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Over two decades, Constellation Software Inc. used a steady diet of acquisitions to become one of Canada's largest tech companies, gobbling up more than 250 smaller rivals to build a $12-billion business.

In recent months, Constellation's growth-by-deals strategy has stopped working. Activist investors and private-equity funds have become increasingly aggressive players in a sector the Toronto-based company used to dominate, and are outbidding Constellation on takeover targets.

The company is adapting – it is venturing into the Japanese software market through a joint venture struck at the end of December. But for investors, the thrill is gone: After years of strong performance, Constellation's stock is losing the premium valuation it once enjoyed as a go-go growth play; having gone from $37 to $600 since 2010, it has stalled in recent months.

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It's the latest example of the limits faced by a company focused on expanding through acquisition. (A more dramatic, and ugly, case study in how these roll-up growth strategies lose steam comes from Valeant Pharmaceuticals International Inc.)

Constellation's most recent attempt to snap up a promising tech company on the cheap shows how activist investors and PE funds have changed the dynamics of the market. Back in August, hedge fund Crescendo Partners forced telecom services company Redknee Solutions Inc. to put itself up for sale.

Crescendo, based in New York, is known for stirring the pot at underperforming Canadian companies such as Forzani Group Ltd., Spar Aerospace Corp. and Geac Computer Corp.

Redknee, which makes its home in Mississauga, Ont., went public in 2007 and is one of many small-cap tech companies that are long on potential but struggling to make the major leagues.

Constellation emerged as Redknee's white knight in early December, striking a friendly deal to invest $80-million (U.S.) This was business as usual: Constellation pounced on a vulnerable small rival, and no one expected another bidder to challenge Canada's tech king of consolidation.

Except this time, a rival did step up. Private-equity fund ESW Capital, a long-time Redknee shareholder, offered to inject $83-million, and Redknee's board and their advisers at TD Securities decided this was the better option. ESW Capital, controlled by Austin, Tex.-based entrepreneur Joseph Liemandt and his family, holds stakes in more than 50 tech plays and favours investing in troubled companies.

Coming off their swing-and-miss at Redknee, Constellation management stressed to analysts that they still see plenty of takeover opportunities and forecast up to $1.6-billion (Canadian) of acquisitions in the next five years. Industry observers are more cautious: Tech analyst Steven Li at Raymond said in a recent report on Constellation: "The slower pace of M&A bears watching, in our view."

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Even if Constellation can close deals, the price tag is rising on tech takeovers, which weighs on the potential returns for the buyer.

"Increased private equity competition and shareholder activism has driven up valuation multiples which makes it difficult for disciplined acquirers to deploy capital on mergers and acquisitions," said a report on Constellation last week from CIBC World Markets tech analysts Stephanie Price and Varun Choyah. The pair added: "Though Constellation has lowered its hurdle rate for certain types of acquisitions, we continue to view the environment as challenging."

For Constellation, and any company that looks to takeovers as a growth strategy, it is getting harder to find targets at bargain prices.

Equity valuations are already elevated in many sectors after an extended bull market. Private-equity funds such as ESW Capital have emerged as serious rivals to strategic buyers. And activist funds such as Crescendo are gaining influence as they build sizable war chests and alliances with traditional institutional investors.

Governance guru David Beatty, a professor at the University of Toronto's Rotman School of Management, said a report last week that there are now approximately 550 activist funds around the world, with $180-billion (U.S.) in firepower, compared to $51-billion just five years ago.

Mr. Beatty said: "To magnify their clout, [activists] are increasingly attracting the interest of asset and pension-fund managers and collaborating in transformative campaigns."

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