Podcast Transcript: Going deep on Constellation Software with Mostly Borrowed Ideas (MBI)
This is the full transcript of podcast #7 with MBI
As a bonus for supporters (💚 🥃), here is the full transcript of this podcast interview with Mostly Borrowed Ideas on Constellation Software. I hope you enjoy it, thank you for being you!
Here is the audio version of the podcast:
Liberty:
Hello, my friend. This is the part where I pretend that we haven't been speaking for 30 minutes before this.
MBI:
Yeah. Yeah, let's pretend.
Liberty:
How are you?
MBI:
Oh, I'm so good. How about you, Liberty?
Liberty:
Hey, long time. No speak. No, I wanted to talk to you about Constellation, your latest deep dive, because it's a company that's pretty close to my heart. And I've been learning about it for almost a decade now, but to you it's all pretty recent. So there's tons of stuff I know about it, but I don't even know how I know it, right. After a while it's like, "Where have I learned this? Did I read this somewhere? Talk to someone? Was it at the meeting, or?" But to you it's all loaded up in RAM, you know where you learned about it. So I'm curious, how was it learning about this company? What did you find different about it from others? What did you like most about it? What did you like least? How was the experience of researching it?
MBI:
Yeah, no, I think kind of after doing the deep dive, my first inference was, "I wish I'd studied this company earlier." I noticed some people on Twitter talk about out this company, almost idolize this company. I didn't know much about Constellation before doing this deep dive, but I knew Mark Leonard, he's kind of a bit of a mythical character, and many people, especially the shareholders, seem to have a very high opinion on him. So I think I learned more about investing, about how to think about operating and investing and at the same time, much more than I probably expected going in.
MBI:
So one of the things that stuck with me is hurdle rates are magnetic in nature, right, that's pretty much his quote from one of the letters. So just to kind of flesh that point, he had this hurdle rates for all these acquisitions that his M&A professionals, business unit managers would go out and acquire some companies, but they have to make sure that they are maintaining some hurdle rates. And I think in Constellation's history, they have raised hurdle rates, I think, once and decreased it twice in 20 years of its operations. And what they found out that when they decreased the hurdle rates, the IRR for all the opportunities that they explored or pursued also went down with it.
MBI:
So it's not just some marginal acquisitions that they're kind of on the fence whether to pursue it or not because it's so close to the hurdle rates they are pursuing, that's what probably they expected, but that's not what happened. What happened was, basically, everything that they pursued tended to kind of become closer to the hurdle rates they have decided, right. And that kind of made me also think about what sort of hurdle rates I want to think about when I'm investing in companies. Should I...
MBI:
I know that's kind of the debate, I think, among many investors, and I don't have a very black and white answer on this, even after going through Constellation's letters and Mark Leonard's musings on this. Part of me thinks if I have a very high hurdle rate, I may miss some of the... usually good companies are well understood. I don't think I expect to find 20 companies undiscovered in my life and which will be like 10-baggers, 100-baggers in my lifetime. My best guess is basically, I'll buy generally fundamentally good businesses, which perhaps are underestimated how good those businesses are.
MBI:
So I'm not saying the inflection point will be from bad to good, rather good to very good. And because I'm okay with good, I don't want to wait for very good IRR, I'm okay with good, I'm tempted and I'm usually lured to take a stake in companies or buy companies where IRRs are pretty much in the reasonable range. But I'm wondering after reading that, I'm wondering to what extent that being okay with reasonable IRR may have a tendency to kind of work as a gravitational force for most of my portfolio's return. It's too early to say, I don't know, I'll have to wait and see, and kind of probably wait for 10, 15 years to go back and see what happened and what did I do and all that.
MBI:
The thing that I struggle with investing, and I know I'm going on a tangent here-
Liberty:
No, its fine. It's fine.
MBI:
Yeah.
Liberty:
That's why we do.
MBI:
One of the things that I... Right. Well, one of the things that I struggle in investing, I feel like there's this mismatch in time horizon in the sense our pretensions are front-loaded. So like, "I'm a good analyst, I'm a good investor." I don't know that. There's little evidence of that. These things are kind of front-loaded, I have to convince you I'm a good analyst, I'm a good investor, for you to, let's say, invest in my fund or subscribe to my newsletter. Things like that.
MBI:
I know people talk about track records and all that, but nobody has 20 years of track record on their own, and then they go and raise money. People take chances based on who this person is and who they are. But there's a lot of, for the lack of better word, pretensions involved in that process. And those are kind of front-loaded, right?
Liberty:
It takes so long in the market to have a really solid track record that by the time you have it, you're basically ready to retire. Most people are not like Buffett, most people won't do this for 60 years. Most people, at some point they reach some number and they're burned out, they're tired, they're retiring right at the moment when they have a long enough track record that most people would say, "That guy is really good. That woman or that person is really solid." So for the rest of us, it's like, "Well, try to guess based on super limited information," and maybe the whole time they were operating in just that one cycle or that one type of market, or... It's super difficult, I totally agree with you.
MBI:
Think about since GFC, Global Financial Crisis, it's been what? 12, 13 years? That's a long time. That's a long time for anyone to make a lot of money to be regarded as a great analyst, an investor. And maybe all this time they were just riding on a cycle without knowing. So that's always a possibility. So that's something I struggle with because I know that when I think about my own investing, my own portfolio, I know the results aren't going to be evident or apparent in three years, five years. It may take a lot more repetitions, a lot more iterations for me to stumble on to my own philosophy.
MBI:
I think you were talking about just before recording, someone on Twitter you saw having a plaque of all the companies that they have bought in their portfolio and they have this in their, probably, greeting room or workspace on their home. I feel like that's a great way to kind of feel a sense of ownership of the companies that you buy.
Liberty:
It's tangible.
MBI:
Is much more tangible. But yes, it takes time to really feel that sense of ownership. If you bought Constellation Software 10 years ago versus someone like me who bought basically this month. It's not quite the same, although theoretically we are both owners of Constellation Software. But the sense of ownership, theoretically we know the answer, theoretically we both are owners, but I think time is a significant part of that sense of ownership like when you own a... A lot of people take it as a negative and it can be negative. A lot of the things in investing is a bit of a paradox. When you are with a company for 10 years, it does give you more sense of ownership but it also has a tendency to infuse biases and all that, right.
Liberty:
You get attached, you get emotional about it, and all those things that some would say is negative. But on the other side, I would say, to counterbalance that is like... I think it's Ed Borgato who said that you can't borrow someone else's confidence. And what builds confidence is exactly this time. You have more time to research and learn, but you also have more time to see the company in action and you get to trust them. When they say something, they do it. How do they react to various situations? And over time you kind of build that confidence in the company.
Liberty:
And so if I was to sell a company I've owned for 10 years and I have super high confidence in their quality and leadership and everything, and I was to sell that company and replace it with some other company, it can be equal on the other stuff, it can be of equal valuation and equal quality, and it's that I need more than what I'm selling to compensate for this resetting of confidence and of experience with the company. And I think too many people who are constantly selling and buying and selling and buying, maybe they don't realize that they're missing that because they never get to that point where, "Oh, I've owned this for eight years and I know everything about it. I know everybody who knows everything about it."
