Constellation Software & VMS Competition

This episode explores the evolving competitive landscape of Vertical Market Software (VMS) acquisitions, focusing on Constellation Software Inc. (CSI). The discussion begins with Speaker 1 reflecting on their initial misunderstanding of CSI's success, highlighting their belated appreciation for the company's management team and the inherent characteristics of VMS assets that facilitate programmatic M&A. More significantly, the conversation pivots to a recent research project analyzing CSI's competitors, revealing a surge in firms employing similar acquisition strategies. For instance, the research involved interviewing over a dozen executives from various VMS-focused acquirers across the US and Europe, examining their acquisition targets, pricing strategies, and potential impact on CSI's future returns. As the discussion progresses, the focus shifts to CSI's recent larger acquisitions, such as the Allscripts deal, and the potential reasons behind this shift, including increased competition forcing CSI to pursue larger, less ideal targets. In conclusion, the analysis suggests that while CSI's success is rooted in its ability to institutionalize M&A, the emerging competitive landscape may challenge its ability to maintain historically high returns on capital. This raises questions about the long-term sustainability of CSI's acquisition-driven growth strategy and the potential for lower future returns.