Liberty

As predicted: http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2333196 Prime Members Now Earn 5% Back When Shopping at Whole Foods Market Using the Amazon Prime Rewards Visa Card Also launching some generic OTC products: https://www.cnbc.com/2018/02/20/amazon-has-quietly-launched-an-exclusive-line-of-over-the-counter-health-products.html

Lots of torque from 0 RPM + instant modulation of traction control + snow:

Stock down over 9% right now on Q4 results. https://news.walmart.com/2018/02/20/walmart-us-q4-comps1-grew-26-and-walmart-us-ecommerce-sales-grew-23-walmart-us-full-year-comps1-grew-21-and-walmart-us-ecommerce-sales-grew-44-fiscal-year-2018-gaap-eps-of-328-adjusted-eps2-of-442

this kind of behavior will spur a wave of consolidation among suppliers? It already has: btw, I posted this in the TDG thread because there's no BA thread, but I don't mean to imply anything about the impact on TDG.

https://www.bloomberg.com/news/features/2018-02-14/boeing-is-killing-it-by-squeezing-its-suppliers

A lot of the small VMS businesses are lifestyle businesses run by technical founders who have started them decades ago, have known the employees for a long time, etc. The considerations and skills are different than for much bigger businesses, publicly traded, run by a bunch of MBA non-founders, etc. OpenText is pretty different in model from CSU, in my opinion. Even Enghouse, which is run by someone who knows Mark Leonard, tends to integrate the businesses more and stick to fewer verticals.

It's indeed rare. A business like Heico does something a bit similar, financing acquisitions mostly through FCF (a bit of debt), as does Roper or Jack Henry. Sorry, I didn't mean to make it sound like you said this, I was just trying to differentiate CSU from the more common model of private/public arbitrage that goes "get a high valuation because you're growing quickly by buying companies with stock issued at a high valuation because you're growing quickly by buying companies with cheap equity...". Obviously that's a brittle model. I like that CSU is the inverse of that and benefits from shocks to its industries or even from generalized lower valuations.

I have been thinking about this as well. I don't think they have any real edge but what is it that has made their process successful and consistent? I have owned the company in the past and actually did go through quite a few transcripts and reports to try to understand the process. I think it must come down to changes at the actual company. I recall reading they have a team that goes to the acquired companies and tries to implement certain standards. Beyond that, I'm speculating here, each of the acquired companies must have overhead admin staff (HR/payroll) that can be cut as they centralize those processes. It wouldn't be a huge savings but it would drop right to the bottom line. There might even be room to cut some developer positions if the customers are sticky but that could jeopardize the future. As far as the arbirtrage theory, I don't think it holds up as they aren't selling shares to make acquisitions. There is definitely a gap between their public valuation and the purchase price valuations but they don't take advantage of the gap. As I've said above, the VMS businesses and CSU are different animals, which explains the different valuations. VMS businesses can't redeploy the vast majority of the cash they generate, so they are valued mostly as slow-growing cash cows. CSU can redeploy the majority of the cash it generates at high ROICs, so it is valued differently. VMS are also very vulnerable to disruption in a single industry. CSU is not only diversified across industries and geographically, but as a buyer of asset, it benefits when there is disruption that causes distress and lower valuations (in fact, in the past CSU has invested in publicly traded software companies opportunistically, another way to deploy capital). And as you point out, since they don't issue equity to acquire companies, they're not vulnerable to the reflexivity that happens with companies that depend on a high valuation to keep M&A going, and that depend on M&A to keep valuation high... But if CSU couldn't do anymore M&A starting tomorrow, some things would happen, but it wouldn't be a catastrophe, IMO. The valuation would likely compress since their track record of creating value through M&A is strong, but it wouldn't go to the floor. It's still a very good business (high margins, capital-light, recurring revenues, low competition), better than the average SP500 company, I'd say, so probably not a below market multiple. They'd probably redirect more capital to internal growth initiatives, so over time organic growth should tick up (probably not getting as good ROICs there are with M&A, but still high), the margins would go up for a while, as they've explained the recently acquired businesses have overall lower margins but go up over time after they own them. Margins would also go up because all the costs for M&A would go away (they're low, but still non-zero). Then there'd be a series of special dividends to return the extra cash. So with the growing margins and higher organic growth, I think results would still be nice for the long-term despite a one-time valuation hit. If they wanted to do even better, they could leverage a bit to some solid investment grade level, maybe 2-3x EBITDA, and I wouldn't be surprised to see double digit per share growth in FCF with very low risk. Not a terrible scenario. SaaS is just a delivery method. Many CSU businesses operate with the SaaS model already. Leonard seems to think that the economics of SaaS aren't quite as good, but that seems to be a question of degree, not of kind. Also consider that Leonard is always pretty conservative in his forecasts. He's been saying for 10 years that valuations are high, it's hard to buy things, things are not looking as good, etc, yet they've done pretty well (you can also find Buffett letters from the 80s that mention how their large capital base means it'll be hard to outperform going forward). SaaS doesn't change the fact that small vertical niches will be served by specialist companies, and that the Microsofts and Oracles and SAPs of the world won't develop specialized software and do customer support for small markets with just a few millions in revenue per year.