Liberty:
Some people would get to the point where they're so attached to it and so emotional to it that they would lie to themselves, to just keep owning it. And they would be the last to admit when something has changed or there's a new problem. [crosstalk 00:09:20]. But if you can, I don't know, work on yourself and be the kind of person who will admit mistakes and try to see them, I think that there's a balance to be found there. The thing about compounding is that almost all of the benefit come at the end of the exponential curve. And so if you own a super great business for a year, maybe you can get lucky with some valuation multiples, but the real value will be built over much longer.
MBI:
It kind of is related to what's your investing philosophy and how you want to pursue investing. In investing, I think there's always this, like I said, paradox. What I really want to do as an investor is to be aware of the paradox, not necessarily be able to solve the paradox. So yes, I know when I own something for 10 years, there is a true sense of ownership. I understand the business in a much greater depth and breadth than someone who's been researching for a month. But at the same time, it also has a capacity to infuse that sort of biases in my process. Now, I just want to be aware of those two things. Not necessarily I'll be able to just solve that paradox just by being aware.
MBI:
In many cases, I think you just mentioned that you have to be able to admit mistakes when something has naturally changed. Unfortunately, I think it's... on things like that, it's probably a degree, it's not like a group of people who can admit to mistakes when they can see. And there are these other group of people who just can't admit even if they are shown that they have made a mistake. I think it's probably a degree. We all have a tendency to kind of withstand the admission of mistakes. But it's a degree, some people are quite adamant and they cannot accept the fact at all that they can make mistakes, especially if it's public.
MBI:
And so, again, just being aware that this is a human condition, not necessarily a personal condition. This is a human condition, when you are wrong, you will resist to acknowledge it. But the moment you are aware of that temptation and the human condition, you will be far less harsh on yourself, you wouldn't bash yourself saying, "You are a bad investor or a bad analyst because you missed this or that." That's a human condition, you will miss a few things. Unfortunately, the things that you missed turned out to be a pretty big deal for, let's say, this investment or company. And a lot of the time you'll miss things that won't turn out to be a big deal, and it's probably good for you that you missed those things, then you can convince yourself saying, "Oh, do you know what? I knew about probably those certain risks, but I didn't miss the forest for the trees."
MBI:
So there are different ways... I also feel like in investing it's a very personal journey for everyone involved and it's so hard to generalize right and wrong, like correct or incorrect approach. I feel like, especially for an individual investor, it probably takes more than 10 years to really understand.
Liberty:
[crosstalk 00:12:30]. And there's no control group. You can't just rerun the timeline and see how you would've done. I so agree with you about how it's a question of degrees, it's not even about binary, like you have it or you don't. And in my experience, the way to nudge yourself to kind of the right side of the distribution is just with practice. Even admitting you're wrong is a skill. Changing your mind is a skill. It's not like-
MBI:
Yep.
Liberty:
... you don't just meditate on it then you can do it when the time is right. You have to constantly practice it, even on small things. It's kind of like a boxer, you're in the gym and you're practicing so that on the big fight day you know what to do. And so sometimes just like someone points something out on Twitter, whatever, you are wrong and you say, "Oh yeah, you're totally right. I was wrong about this and that." Just doing these small things that maybe when there's something really important on the line, you'll have the reflex of even going there.
Liberty:
I want to go back to the letters. It's almost a cliche at this point to say that, "Oh, Constellation's letters are great. They are great letters up there with Buffett's and Bezos' and everything." But I'm curious what you think of the letters. Reading them, how did they hit you? Or did you have such high expectations because everybody was talking about it, that you were kind of like, "Okay, it's not that great after all"? I'm just curious, how did they hit you?
MBI:
No, I think I already mentioned, it kind of beat my... already had a level of expectation, going in. The way he kind of thinks about autonomy, the tension between centralization and decentralization. In my deep dive I mentioned I read this book, Billion Dollar Lessons, which is a terrific book, especially since we have been going through this decade-long bull market, we have been devoid of many lessons that we probably need to learn vicariously at this point. So that book was a great help and that book had a chapter on rollups and all that, like how rollups, pursuing both economies of scale and the benefits of centralization by pursuing economies of scale. But they also want the decentralization benefits of having a manager in that particular, let's say, community who would understand the market and the business reality of that market much better than the person who is in the headquarter.
MBI:
But those two things are kind of at odds with each other. So I was kind of curious, I had that in my back of my mind how Constellation does it because... and that's the first question that I had even before studying the letters. I understand that... I obviously knew that their [inaudible 00:14:54], but how exactly are they managing hundreds of these businesses? How exactly they are kind of trying to centralize everything, like the same operating book and very rigid structure, or are they completely autonomous then how will they be able to kind of get the margin benefits? What's the benefit of being part of that Constellation structure?
MBI:
So I had those questions and it almost felt like Mark Leonard knew the questions in my mind as I kind of went through the letters. What probably also made me feel comfortable that I didn't agree with everything that I read. A lot of the times, for example, and this happens with me when I'm reading Buffett's letters. Buffett is such a huge stature in my mind and in investing world, I actually find it very difficult. If you ask me what's the thing that you disagree with Buffett, I probably will say only one thing that is he mentioned about something like he would buy, I'm butchering this quote, but he mentioned something like he would own a company that can be run by a sandwich or something like that because the business reality remains what it is and the management can change from time to time, but he wants to own a company whose economics is robust.
MBI:
I don't think there are too many businesses in the world that can be run by a sandwich at this point. But that's pretty much the only thing that... and it's not even like... probably even Buffett had... I'm probably not doing justice to what Buffett's underlying point was. I don't think even he thinks that [crosstalk 00:16:25].
Liberty:
That's often the case, right. People will find-
MBI:
Right. Right.
Liberty:
Like we all do it, but someone said something in a certain context, tried to make a certain point, and then we try to apply that to every possible point about that topic. And so Buffett would probably tell us, it's like, "Well, in the context of what I was talking about, like slow changing industries with modes, then you don't want it bad, but even if someone bad were to go, it wouldn't be catastrophic." So it's probably something like that he meant.
Liberty:
But if you look at like today, many industries they change much faster. Anything in technology, you can't even have mediocre management in most of those. Yeah, I totally agree with you.
MBI:
There were a couple of instances, I would say, I felt I don't agree with what Mark Leonard is saying. His point about buybacks. He mentioned very curious definition. He said buybacks are essentially prey to the shareholders because the management has insider information so they can coin the market or something like that. I don't think that's the case, and I mentioned like Constellation is perhaps... I think it's probably the only company that I know of, it is quite possible that it may be the only company which didn't experience 30% drawdown in the public after coming to IPO. It didn't experience 30% drawdown, and it became a more than 100-bagger since it's IPO.
