Constellation Software (TSE:CSU) acquires smaller software companies in highly vertical markets to dominate the software needs in those very specific niches, becoming the go-to company in multiple areas and sharing efficiency practices across the company’s holdings, says Peter Hofstra, President and CIO at Manitou Investment Management Ltd.
“Think of a golf course scheduling software, that type of thing, and [Constellation Software will] come in and completely dominate that niche market. And they’ll do that across things like bus scheduling, but they will come in and dominate these various niches with these smaller software companies, and then look to aggregate these and share best practices and so on,” Hofstra said.
Hofstra says that, because TSE:CSU is a software company, they don’t have the need to deploy large amounts of capital, and they can often do an earn out with their acquisitions. Moreover, the software is licensed, and there generally are upfront payments from their clients, making the holding one of his favorite companies.
“[Constellation Software is] a company that we think has taken a while for the market to really recognize its capacity to grow, and one that we’ve done very well with at Manitou. It instituted a dividend over a year ago, and it’s now in the index, so it’s become a company that’s certainly gaining more attention,” Hofstra said.
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