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Jul 5, 2022

Constellation Software primed for more deals after US$1.2B spree: Analyst

Barry Schwartz discusses Constellation Software


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After what’s believed to be a record-breaking deal spree in the first half of this year, Constellation Software Inc. isn’t about to stop gobbling up assets, an analyst said Tuesday.

In a report to clients, RBC Capital Markets Analyst Paul Treiber estimated Constellation clinched about US$1.2 billion in deals in the first half of the year, which he said would be a record pace of growth for the Canadian technology firm in the first six months of a calendar year.

Treiber calculated 30 acquisitions made by Constellation and its various operating units in the second quarter of 2022, totalling US$210 million in spending. Of the 30 deals reached, Treiber said two were mid-sized acquisitions: TOMIA, for US$39 million; and Rohde & Schwarz Cybersecurity France, for US$25 million. Treiber excluded the purchases of Allscripts HLP, for US$700 million, and Sygnity SA, for US$71 million, from the second-quarter tally since they were announced in the first quarter of the year.

“We estimate that the businesses acquired [in the second quarter] generate US$254 million in annual revenue and are eight per cent accretive to [earnings per share],” he stated in the report.

The likelihood of Constellation increasing its deal flow is even higher amid the recent market downturn, he added.

“We believe the pullback in public market software valuations increases the probability of a higher pace of acquisitions,” he said.

Treiber also noted that Constellation has mastered buying companies during market weakness. 

“We believe Constellation is able to deploy capital on acquisitions in periods of economic duress at rates well above its hurdle rates,” he said. Treiber added that Constellation’s ability to buy more than 100 companies a year reflects its “de-centralized M&A model” and the size of its addressable market that he estimated to be worth more than US$200 billion, with more than 40,000 potential targets.

Treiber has a sector outperform recommendation (the equivalent of a buy) on Constellation Software’s shares and a 12-month target price of $2,700. That implies a 40 per cent return relative to Constellation’s closing price on the Toronto Stock Exchange Monday.  

The company’s M&A strategy has also made it a favourite of Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management.

“They know how to run [software companies] and they know how to generate free cash flow,” he said in an appearance on Market Call last month. “We think the runway of growth for [Constellation Software] is huge.”