The big news in TMT in September was ADBE’s acquisition of Figma, which I covered here.
What caught my eye in the top expert call transcripts published in September was an interview with a former M&A director at CNSWF (Constellation Software), one of the most acquisitive companies in recent memory.
The company runs what the expert calls a contrarian investment strategy: focusing on niche, sticky software instead of burning money chasing giant TAMs.
“Constellation Software, the parent entity itself, is an investment holding business. It’s like a Berkshire Hathaway. The company over many years has aggregated a number of software businesses that all run and operate as independent business units within this umbrella called Constellation.
If you think about modern software investing, where you’re talking about growth equity or VC or just software companies today, the investment mindset is to look at a business that goes after a really large TAM with a large addressable market that has the power to change the world, that has the power to displace incumbents. You’re looking at a large market opportunity, broad appeal, grow at all costs. Usually, it’s one or two or three leaders in each category that come out on top, but everyone dies trying,
Constellation Software has a very pragmatic approach, a contrarian investing approach… of looking at really unique niche businesses going after a very niche market, very small addressable market that are so specific and have built such a custom and specific solution for a pointed market. They are really, really hard to displace. These are businesses that have amazing retention rates that are able to command pricing power again because they’re so unique with a small audience, but are typically very high-margin businesses, given that focus on efficiency.”
-Director, M&A – Constellation Software Inc. (Prior)
CNSWF now has over 500 of those independent business units, meaning they’ve had 500 opportunities to perfect the acquisition playbook. The challenge for the company now, according to this expert, is that the players have changed.
“Constellation has built a really solid operating playbook which has allowed them to repeat this process across over 500 business units that sit under the umbrella and continue to do so. The company has systematized investing and optimizing vertical market software businesses.
If you think about the businesses that Constellation acquires, these are businesses that were typically founder-owned and founder-operated, are generally bootstrapped, running at decent margins, or have the potential to run decent margins under a Constellation leadership. Most of the time, founders are looking for succession. These are businesses that were largely founded in the ’90s and 2000s. There is a different mindset of founders from that generation.
I beg the question of, if you look at 2022, how many entrepreneurs are starting software businesses that would be bootstrapped, that would be margin disciplined, that would go after a targeted market? When you think about Constellation over the long term and the new generation of businesses that Constellation would potentially invest in, Constellation would need a different roadmap. I think they understand that.”
-Director, M&A – Constellation Software Inc. (Prior)
CNSWF built a perfect acquisition and optimization playbook for a world that no longer exists. On a conceptual level, the bull case is that good capital allocation skills apply to any environment, and the bear case is that the chasm is too wide.
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Top 10 Expert Call Transcripts – Information Technology – September 2022
- MCHP (Microchip Technology Inc) – Former Manager Is Bullish on MCHP and Sees Slower Growth Due to Lack of Focus on Innovation and Automotive Applications
- CNSWF (Constellation Software Inc) – Former Director Respects CNSWF’s Contrarian Investing in Software
- WDAY (Workday Inc) – Former Sr. Director Thinks There Is a Lot of Runway Left Among Enterprises for WDAY’s Financial Solutions
- VRSN (Verisign Inc) – Former Competitor Sees Little Risk in VRSN Dot-Com Renewals but Sees Risks in Dot-Com Domain Growth
- FSLR (First Solar Inc) – Former Data Scientist Expects Acceleration in US Installation
- ADYEN (Adyen N.V.) – Former Partnerships Lead Believes ADYEN-NA Is a Strong Payments Company and Will Do Well in the Countries It Decides to Launch and Operate In
- ADBE (Adobe Inc) – Former VP Believes ADBE Continues to Enjoy Strong Structural Tailwinds and Growth Opportunities but Needs to Adapt to New Customer Segments and Improve the Ease of Use
- LRCX (Lam Research Corp) – Former Order Manager Thinks LRCX Is Strategic Has Strong Foundations and Will Do Great in the Long Run
- MDB (MongoDB Inc) – Customer Sees the Majority of Database Spending Shifting to MDB With a Preference for Atlas
- SNOW (Snowflake Inc) – Former Enterprise Sales Director believes there’s a lot of opportunity to grow revenues within Global 2000 accounts
Top 10 Expert Call Transcripts – Communication Services – September 2022
- WBD (Warner Bros. Discovery Inc) – Former VP thinks DIS is the Best Positioned Streamer
- NFLX (Netflix Inc) – Former Director Is Bullish on NFLX’s Pivot to Advertising
- TWTR (Twitter Inc) – Former Manager Believes TWTR Is in the Middle of the Pack While META Leads the Innovation in Social Network Security
- WBD (Warner Bros. Discovery Inc) – Former Director Believes HBO’s Strength Is Tentpole Content and NFLX’s Strength Is Having Enough Content to Keep Viewers on the Platform
- CMCSA (Comcast Corp) – Former Director Believes Fixed 5G Is Taking Share From Pricing Not Quality of Service or Capacity
- CHTR (Charter Communications Inc) – Former Director Thinks That Incumbent Broadband Providers Have a Huge Advantage
- GOOGL (Alphabet Inc) – Customer Believes GOOGL Will Continue to Grow Its Share Albeit at a Lower Pace
- EA (Electronic Arts Inc) – Former SVP Believes EA Would Be a Strong Partner and Target for a Company With TV Offerings Such as AMZN NFLX and DIS
- SPOT (Spotify Technology S.A.) – Former Client Partner Believes SPOT Will Have a Tough Time Generating Meaningful Podcast Revenues Without Major Franchises
- GOOGL (Alphabet Inc) – Customer Sees GOOGL as the Dominant Advertising Counterparty but Does Not See an Opportunity to Outgrow