MBI:
I would be hard-pressed to find any other company which experienced similarly on a risk adjusted basis. I think I'm confident that this is perhaps the best stock in the last 15 years ever since it's IPO'd, right. So it's a pretty special company. So it's lucky that he's wrong about... at least I think he's wrong about the way he characterizes buyback. And if Constellation went down by 50%, 60%, I think he would love to prey on some of these shareholders who are selling and he would love to take some of those shares back.
Liberty:
He would probably warn everybody like a year in advance, and he would... because the place that this is coming from is him being so afraid of any conflict of interest of any ethical gray zone. In some ways it reminds me of you a bit, when we're talking about your newsletter and you're like-
MBI:
Definitely edit this out.
Liberty:
... "I don't want to advertise because I don't want to look pushy." The guy is so ethical that he's like, "Well, if I did a buyback and I knew more about the company than the person I'm buying back from, is that ethical?" Most CEOs will never even ask about it, it's like, "It's the public market. People know they're buying and selling. It is what it is." So the place he's coming from to me is such a strong signal about the way he sees shareholders and the company, that to me, it's like, "Okay, even if I lose a couple percent," because he doesn't do buybacks when the time is right, "how much have I gained from having someone so upstanding and of this level of ethical thinking?"
Liberty:
So to me it's like, "Okay, I'll take the hit there." And even on later AGMs that I went to, I think people kept asking him about special dividends and buybacks, and it was back when they had more trouble deploying their free cash flow. And he was starting to open the door to buybacks. He was talking about-
MBI:
He does change his mind. So if you read the letters, he even mentioned like, "Oh, I don't want to discard the dividends because a lot of shareholders probably bought the stock because of the dividend, and I think it would be kind of a disservice if I stop paying dividend." And in the recent letter, he kind of walked it back. So he's not a rigid person. He's not like, "Oh, I said this five years ago, 10 years ago. I can't change my mind. I can't say something else that would contradict to what I wrote six years ago, seven years ago." Of course, you should. It's quite human, and it's quite natural to say something six years or seven years down the line that may contradict what you have said six, seven years ago because you have learned something and all that.
Liberty:
It's the old line about, "When the facts change, I change my mind." He's very patient in that. He keeps updating. It's like the thing about large acquisitions, he didn't want to lower the hurdle rate. Then he talks about the fervor of the newly converted. He changed his mind on that. And now he's going all in on that, writing a new letter to explain, "We're open for business on large deals." So with that stuff, it's like the dividend. Back when he wrote that about the dividend, the stock was much, much lower. So the dividend was a much higher yield to owners of the stock. So if he had cut it back then, a bunch of people may have lost, I don't know, 2%, 3% yield. But today the dividend is basically nothing. I don't know what the yield is, but they haven't changed the dividend in 10 years, so the yield is basically nothing now. So cutting it now-
MBI:
Nothing. Yeah.
Liberty:
... it's not the same impact. So that kind of stuff is the stuff you update about. I want to share with you the thing that unlocked the model of the company for me. Once I understood that, years ago, that's when I went like, "Okay, now I get how this works." And let me know if that rings a bell for you, if you had the same realization. So the short kind of thesis on Constellation is like, "Oh, it's a rollup." And the idea is that they're buying these tiny companies at one-time sales or four or five, six times EBITDA, and then they're turning around and inside of the public vehicle, the market is going to give them five or six times sales, 20 times EBITDA. And they're [crosstalk 00:21:42].
MBI:
Arbitrage, right?
Liberty:
Exactly. And so people are like, "It's the exact same assets and you buy item private for four times and you turn around and you sell them for 20 times, that's BS." So at some point the market is going to realize the scam and the stock is going to be cut by 75% or something. So that's what people were saying about Constellation for a long time back when I started looking at it. And my kind of unlock, my realization was that the businesses that they're buying, they're basically cash cows, they're almost bonds with very high yield.
Liberty:
So you have this tiny company making a million a year or something, but they have nowhere to reinvest it. So maybe you have this 20% yield, but the money you're getting, you can reinvest at 2% or 1% in the bank. You have a bunch of cash sitting on your balance sheet and you can't do anything with it. And so that business is not worth a very high multiple.
Liberty:
But inside of Constellation, what Constellation grafts onto these businesses is a reinvestment vehicle that has a proven track record of getting ROIs in the 30% range. And so suddenly these cash flows from all of these cash cows are being funneled into this machine that reinvests them at very high returns. It's kind of like the snowball. They've also proven over time, not only the ability to reinvest, but to scale the machine too. So that's why the market is paying 20 times EBITDA or whatever it is for.
Liberty:
And so once I understood that, all of a sudden it made all of the sense in the world. Now it's less about the model to me, and it's just about like, "How can you adapt the model to scale it up? And how are you keeping operations and discipline and the core discipline of acquisition and the operations of not damaging these businesses that you want to keep forever?"
Liberty:
Because even if organic growth is 2% or whatever it is, that number hides a lot of things that most people never... they don't look under the hood. They see, "Oh, it's growing 2% like crappy businesses. It's not..." But it's like, "Okay, if you disaggregate that number, you have the maintenance and recurring line, which is where most of the value is created inside of the company because it's high margin and recurring." And that part is growing like, I don't know, 3, 4, 5, 6% sometimes. And a lot of what's not growing or shrinking is professional services, hardware, sales, a bunch of stuff-
MBI:
Licensing. Yeah.
Liberty:
Yeah. A bunch of stuff that's basically very little value is created there. So just that is one part. The other part is the aggregate number also eyes that they buy shrinking businesses or runoffs. So if you buy a huge, like the new Allscripts business that they bought, that's kind of a shrinking and not super high quality in some metrics. But if you buy it cheap enough and you can kind of turn it around a bit, stabilize it a bit, you can still make great, great, great IRRs on it, but it's going to make your aggregate organic growth look worse. So people who have a quick glance at the company are like, "Oh, 2%." But they don't know that some businesses are growing 5%, 10% into it, and they have other things that are shrinking 10% a year, but they're still creating value from it.
Liberty:
So some of these superficial views would be, "Don't buy their shrinking businesses. You're going to have better numbers and the market's going to be happier." But it's like, "Yeah, but you're creating less value too." So I'd rather have Mark buy runoffs and turnarounds and make great money on them, than try to optimize for the best looking numbers so that people who look for 10 minutes at the financials feel better about it. So these were some of my unlocks for understanding the business.
MBI:
So I think I probably read one of your tweets where you kind of framed it that way, that the biggest difference between all these companies operating on a standalone basis versus being under the umbrella of Constellation Software is whatever cash flow they're generating are being deployed by other businesses so it's a more prudent capital allocation system. Like for example, even for something like newsletter, we have a very high margin in our business, but we don't have ways to allocate this capital.
MBI:
So the way I kind of allocate my revenue stream or earning stream from MBI Deep Dives that is basically buy businesses. We use this money to buy companies from the public market, and to the extent those investments are good investments, will make MBI Deep Dives at a much more robust financial position five years, 10 years, 20 years down the line.
