Is Constellation Software on the Block?
May 23, 2011 Alex Woodie
The first four months of 2011 has seen M&A return with a vengeance in the IT sector, and the IBM i software space has not disappointed, with deals announced for Lawson Software, Novell (by Attachmate), MKS, and Aldon, as well as rumors about a $1 billion-plus deal for Micro Focus. Now it appears that Constellation Software, which owns Friedman, Varsity Logistics, and other IBM i commercial assets, could be the next ISV to get sold.
Constellation announced on April 4 that its board is undertaking “a review of strategic alternatives” to enhance shareholder value. The company said it retained BofA Merrill Lynch and BMO Capital Markets to act as its advisors. While the company didn’t come right out and say it’s now taking offers for the company, it’s doing and saying exactly what scores of other companies did and said before selling.
Following the disclosure, several minority shareholders in the company, which is publicly traded on the Toronto Stock Exchange, have spoken out about a possible deal. The most vocal has been Mawer Investment Management, the third largest investor in the stock, with a stake of about 12 percent.
The folks at Mawer told Reuters that Constellation’s board is shopping around for a deal so that the company’s two largest shareholders, Birch Hill Equity Partners and Omers Private Equity, which own 50 percent of the company, can exit their investments with the maximum return. While the firms could sell their stakes on the open market, getting a deal for the entire company could prove more lucrative.
That is a big concern for smaller firms like Mawer that are bullish on Constellation. These firms like how the company has grown quickly through acquisitions, and weren’t planning on selling their stakes any time soon.
Constellation was founded by the venture capitalist Mark Leonard in 1995 specifically to be a consolidator of applications in vertical markets, including public and private sectors. The company, which was originally a subsidiary of the Ontario Municipal Employee Retirement System (OMERS), has more than 2,200 employees, and more than 20,000 customers in 30 countries split across its six operating divisions, including Emphasys, Volaris, and Harris, which target the public sector, and Friedman, Jonas, and Homebuilder, which target the private sector.
Many of Constellation’s IBM i holdings are through Friedman, the Deerfield, Illinois-based developer of ERP software for manufacturers in the specialty “make to order” industries, such as the window and door manufacturing business. Constellation acquired Friedman in May 1999, when Michael Greenough was an executive vice president with Constellation. Greenough, of course, went on to direct acquisitions at a number of other consolidator-generals, including Geac and SSA, which are now part of today’s biggest consolidator-general, Infor.
The Friedman operating group also owns Varsity Logistics, a San Francisco developer of IBM i shipping software that was acquired by Constellation in the fall of 2007; Computer Solutions Inc. (CSI), a Florida developer of order management and e-commerce applications for the IBM i platform; and Viewlocity Technologies, a Dallas, Texas-based developer of supply chain management software for IBM i and other platforms. The Friedman Group acquired Viewlocity earlier this year.
Acquisitions have been good for Constellation, which reported a 44 percent increase in revenues, to $631 million, for its fiscal year 2010 ended December 31. Adjusted net income rose 40 percent to $87 million for the year, during which Constellation spent $91 million on 21 new acquisitions. Organic revenue growth was 4 percent, the company reported.
During 2010, holders of Constellation’s stock (CSU on the TSE) were rewarded with a 36 percent increase in share price, from about $37 per share to about $50 (Canadian). Since then, the stock has appreciated by another 40 percent.
Constellation’s investors have benefited from this run-up in stock value, as well as the $2 dividend that CSU pays and the company’s continued profitability. If the company continued growing at this healthy rate, it would soon be worth much more than the current $1.5 billion (Canadian) market capitalization, they argue. Selling at the current $70 per share level doesn’t make sense for them, they argue–but they fear the majority shareholders will make the decision for them.
Constellation did not respond to requests for information by IT Jungle before this issue of the newsletter went to press.