Analysis: Constellation Software (TSX: CSU) /P1

This is another type of post. I am writing as I am exploring a company that I have heard more and more about: Constellation Software. Source used are initially the public documents, so statutory filings, the annual letters of the CEO and elements like that.

I am writing here as I read and do not claim to do a deep analysis. The language is how I write, not artificially complex.


As the company state, this is a holding/investment company. The investment strategy is owning cash generative assets for a long term (as opposed to trading) and use that cash flow to buy other assets. So the cash flow stream does not come from product as such but it comes from the business that then have products. Those I am not looking at those right now, since I am staying at the company level.

Business Model: 

In a "normal" business I would look at the unit economics of the products being sold plus the market size for them. Those products generate cash which you can use to make other products that again make more cash or give it back to shareholders.

This company is in the business of buying other companies. That means the company management basically does the product analysis described in the paragraph before. That is the basis of judging the management. Obviously one could form an opinion of the products of the company the management has bought, but this would be more of a qualitative assessment. The equivalent in a "normal" company would be to go on the level of product execution, like a particular advertisement campaign.

Given the above, there are two factors that matter for the business model:

  • free cash flow of existing companies 
  • additional free cash flow generated buy the additional acquisitions

The first bullet point here is basically the running of the existing business, the second part is the "investing element".