralizing" the M&A process, meaning lower-level product managers can pull the trigger on deals without needing approval from head office. The threshold for individual business units to deploy capital on M&A goes to $20-million from $10-million.
"Constellation should see the benefits of having a larger group of managers deploying capital and an increase in the number of transactions completed," Scotia Capital Inc. analyst Paul Steep wrote in a note.
The company has already had a banner year in M&A, spending $146-million on 28 deals so far, compared to 16 at the same time last year.
However, Steven Li, analyst with Raymond James, cautions investors not to expect results right away.
"A bit too early to tell what impact this decentralization might have on return on invested capital levels, as it will take a couple of years before seeing the results," Mr. Li wrote in a note.
By nature, Constellation is more cautious in spirit that some of its brethren when it comes to M&A. Despite its significant market capitalization of more than $14-billion, Constellation has never pulled off a huge, or as the street would term it, a "transformative" deal. Its largest to date was buying Dutch software company Total Specific Solutions for $350-million in 2013. Its average deal size is only $32-million, according to Thomson Reuters. So far, investors don't seem to mind, with the stock trading near an all-time high.
"The key investor concern we generally hear on Constellation (aside from valuation) is whether the law of large numbers will lead to a significant deceleration in growth – especially as Constellation hasn't been successful in landing larger acquisitions," BMO Nesbitt Burns Inc. analyst Thanos Moschopoulos wrote in a note.
For good reason, some investors are wary of roll-ups. There have been some spectacular blowups over the past few years, most notably Valeant Pharmaceuticals International Inc. and Concordia International Corp. – both of which were rewarded richly by investors for years by buying one company after another by leveraging up. Eventually, both collapsed under crushing debt loads.
Peter Hodson, founder and head of research at 5i Research – who has consistently recommended the stock to clients – said he's not worried that Constellation will eventually meet the same fate.
"They've done it all without any new equity and with a clean balance sheet," he said in an interview of Constellation's acquisition strategy. "If you compare it to some of the other roll-ups – Valeant and Concordia, it is a very different risk profile."
Niall McGee