MBI:
But again, these are not undiscovered, these are not kind of... these are not the wretched undiscovered gems that you would find, let's say, sometimes in the private market. So I don't expect to generate 20% CAGR in my portfolio for the next 20 years, 30 years. But when it comes to Constellation Software, I think my unlock was, some actually subscribers mentioned, definitely watch some YouTube videos of Constellation Software companies, just know how shitty the softwares are and all that. And yes, I've watched some, these are not the kind of softwares I use, or I would like to use, or I would like to buy in the public market. But my unlock was, Constellation Software is a system. All companies are in some way or the other, but Constellation Software is through and through a capital allocation system, it exists to run that system.
MBI:
So when you do a typical deep dive, I basically look at how the company... what's the product? How it makes money? Why customers use it? And what's the competitive situation, capital intensity, reinvestment runway, all that? So when you think in Constellation's terms, some of the questions are not as relevant because there are just too many of these businesses that are under the Constellation Software system. So the most important question for Constellation is basically, the system they have, whether it can be scaled, whether the acquisition runway is large enough for them to kind of keep deploying these cash flows that they're generating.
MBI:
I think one of the things that I mentioned at the very end of my deep dive, and this was one of the areas in the letters that kind of convinced me and tempt me to be shareholder of Constellation Software, he mentioned that if Constellation Software started in 1895 versus 1995, perhaps they would be buying newspapers. So what really struck me from those few sentences in the letter that he's not... you would see many investors or even shareholders, they're fascinated by VMS, vertical market software, and why that is such a great industry, why it's kind of overlooked and all that.
MBI:
But I don't think Mark Leonard is quite as fascinated with VMS than perhaps some of the, let's say, investors are. He basically just wants to maintain his system. And the most recent letter is an indication of that, that he wants to go beyond VMS. He's not beholden to what has worked in the last 10 years, 20 years. He's aware of the fact that what has worked in the last 10 years, 20 years may not work in the next 10 to 20 years. So the evolution has to be the constant process, not what has worked in the past and all that.
MBI:
The tricky thing is, and I think this is true for investing in general and for many companies, if 10 years from now, we have this conversation and it turns out Constellation was a crappy investment for me, let's say, because I bought this month. Maybe it would have worked out fine, even if it's a crappy decade for them, maybe someone who bought it in 2010 probably is still more than fine investment. But let's say for someone like me who bought it like a few weeks ago, let's say it's a crappy investment 10 years from now. And I think the most likely reason is basically the fact that they tried to expand their horizon in terms of going beyond VMS and going these larger acquisitions and all, it didn't work out. It turns out they were much better allocated, they're a much better operator for this small niche businesses, and not as good, and probably they will face a lot fiercer competition in acquiring those businesses.
MBI:
One thing that was very interesting for me, that the multiples that they paid for these acquisitions in all these years from 2006 to 2021 was hovering around 1X sales. So it did shoot up, the multiples didn't... they were very disciplined. So it would be hard, I don't think we should expect that they would maintain that 1X multiple when they'll probably do this one or two large acquisitions probably every year from now, given the kind of cash flow they're generating now. So it's possible that, let's say, they're not as good with these acquisitions, and 10 years from now, the detractors of Constellation Software today would say, "What were you thinking, that the CEO is basically going out of VMS and beyond VMS and trying to do these larger deals when they made all their money from these smaller deals and all that?"
MBI:
I think what's perhaps underappreciated among many investors, everything is an evolution, it has to evolve. There is no way Constellation is going to do these 5 million acquisition deals in 2030. And there's no way they will be able to deploy all their free cash flow, just doing these 5 million deals. So for better or worse, they have to learn how to do these large acquisitions, so if that doesn't work out, that doesn't work out, but that's the necessary evolution that they will have to go through.
MBI:
Even when I think about my other holdings, Facebook or Meta, it's the same thing. A lot of shareholders want them to be focused on Instagram or Facebook the way it exists today, "Oh, why don't you just make sure Instagram shopping adoption is strong. Include your payments and all that. Make sure that you make more money from the current system." The thing is that the evolution, Instagram and Facebook wasn't what it is today, and it wasn't the same five years ago or 10 years ago. It has gone through its own evolution. And because it makes so much money, it's such a cash machine and printing machine for Meta and shareholders, they want to hold onto it. They want to keep doing what has worked.
MBI:
But we all know, especially in technology, things are so fast-moving. If you miss a significant trend, it can be too late, especially when you already have such a large business. For a business, for any of these businesses, I think, like any of the big techs, the risk that I see... and I own at least, I would say, four of them, I don't own Apple directly, but I own so much of Berkshire Hathaway that it's like 5% of my position, Apple.
MBI:
So all these big techs, the biggest risk that I see that it's difficult for them to come back if they miss a mega trend, if they miss something very big. If AR and VR is such a huge deal, and let's say Facebook is not part of it, or Apple is not part of it, that's a huge risk. [crosstalk 00:32:36].
Liberty:
Kind of what happened to Microsoft. Microsoft kind of missed mobile and they were kind of lucky that Satya was good enough and they were able to ride cloud and kind of reframe the whole company and the culture and get out of just everything focused on Windows because without that, they would be much diminished, I think.
MBI:
It's a much bigger problem today than it was for Microsoft because the size is just so much bigger. So it's 2 trillion, $3 trillion-companies, Microsoft and Apple. So if they miss any large transition, especially as big as computing platform transition, that's a huge deal. And it's not a question of, "Oh, Apple is going to be 7% IRR in the next 10, 20 years." If they miss this transition, no, Apple is probably going to be a dead, not like total dead, but it's going to be a very crappy investment for our investors. And that's not just for true for Apple, it's also true for Facebook or Microsoft or Google or Amazon.
MBI:
If we all spend five or six hours a day on AR/VR, and let's say, Amazon has completely missed that transition. If we're shopping on virtual reality and not really going to those superstores, Amazon may lose some potential, some growth maybe from existing businesses. So it's always a worry for me as someone who owns some of these big tech companies, I don't want them to miss any big transition.
MBI:
So at first I was just as skeptical. I'm still skeptical of the AR/VR bets by Facebook, not because I don't think those are going to be big things but because I'm not yet convinced that Facebook is going to be the winner of those big bets. And the amount of money that we are seeing Facebook is making, I think, is an admission that they're probably not as well positioned than let's say Apple and Google, and maybe Microsoft.
MBI:
But I think I'm much more comfortable with the fact that it has a higher probability of making Facebook well-positioned for the future. Not necessarily, it's a certainty, there is still an element of uncertainty, a high element of uncertainty how well-positioned they will be. But I don't want my CEOs or operators to be focused on whatever that's working right now and whatever that's worked in the past because I think that's probably a recipe for not a good return on... it's a recipe for disaster if you just keep doing what has worked in the past, at least technology is probably not the right industry for that.