Actually, this is an example of why CSU is unique. They don't give options or RSUs or any stock compensation. They give very large cash bonuses that are rationally tied back to your sphere of influence. Management is expected or encouraged to use the cash bonus to purchase stock on the open market. There is no incentive to artificially game the stock price. They have the most rational incentive system of any company I follow. The only others that come close are BRK and the 3G companies. Yeah, the incentives are tied to the ROIC/IRR and organic growth of the specific business unit where the people work, and there are zero options, it's all stock purchased in the open market. They've also recently been rejigging incentives to better capture the long-term results of initiatives that might take long periods of R&D and investment before they bear fruit, to avoid de-incentivizing those because if you just invest less, you can have a seemingly higher ROIC but it reduces your long-term growth. They really have a long-term mindset. Oh, and the CEO has cut his salary and bonuses to zero (salary since 2014, bonuses too since 2015), he's now only making money through being a shareholder. Before that he had a pretty small salary compared to others in similar businesses (his peak salary+bonus right before he cut it was around $2m). He never had any options either, afaik.

What makes the model special is they combine niche VMS economics with ability to redeploy capital. The small VMS companies can't redeploy the vast majority of the capital that they generate at high rates, while CSU can, making it deserve a different valuation. You're too human, eh? Glassdoor is meaningless in a company this decentralized (on top of sample bias). Some businesses had bad working conditions before being acquired, and they might still do afterwards, and that's too bad. But the business unit is to blame, not HQ. Being acquired by CSU seems a heck of a lot better than being acquired by PE. CSU keeps businesses forever, provides autonomy, small teams, no bureaucracy, and provides ways for managers to grow (become capital allocators, do tuck-in acquisitions, invest in long-term organic growth projects, become a portfolio manager at the operating group level, etc). PE loads you with debt, stops investing for the long-term and flips you a few years after gutting you, often so you can repeat the cycle at a different PE firm... Seems to me like CSU is the acquirer of choice, which is one of the reason why so many small businesses sell to it even if they could get higher prices with PE. Not to mention that many, many CSU employees have become millionaires through stock ownership (one of the reasons the CEO has often talked down his stock price... doesn't want it to get overvalued and have his employees feel like they have to sell).

I wasn't suggesting to "read just to read", but because I think it's an interesting company that I think you might enjoy learning about. Don't even read the thread, just read the shareholder letters. How many companies really have a genius model when it comes down to it? If you are looking for that, you'll be disappointed all the time. It's mostly all of the same basic things applied well, in the end... Constellation is great because they're very disciplined, very shareholder friendly, very long-term oriented, and operating in good businesses (fishing in the right pond). They also do something that is hard and has an easier alternative (between tracking thousands of tiny mom & pops businesses and buying dozens of them, and going to investment bankers to see larger businesses, almost all software acquirers do the latter). That's it. How long can they keep going? Depends what you're looking for. If you're expecting them to repeat their early years, then yeah, that can't go on forever. But if you're looking for reasonable results, I think they can continue for a long time. It's a huge industry, they've made maybe 250 acquisitions over the past couple decades and there's tens of thousands of VMS businesses out there. They're just getting more into Europe and Scandinavia, just started a JV in Japan to look more over there, etc. They've just greatly increased the number of people who look at M&A full time because they knew that they were not even seeing tons of deals, they're also working on getting in front of more of the larger deals (that they almost never get because they're too disciplined on price, but if every few years they deploy a few hundred millions or a billion in a single deal, that helps). In the past month and a half, they deployed more capital than in all of last year, so it seems to be working so far. The CEO has also said at the last AGM that if they can't deploy all their cash, after long enough they'll start doing special dividends rather than lower their hurdles. That'd be fine with me too. Almost, not quite. They're not trying to stop buying tiny companies and move on to bigger companies. They've just kept scaling up their capability to buy more small companies while they look for the rare bigger companies that meet their hurdles (they also get a bunch of medium ones... All the press release companies I post here are $10-20m+ range). And the companies are not exactly no growth, many have pretty decent organic growth, especially for maintenance revs, which is the recurring and highest margin part. Mostly around 1-2x GDP. But they also buy distressed assets and shrinking businesses sometimes, and will shut down parts of acquired businesses if those parts don't generate good returns, so the overall organic growth number is noisy (a couple years ago they bought some larger mining and real estate distressed companies that made overall organic look bad, but if they had their usual discipline buying those, they'll get nice IRRs). You can get more detail in some of the letters... But in the end, what matters to me is that they get good returns on their capital, not a certain number of growth. Chasing growth can destroy value, especially in niche markets; if they wanted to they could go after more growth but that might trigger a war with competitors that would just make the economics terrible for everyone. Best to be rational and keep your competitors rational.

