Constellation Software (CSU) has been one of the most successful technology companies in Canada over the last decade. Mark Leonard, now CSU’s former CEO, was the architect of the highly successful business model of acquiring small vertical market software (VMS) businesses in niche markets that are often overlooked by large software companies like Microsoft or Oracle due to their limited addressable size.

The company has adopted a decentralized culture that allows managers at the subsidiary level to do mergers & acquisitions (M&A) within a certain dollar threshold, while maintaining strong alignment of interests between managers and shareholders. This formula has been so successful that it has redefined the category of serial acquirers as a potential hunting ground for compounders.

Given CSU’s current size of around CAD$82 billion in market capitalization, investors might wonder how long the company can sustain a healthy double-digit growth rate. So far, CSU’s management has proved doubters wrong, as they continue to execute brilliantly and prove that they are not a “one-trick pony”. In recent years, CSU began spinning out subsidiaries to encourage entrepreneurship, enhance operational efficiency, and enable proper investor evaluation. For instance, CSU spun out Topicus and Lumine—both of which have already created significant value for shareholders.

Investors essentially see these entities as “mini-Constellations” with potential to grow and compound capital for years to come. This blog will break down the investment case for each entity along with our ranking. 

1. Constellation Software (CSU): The original CSU entity has been one of the best-performing stocks in the Canadian market over the last decade. Its success has become a global case study for serial acquirers. That said, due to the law of large numbers, the parent company may not be able to sustain a 15%-20% compounded annual growth rate (CAGR) indefinitely. Going forward, the company will likely seek opportunities to deploy capital outside of the VMS universe to continue to compound capital for shareholders. It is still unknown which market niche they will target to build an expertise around next, but our experience suggests that it’s unwise to bet against a great management team, even in the wake of Mark Leonard’s departure.
2. Topicus (TOI): The company was spun out in 2020; the original intention was to facilitate the transaction for the target company – Topicus.com – a Netherlands-based diversified VMS provider. TOI’s founders still wanted to maintain their own identity as a separate company and did not want their legacy to disappear into a large conglomerate. As a result, TOI became an arm’s-length vehicle for CSU to expand its presence to acquire VMS businesses in the European market. Historically, TOI’s portfolio of businesses has displayed the strongest organic growth profile among CSU’s family of businesses.
3. Lumine (LMN): Lumine was spun out in March 2023 to facilitate its acquisition of WideOrbit, a U.S.-based media VMS business. Since then, LMN’s share price performance has been sensational, even accounting for the most recent drawdown. Over a two-year period, LMN has delivered investors an annualized return of roughly 40%, not too shabby for such a young public company. Much of this success stems from LMN being the smallest member of the CSU family: each successful deal tends to have an outsized impact relative to its market cap. The company’s pipeline of acquisitions has also remained strong in recent years.

Our ranking here is based on our view of each company’s risk/reward profile rather than just expected returns. In that sense, CSU remains the most diversified conglomerate with the longest track record and currently trades at discounted valuations. Of course, investors should be aware of certain overlaps across the three, since CSU remains the controlling shareholder of the other two entities.

For direct exposure to higher growth and greater risk, investors may favour LMN while moderating exposure to CSU and TOI. Ultimately, these names should be viewed collectively—as a single position within a portfolio, and investors should adjust position sizing accordingly to manage risks.

Current Situation

In recent years, all three entities have executed their strategies effectively. However, share prices across the group have been under pressure recently due to uncertainty around artificial intelligence (AI) and the abrupt resignation of Mark Leonard for health reasons. CSU, in particular, experienced its largest drawdown since going public, as the company’s prospects have never been uncertain.

Overall, due to the decentralized organizational structure, the importance of one person like Mark Leonard, though, is significant, but it may not tremendously impact the whole system that has been operating autonomously for some time. Lastly, investors can argue that “Mark Leonard’s premium” is no longer embedded in CSU’s valuation, but our view is that AI will not disrupt the vertical market software (VMS) industry overnight, if ever.

Importantly, in the most recent call, CSU’s executives mentioned AI has not significantly changed its business model, M&A strategy, or long-term outlook—yet. Time will tell whether this proves to be a once-in-a-decade buying opportunity or the start of a long-term slowdown remains to be seen. For now, our view is that CSU’s family is not going anywhere, anytime soon.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.