Liberty:
It's probably a different podcast, but it's also funny to me how, especially financial people tend to look at everything through the lens of money. So it's like, "Well, Facebook is spending X billion on this, so they've got it, right. They're going to be the ones developing it." But if you read about Apple, the iPhone was made by a few hundred people. It didn't cost billions and billions... Okay, they had to buy some technology, develop it internally and this and that, but it's not like... the iPod was an idea, right. They saw that some Japanese company developed some 1.8 inch tiny hard drive, and like, "What can we do with this hard drive? Oh, we could make a music player." It's about the idea. It's not about spending billions and billions. You can spend all the money you want, but if you don't have the right people or the right culture or the right leadership, that's going to be tough.
Liberty:
On Constellation, going forward, if I had to look at the probability distribution and think what's most likely to me, I feel like on the non-VMS stuff, they're going to be very careful about it. They're going to see some stuff and let it grow if it works, and if it doesn't work, it'll stay small. So I don't feel it's a kind of big bet the company thing. But if you listen to Mark, the kind of businesses that he really admires and loves, he seems to think that Transdigm is a better business than Constellation. He loves Nick Howley. I know they've met and high coach he likes too, and he's studied all these high performance conglomerates. So he's looking at ITW and Roper, and all these companies doing kind of different things than Constellation is doing.
Liberty:
So if he branches out, I don't feel he's going to, all of a sudden, start to sell shoes or something. I feel it's going to be still kind of on-brand for Constellation. So I'm not too worried about that. But on the bigger deals, I feel like what we're probably going to see is one or two a year that are kind of like the Allscripts deal most of the time. Like divestitures from large companies, they have this segment that's not making their overall numbers look good, so they want to just check it somewhere.
MBI:
Get rid of it. Yeah.
Liberty:
I feel like Constellation can probably get those because PE and all the other competitors are not that interested in those. For super high quality, large software businesses, I feel like Constellation will have a very hard time. Once in a while, they're going to get a TSS or a Topicus, maybe because they're already in some markets where others are not looking as much, or they have relationships on the ground. That's one of the things that seems to help them scale up the tiny businesses a lot, is once they enter a country... it took them 10 years to go into Sweden or Australia or Japan or something, and then they do one deal there, and then the next month they have another, and then six months later they have...
Liberty:
And they talked about this at the AGM, there's a network effect where once you have a business on the ground, they tend to know who else is around, their competitors, slightly adjacent industries. And once they're there, they can start to form relationships. And once someone is for sale, they can go directly to them. They don't give that number anymore, they used to. But they used to talk about how many VMS business they tracked. Because they have this huge database of businesses. It feels like every Constellation employee, part of their task is every six months you call this business and say, "Hey, how are you guys doing? You're thinking about selling? What can I do for you?" And you keep these relationships alive so that once they decide to sell, or I don't know, they have a transition or something, they think of you.
Liberty:
When I started tracking Constellation, they were tracking 20,000 VMS companies. I was like, "Wow," that's more than you'd expect if you've never looked at it. And the last number I heard was around 60,000. And they talk about their coverage still being very low. And then I don't remember the percentage, but being in a very small number of the big process for larger companies and missing a lot of the smaller ones.
Liberty:
So it's counterintuitive how many of these companies there are everywhere, and they're not even looking in all markets like South America. I don't know, it feels like they can probably still keep ramping up the small businesses for a while longer as we've seen, right. You wrote about how they had like 15 in 2016, and now they have over 100. It feels like that system of decentralization and keep your capital at the business unit level and all that. It feels like that's working.
Liberty:
The problem with compounding is the numbers become really, really big after a while. So I don't know how long it's going to keep working, but for the foreseeable future, it feels like that plus a few big runoffs and big hairy companies with problems, that together, Constellation hasn't deployed that much capital since inception. Some companies, you... Thoma Bravo just bought Anaplan for almost 11 billion. I don't think Constellation has deployed 11 billion since it was founded 26 years ago. So I don't know, we'll see [crosstalk 00:39:33].
MBI:
Just Thoma Bravo and what's the other name? [crosstalk 00:39:39]. Yeah, in aggregate, these two PE firm have more than $150 billion in them.
Liberty:
Yeah, that's crazy. And that's the thing, right. The other unlock for me for Constellation is like, "Well, why doesn't PE just come in and buy everything and increase multiples? It's going to screw like Constellation's model." But from what I've heard people dealing with these processes is, the kind of businesses that Constellation buys, it's as much trouble to buy one of these million-dollar businesses, if not more trouble because they're not all professionalized and cleaned up. It's more trouble to buy one of those than for PE to buy a huge $50 million company.
Liberty:
And these companies have huge AUM to deploy, and they're not going to spend all their time and their people and resources on trying to get all these tiny companies at like... even if they get 30% IRR on $5 million, what is it to them? So that's kind of part of the mode is that they're kind of under the radar of what's even interesting to these large companies. So most of the competition seems to come from a bigger Thoma Bravo business that's doing bolt-ons and that business is going to bolt-on a bunch of smaller ones that may interfere with Constellation-level companies.
Liberty:
But a lot of the time the businesses they're buying are like mom-and-pop shops that are like... there's no second buyer, right. They don't even know how to do a process. They don't have bankers. Constellation has a process to come in and do due diligence and figure out how the business is. But a lot of others would come in and it's like, "Where are your books?" Like it's on a napkin, basically. I'm exaggeration, but it's not the kind of business that many want to buy. So that feels like the expertise that buying these tiny businesses feels part of the mold to me.
MBI:
I think the other benefit or advantage Constellation has over, let's say, other potential buyers of these tiny VMS businesses is Constellation has the base rates. They have been doing this for 25 years. And Mark talks about if a new manager is feeling very bullish about the prospect of a particular acquisition that he or she is espousing for, and if it turns out it's 95th percentile in terms of the revenue growth prospects and profitability and all that, it does give everyone a pause that, "Is it really such a good business to be on the 95th percentile?"
MBI:
So the idea of base rates is basically, it tends to... I think it allows you to have a moment of reflection, "Oh, so I have projected, let's say, this business to grow from 5 million revenue to 30 million revenue in 10 years. And if it plays out that would actually make it top one percentile businesses that Constellation has ever acquired, and Constellation has acquired 700 businesses by now." So that's a pretty big statement.
Liberty:
It's a good sample size.
MBI:
Yeah. "I'm going to buy something today that is better than almost everything we bought, like 700 of them bought in our history." That gives a lot of pause to a lot of people, and that allows people to reflect upon what they're proposing. Now, if you and I, if we think, "Oh, do you know what, I can do this math. I can know what's a good business when I take a look at it." So we can kind of band together and go out there and start buying these VMS businesses. But we don't have that base rate-
Liberty:
How do we calibrate, right? What do we base that on? I bet some portfolio managers inside of Constellation, and not to say Mark himself and Bernie and the people doing a lot of deals, because in the earlier days more deals went to HQ and now it's more decentralized, but some of these people have probably more experience buying companies than almost anyone else, right. Few people over their lifetime will buy 20, 30 companies. So not everybody inside of Constellation has that much experience, but some of them just the human capital part of the equation. Also, Mark is so attentive to incentives. I feel like that's another huge part of it. If you're inside of a big [crosstalk 00:43:36].
