Boss Your Comps pt.3: Does your rollup deserve a Constellation Software multiple?

Why is this discussion important

We’re living in momentous times for the rollup industry, with a plethora of new entrants raising capital for very different strategies but fundamentally the same premise. From CSI copycats (VMSs, mission-critical software, etc.) to niche plays (Salesforce ISVs, WordPress / Jira apps etc.), every pitch we’ve seen references CSI’s scale and valuation as “proof of concept”. But is it really? Do these startups know what they’re talking about? We spoke to multiple CSI investors and sell-side brokers to find the answers to these questions. 

Let’s get our facts straight

As of the date of writing, Constellation is trading at 5.4X revenue, 21X EV/EBITDA and 26X EV/FCF (based on 2023E consensus estimates). This is rich – on par with Microsoft and Oracle. At US$43B market cap, CSI is Canada’s 12th most valuable public company, trailing Lululemon and Couche-Tard. What’s more, at ~C$2,600, the stock is trading at an all-time high: up roughly 13X in a decade and comfortably beating the Canadian benchmark (up ~50% during the period). 

CSI investors tend to fall into either of these two camps: those that believe the valuation appropriately reflects its track record as well as growth prospects; and those that feel it is a bubble. Since we are not equity analysts, we did our best to dissect the former group’s perspective.

Key success factors of serial acquirers

Firstly, let’s recognise that the CSI equity story is essentially a serial compounding story. Most investors that are bullish on CSI, have studied and/or invested in the following names:

• Danaher Corp (listed, $176B market cap): a rollup of medical, industrial, and commercial product businesses.

• Transdigm (listed, $47B market cap): a rollup of aerospace manufacturing businesses.

• Capital Cities/ABC (no longer exists): a rollup of TV channels.

Adding CSI to the list above, the four most common characteristics of successful rollups are not necessarily software-specific:

• Big, fragmented markets with lots of targets

• A fine-tuned execution machine. A decade ago, CSI was closing 20-40 acquisitions per year, a figure which has risen to over 100+ years in recent years. That’s one completed acquisition every 3 days. Put another way, the average invested capital has risen from $195M in 2008 to $4.6B in 2022 – up an astonishing 24X! 

• Low price to acquire those targets relative to the improvements that can be implemented to achieve incremental returns. Here, the ability to improve earnings sustainably is key.

• Frugality. Perhaps most famously, CSI does not allow its employees to take business class flights even for longer durations. There are no secretaries, either!

Further reading: for a deep dive on CSI’s M&A machine, read “A Better Combined Ratio”, by Bizalmanac. 

Taking CSI as an example of a best-in-class acquirer, here are a few ways how it aces operational improvements:

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