There's no synergies. They actually break up their larger businesses into smaller ones because they believe that an entrepreneurial culture is more effective and bureaucracy hurts the businesses. They've had ROICs in the 30% range for over a decade (on total capital employed, I'm not stripping out intangibles or goodwill). Turns out, small mission-critical software businesses in niches without much competition are actually great businesses. They just usually can't redeploy their capital, so that caps their ultimate value. But if you have a model that can use that capital and redeploy it at similarly high returns, then you have something even better.

Anyone new to this company, I'd suggest reading all the president's letters, this thread, and the articles linked from it first. The model is pretty well descried, I think. But in general, it's not a secret model -- the CEO has said that the barrier to entry is a checkbook and a phone -- it's a "simple but hard" model, kind of like how Berkshire's model is clear for all to see, yet almost no one has done it because the secret sauce is discipline and rationality. Short version is: Company that hasn't issued a single share since IPO and has net cash is buying super-sticky tiny cash cow software businesses that don't need capital for 4-6x EBITDA, then improving them via best practices and/or cutting low-return operations (commodity hardware sales, consulting, etc), and using their cashflow to buy more. Almost no one else can buy such tiny businesses and move the needle because their secret sauce is the ability to do good acquisitions in a disciplined and rational way at scale (tracking every single one since inception, calculating base rates, deploying capital across dozens of verticals and around the world, so can move to unloved industries/geographies to get lower prices, etc). They are tracking over 37,000 VMS businesses, keeping in touch with them so that when they decide to sell, they have a shot. Once in a while they get a bigger business, like Acceo recently or TSS a few years ago (TSS has been a big success -- you can track it because they don't own 100% of it and they have a put on the remaining part, so it has to be revalued based on fundamentals metrics and that has gone up a lot since). The secret sauce is it's orders of magnitude harder to deploy $100m over 50 small businesses than in one big one, but if you can do it, you can get much better prices and face less competition (tiny businesses are actually harder to buy than big ones because tend to be less "professionalized" and dressed up the way that big acquirers want). The last thing Vista or Thoma Bravo or Roper wants is to track tens of thousands of mom & pops operations and have to deal with dozens and dozens of $2-3m acquisitions... They're not set up for that. But if you have 200 business units, all you need is for these managers - who knows their vertical better than anyone - to buy a competitor every few years and you've already deployed a lot of capital in a decentralized way.

CFO said that if you adjust for the tax timing impact, this year's cash was up 17%.

Weitz on their new PCLN position: https://weitzinvestments.com/resources/documents/Literature_and_Publications/Commentary/2018/AnalystCorner_PricelineGroup.pdf

Speaking of conference calls, at the end Leonard said that he was thinking about stopping the conference calls and requested feedback from long-term shareholders (via emailing them or calling them) about this. I personally wrote that I think the calls are useful because they help us get to better known management and how they think about certain things, and even if the analyst questions aren't always the best, often there's some aside that Mark or Bernie will make that will be super useful in understand some part of the business or the VMS industry, and that some things that might seem obvious to them might not be as obvious to us, so it's still a good chance to learn. There's also be interesting things that have been said on the calls that haven't been written anywhere else (such as about how they go about decentralizing and pushing down M&A responsibilities), and usually when I have a question when reading the filings, there's a good chance it will be answered on the call.

https://www.bloomberg.com/graphics/2018-tesla-tracker/

The first quarter isn't even over ;)

Q4: https://globenewswire.com/news-release/2018/02/14/1348408/0/en/Constellation-Software-Inc-Announces-Results-for-the-Fourth-Quarter-and-Year-Ended-December-31-2017-and-Declares-Quarterly-Dividend.html http://www.csisoftware.com/wp-content/uploads/2018/02/Q4-2017-Shareholder-Report.pdf

This is a good point. Another great example of this is Big Tobacco You can also go back to the breaking up of the big trusts last century. This is held as a watershed antitrust moment, but if I remember correctly, the shareholders of the broken up entities did quite well.

http://www.adweek.com/digital/brian-killen-shareiq-guest-post-instagram-regram/

https://arstechnica.com/science/2018/02/three-years-of-sls-development-could-buy-86-falcon-heavy-launches/

I wasn't even looking at China. In the US, you can look at telecoms/cable in the past, or healthcare, pharma, or education... All highly regulated, creating high barriers to entry favoring incumbents over entrants and not affecting profitability much (or making it better, if anything).

If anything, big tech is under earning. Google is spending billions on venture-capital-type investments and reinvesting a lot into Youtube growth, Facebook is not really monetizing Messenger, Whatsapp, and is just getting started monetizing Instagram, and ARPUs outside North America are still pretty low, Amazon is reinvesting everything into growth, same with Netflix... Pretty much any of these companies could by choice make its earnings balloon up if they wanted to, but that might not be the best long-term decision for value creation. Regulatory intervention is always tricky. Can have an impact, or can entrench you further by making it impossible for new entrants to compete because the regulation just makes it harder to operate in the industry for sub-scale players. ¯\_(ツ)_/¯

http://tcrn.ch/2C9DcVJ Here’s a video of Elon Musk watching the Falcon Heavy take off