MBI:
Actually, I forgot to mention that was also one of the big unlocks for me. I mean, I have been studying many of these technology businesses over the last, I would say, 12 to 18 months, and stock-based compensation almost seemed like bread butter for everyone, it's everywhere. And Berkshire Hathaway doesn't have it, but Constellation Software not only doesn't have it, but unlike Berkshire they also, not encourage, they actually... it's a requirement that a significant portion of their bonus has to go to buy shares from the public market. I am not aware, it's... I can be wrong, but I'm not aware of any company at least that I have studied so far, which have something like that. So it's definitely... it creates a sense of ownership from the employer's perspective as well.
MBI:
And so it's just... Sometimes I study this technology business, and Facebook is part of that, and I would read the engineers or employees comments on different platform, let's say on Blind and people are posting anonymously, but you can see that they are working on this company and that. And it feels very transactional. They don't care what Facebook is trying to do or what Google is trying to do, or some other company is trying to do. Some of them, I'm not saying that's majority of these engineers, but some of them look at their jobs as quite transactional. And I'm not saying that's not right or wrong, it's fine. If you are working on a very tiny project on Facebook, yes, you probably don't have the luxury to think that you are creating and shaping the world because the project or the product you are working on has probably not a huge impact on where the ship is going.
MBI:
And Constellation is also like that. But I think it allows these employees to have this greater sense of being part of the system. There are so many people who are allocating capital, it's not just Mark Leonard. They're also allocating capital, and also they know their numbers. Like Mark mentioned that if you bought something, if you acquired a company and they didn't do well, after a year there's like a post-acquisition review, and it's in your capital base forever. You can't take a deduction for impairment and all that, like say, "Oh, my adjusted ROC is improving, if you just exclude that one deal."
MBI:
No, no, no. It doesn't work like that. So if you kind of mess it up on one particular deal, it's going to be in there for forever. And you will remind yourself that when you adjust for this one-off numbers, then over time, you forget it. "We know there's this one mistake that I made, but I did all the other four or five acquisitions really well and it all turned out okay." I don't think that's really helpful from the systems perspective.
MBI:
So everyone is trying to learn from each other, from these acquisition reviews and trying to make sure that the system works better. Right. And why do they care so much that system works better? Because they own that system, they're part of that system. And then if you are in Constellation for five, 10 years, it's perhaps a significant part of your net worth. So that level of perception of ownership is perhaps very difficult to recreate in many of the Silicon Valley companies, at least the way their composition is structured.
Liberty:
Yeah. I feel like some of the other incentives that make it work, it's one company but it's 700 or whatever business units, and they try to keep those very independent and decentralized. And so when you work at this specific business unit, the name on the door is not Constellation, it's whatever your unit is. In there, they're trying very hard to keep the teams small and keep it entrepreneurial and remove any bureaucracy as much as possible. And from the point of view of some engineer working there... "Okay, maybe if I work for Facebook or Google, maybe my base pay would be higher and compensation." But there's a bunch of other intangibles where like, you don't have to deal with a lot of other crap if you're at Constellation. You feel part of a small team.
Liberty:
Mark talks about these small high-performance teams that he wants to keep. And sometimes when businesses get too big, they split them up instead of doing what everybody else is doing and, "Oh, we're going to get synergies." And it's like, "No, no, no, we're going to make more businesses like de-synergies." But the employees there, their bonuses are based on the ROC of their unit and the organic growth of their unit. And so they feel like they're making a difference, it's almost like they have this... like they're almost stuck in their own business unit on top of Constellation as a whole.
Liberty:
Once you have this many businesses that you track and you have base rates and metrics for everything, basically, well, if someone is doing really great, you can go over there, see what they're doing, and then try to upload that best practices to the rest of the business. So TSS now has merged with Topicus, and Topicus has been great at spinning up new businesses, organically, from the inside and has great organic growth compared to Constellation. They've talked about how, "Well, now we want to learn how Topicus is doing that." Even Mark wrote about he's super excited to figure out how they're doing it.
Liberty:
Well, if they can leverage that knowledge, you can't change everything overnight, but if they can inject some of that in the rest of Constellation, how much is that worth for the whole business? If they can keep deploying a ton of capital into M&A at high returns, but the organic growth over time trends from 2% to 4%, that's a huge difference in value right there. That's kind of what he's trying to do also with the new VMS VC fund, he's going to try to spin up a bunch of stuff, and those that work, there's value in the business itself, but most of the value may be just taking those best practices and trying to send them to hundreds of other business units so that they can improve what they're doing.
Liberty:
It feels very much like Mark is a systems thinker, and the whole thing is built as a... you could imagine a board on the wall, with all the lines and the arrows and okay, there's a flow and a stock there, and he's been tweaking the variables and trying to, "Okay, there's some good stuff over here. How can I make it percolate over the rest of the business?" And he's thinking about it from that level, it feels like to me, anyway. That's very cool to see. Few CEOs will be able to explain the business as a system quite the way he does.
MBI:
Yeah, I agree. I agree. When I was talking to a former employee of Harris, I spoke with my acquaintance for a couple of hours and not once that person mentioned Constellation Software. He kept mentioning Harris, Harris, Harris. So the bifurcation from the headquarter to Harris and to maybe other old operating groups are actually there. It's not some good stories that Mark Leonard says in his letters. So if you talk to these employees, you can sense it, they don't mention Constellation Software in their conversation, unless you basically ask them to mention it.
Liberty:
It's like a fractal, right. So there's Constellation at the top, and each group is basically what Constellation was 10 years ago, so Volaris or Harris or TSS, they're all kind of like Constellation in 2012 or something. And then under that there's portfolio manager managing many businesses units. That's one thing I forgot to mention is, another way that they, I think, keep employees is they have this inside kind of ladder where people can grow. So you can stay an engineer at your business unit because before you're acquired, there's maybe like 10 people working at your VMS. You can't go many places, right, you'd have to leave business and go elsewhere.
Liberty:
But once you're inside Constellation, well, at first, maybe you're like interested in doing acquisitions. So you acquire another business at the VMS level, and if you're good at that, if it turns out well, they may tell you, "Well, would you like to go one level up and become a portfolio manager?" And now maybe you manage two, three VMSs, and then you acquire some other VMSs from there. And at some point maybe you go up all the way to the group level and you're part of the capital deployment at the Harris level or Volaris level. They probably all do it a bit differently, that's the thing with being decentralized. It's hard to say like, "All of Constellation, everybody does it this way." They probably all have their systems. I think that's a good way to retain talent, to kind of like, you're going from this tiny island out at sea and then you get plugged into this huge archipelago, Constellation, basically, the name that's what it's saying, right. So I don't know that's an underappreciated part of it, I think.
MBI:
Yeah, no. So one of the concerns that I have on Constellation Software is basically the fact that the stock has compounded at in more than 30% over the last 15 years ever since its IPO, has obviously made a lot of employees a millionaire smart stock. Mark, I think mentioned, 100 millionaires in 2015. And he mentioned he expects to have 500 millionaires from Constellation employees by 2025. I think probably they are already 500 at this point.
MBI:
So my concern is, my due diligence says that the base salaries is actually not as lucrative for the employees at Constellation Software. And a lot of that is basically compensated or kind of masked because of the stock price momentum and because 50 or 75% of their bonus goes to buying the stock and the stock gets compounded 25, 30%, nobody complains as things just compounds at 20, 30%.
MBI:
But if Constellation compounds at a, I don't know, high single digit rate or even low double digit rate, which is still as a public market investment is probably pretty decent, more than decent. But that may stop making up for the lower base salaries that some of the, let's say, more accomplished senior managers are receiving as base salaries. So it's possible that they may face more competition from the outside world to retain some of these employees if the stock kind of stops working. So it's not as pernicious reflexivity as let's say a true stock-based compensation or RSUs, and the options are, but there's still some element of it.
MBI:
And one of the acquaintance I spoke with, he mentioned there's this kind of internal joke in Harris, I don't know about the rest of the operating crew, but at least in Harris, he mentioned there's this inside joke that, "We work at Harris, but we get paid like McDonald's." And it's probably true for the entry-level jobs and when you are starting there. I think that it's probably more true about those roles than middle senior level roles. But then again, in entry-level job, you don't have this bonus compensation which goes to the stocks and all that. So you probably get those, I think, at a certain threshold, I think it's 75,000 Canadian dollar.
MBI:
So when you go to more senior levels, if you get a lot of bonus and it goes to the stock and the stock doesn't do well... And Mark did mention about some of these potential risks like if the stock doesn't perform well maybe many of these employees will just go elsewhere. So he mentioned this risk, but he didn't necessarily have to deal with it because the stock just kept going up and without any sort of pause. It remains a risk. It remains a risk today.
Liberty:
The stock has gone up despite Mark's best efforts to temper it down.
MBI:
Oh yeah, for sure.
Liberty:
He's always writing about, "Oh, it's over-valued. I don't see it going forward doing much better than 10, 12%." He's always like... In his mind it's everybody's... his employees are buying the stock constantly, right, so he has to keep it at least a fair value. If it gets too overvalued, some people may just sell it and quit or feel like they're getting a bad deal. Or as you say, like if the stock starts performing badly for a while, for a long period that may affect retention. And even there's another factor, I just thought of it right now, since the pandemic remote work has become much more prevalent. So I think a lot of Constellation employees were not paid as well as Google employees or whatever, but then also, most of these VMS businesses are not based in San Francisco and New York, they may be in Markham, Ontario or some small town in Germany. The cost of living was much lower, so the compensation kind of floats with that kind of stuff.
Liberty:
But now that it's much easier to find a remote job for an engineer and that you can still live in a small town, but work remotely for Google or Elastic or Cloudflare or whatever, that may be a factor for competition for talent, and Constellation may have to start to raise compensation or figure out something for that.
MBI:
The other thing that I actually thought about, it's just that I didn't mention in my deep dive, so when I was speaking with my acquaintance, he mentioned his appointment was actually... his joining date was delayed by a week. He didn't know why, he just got an email saying, "Hey, we are kind of going through some internal changes. Can you just join week later?" And he said, obviously when you are joining somewhere, it's kind of a nervous moment, and when you receive this last moment email, it's like, "Aren't they just eliminating me?"
Liberty:
"Do you still like me? Are we still getting married?"
MBI:
Exactly.
Liberty:
"Cold feet?"
MBI:
"It's not you, it's me." So yeah, so he was kind of nervous about it. And then after, he joined like a week later. And later he found out that there was some ransomware incident in the operating group he was joining. And it's a risk, there is no denying the fact that many of these VMS businesses have legacy code base, and it can be a real risk since they have a handful of customers, and for them it's a mission-critical software. That is generally considered the bold thesis for the VMS businesses, but it can potentially work against you if you are attacked by ransomware, your customer cannot do something very important and they need to work it now, they cannot afford... like if you're negotiating with these hackers or the ransomware people, you can't wait to negotiate for like two weeks, it has to be done in couple of days because it's mission critical software for your customer.
MBI:
So yeah, so that can be a... it's a real risk, even for companies like Facebook and Instagram, even they suffer... Twitter and many of these high-flying Silicon Valley technology companies have gone through ransomware and all that. So it's a very tangible threat for the businesses that Constellation buys and I think it's probably something they need to address. It's not widely discussed about, and frankly speaking, I wouldn't probably even think about it before talking with my acquaintance. And then I recently actually saw someone also mention on Twitter that maybe ransomware could be an issue for Constellation Software.
Liberty:
That's true though. Even past week, Nvidia was breached, Okta which is security company. So Constellation, that's one other place where being decentralized is helping them, right, because if they get breached, it's not all of Constellation, it's one out of 700 businesses, at least.
MBI:
Yeah. Yeah. Yeah.
Liberty:
And so it would be like-
MBI:
That's the saving grace for now.
Liberty:
What are the odds that all 700 would be hacked at the same time? So I hope that they're really taking it seriously and doing everything possible to secure themselves. But if Okta and Nvidia and Microsoft can get hacked, and not all hacks are the same, some get blown up in the media, but it's basically not that dangerous, but even the bad publicity sometimes can make your customers feel less confident in yourself. So yeah, it's for sure a real risk. I would feel worse if all of Constellation systems were one business because then you could take the whole ship down at once, but it's like an [crosstalk 00:59:26] of small ships, so you sink one, well, okay, you've got 699 left.
MBI:
Yeah. Yeah. Maybe some hacker group will just try to focus on Constellation Software, all 700 businesses one by one.
Liberty:
Go down the list.
MBI:
Death by a thousand cuts, right. Death by a thousand cuts.
Liberty:
It reminds me what you were saying earlier about if you go on YouTube and you look at what the software looks like, and it looks like crap and it depends, unit by unit, but... It's kind of true, but my reply to that would be, "Okay, compared to what?" You have to take the world as it is, not as you imagine it should be. So a lot of this software is replacing a guy with a notepad, or doing it in Excel or Word. So a lot of the time, having specialized software for your own tiny niche vertical is a huge improvement. And enterprise software in general is crap, the UX is terrible. And even a huge one... you won't read people Reddit or whatever, talking about how much they love JIRA and how much they love Salesforce and how much they love Microsoft products.
Liberty:
So all enterprise software is kind of terrible. Tiny enterprise software is probably going to be much older and crustier because there's like five engineers working on it. And maybe the last version was like a green screen and text. And so in some ways it's going to look bad if you look at it and you don't have context. But I think if you keep it in context, it's like, "It is what it is. That's what this software is." If you expect it to be designed by Steve Jobs' brother-in-law or something, it's not going to happen. So I don't know, it wouldn't keep me from investing.
MBI:
No, no, no. Same here. I came to a similar contribution that... and again, a lot of this risk, I mentioned this in my deep dive, even if the company they're buying today goes out of business in seven years, zero revenue in seven years, when you talk about time and value, we think about, "Yes, every business is zero," but we like to imagine that the zero is coming like 40, 50 years down the line, so it won't matter. But I'm saying that a lot of the businesses that Constellation buys, if it goes out of business in even seven and eight years, you can still make a lot of money. If these are very free cash flow-rich businesses, and if you pay low enough, multiple for it, right.
Liberty:
If that money that you take out you can then reinvest at high rates, right?
MBI:
Exactly.
Liberty:
That's the magic. Because if you ended up with a pile of money and business is running out, and going out of business, well, what do you do with the pile of money? But yeah-
MBI:
When you put it in those terms like, "Hey, you do want to buy a business that's going out of business in seven years?" Straight answer is, "Oh no, no, no. I don't want to buy something that's going out business in seven years." Yeah. But there is a price point for the business.
Liberty:
[crosstalk 01:02:07] Do you want to buy it for a dollar? Yeah, it depends on the price.
MBI:
Right, exactly. So yeah, that's perhaps probably a big positive that all these years, it's been what, 25 years, their pricing discipline, their multiple discipline has been pretty much there. Software wasn't anything that everybody used to talk about in probably late '90s or early 2000s, maybe during the tech bubble, but after that people kind of lost interest in many cases.
MBI:
But then again, at the beginning of, let's say, this last decade and then this entire 2010s, and even today, software has become this kind of panacea for everything. Everybody recognizes that what a great business model it can be, but they haven't like... you would expect, if I ask you, "Hey, this is what software businesses are and how the perception has evolved over the last 20 years. What do you think, how the multiple would change for something like Constellation Software?" You would imagine that the multiple would just steadily creep up. That didn't happen, right.
Liberty:
That's the thing that makes me think that they didn't just maintain their discipline, they improved it because if they were paying 1X sales like 15 years ago, and in the meantime interest rates went to zero, everybody discovered software, every big public software company's multiple went up like four or five, six times. And everything is going up, but they're still paying like around 1X sales that feels like they're getting a better deal than they were before in many ways.
Liberty:
And I don't know the exact multiple, so maybe the multiple probably went up some, but probably not in direct relation to the rest of the industry. And I understand the market, what it's paying up for, it's like growth. VMS is not the part that's exciting the market that much, but even taking that into account VMS is a lot more popular than it was in part because Constellation Software has put it on the map, and then you hear about these other like mini Constellations spinning up in different places and... I don't know, it feels like their discipline is only going up despite the magnetic hurdles.
Liberty:
When Mark was talking about... I think he was also talking about how you would expect that if you change the hurdle just on big deals, but not on small deals, that it wouldn't change anything. Just changing it on the big deals will affect the people working on small deals, that's kind of counterintuitive. I guess it's the kind of thing you only find out when you try it.
MBI:
True. True.
Liberty:
So I think this was a good sales pitch for people to pay and read your deep dive. The funny thing is we've been speaking for I don't know how long about the company and I feel like we haven't mentioned, I don't know, 80% of what's in the deep dive. So it's like only a teaser. To you the listener don't think that you've gotten the whole thing because it's only a teaser.
MBI:
No, no, no. I think that's actually true. Even if you read the whole deep dive, I feel like Constellation operates a $35 billion businesses. And many of the companies that I have written about are sort of in the large cap category. And I don't think anyone can expect to just read 20, 30 page of these big businesses and be an expert on those businesses. And that's why I think the way we kind of... the topic that we started our conversation with, it takes time to have that sense of comfort to... and again, you can't always wait for that sense of comfort comes to you. We all like to pretend that, "Yes, I'm comfortable with every stock I own, every company I own."
MBI:
The reality is it's a degree. Some companies you are more comfortable with and there are some that you are less comfortable with. And in many cases, I think the comfort comes from the time you spend with that company. And again, just to reiterate that can have its own demerits as well. So yeah, it's always with a grain of salt that you kind of contextualize everything.
Liberty:
I'm going to leave you an another pitch. It's true that you can't learn everything about a company with 25 pages or something, but I'm going to say that your deep dive is the best starting point that I know of to learn about Constellation. I wish I had that when I started learning about it because there was nothing back then, except for Mark's letters, there was nothing at all. Well, there was probably something somewhere, but I couldn't find it for a while. The thing that I also like [crosstalk 01:06:28]. Yeah, go ahead.
MBI:
Yeah. Sorry to interrupt you. I was actually a bit nervous while writing the Constellation deep dive, in the sense that I was a bit worried whether people would just think, "Oh, I just read the deep dive and I understand it, I don't need to read the letters." I probably mentioned like three times in my deep dive, "You should read the letters. You should read the letters." So there's no way I think my deep dive is a substitute compared to what you are going to read in the letters. It was so tempting for me to quote Mark Leonard every once in a while. And I was like, "Oh well, people are probably not... If they want to read the letter, they can just read the letter. They are here to read the deep dive." So I kind of reined myself in.
MBI:
But yes, I'm trying to temper your sales pitch probably a little here, but I do think people should, whether they read my deep dive or not, I think if they're really curious, they probably should start or end or middle whatever in their investing process, they should read the letters.
Liberty:
For sure. And I think we DM'd about this, but another thing I like about your deep dive... See how I bring it back to the sales pitch? Another thing I liked is that now there's other really great sources for info on Constellation, and you cite them and you link them and you credit them. I love people doing that because I see it too often where someone is like, "This sounds familiar." And they've basically taken something somewhere else and rewritten it and kind of pretend that they came up with it. And so I like that you're like, "Okay, this piece by our friend, the Tent Man is great. Another great source on Constellation. This other piece about serial acquirers by our friends, Ray and Toby, that's also great." You link them, you credit...
Liberty:
So if your deep dive is a good starting point, what's great is that if you want to go further, okay, you have the letters, but then you have the links to these other things. So it's kind of a big central hub to start from. So now I won't let you try to temper down my pitch. So I think we're going to leave it here, but it was great talking to you my friend. It's been too long, we should do this again soon, and I don't know what else to say, have a good day, man.
MBI:
Yeah, no, thanks so much for inviting me. I enjoyed speaking with you, it didn't feel like a recording thing, like it's something we just probably speak anyway.
Liberty:
That's how it should, right. Imagine if we had recorded every previous conversation, we'd be on episode 50 or something.
MBI:
Yeah, maybe we should have.
Liberty:
Well, as soon as I have my time machine. All right.
MBI:
Yeah. Great. Thank you so much. And yeah, it would be great to do this once again at some point.
Liberty:
Awesome. Talk to you soon. Bye.
MBI:
Bye.
Thank you for reading! 👋