Constellation's Succession
A programming note: I am currently working on a Deep Dive on Instacart which I expect to publish by 25th of this month. I have recently spent some time in understanding Amazon’s ambition in groceries (see part 1 and part 2); given Instacart’s success in grocery delivery, I feel it necessary to spend some time on studying their business.
After Mark Leonard’s sudden resignation due to health concerns, Constellation Software had a conference call yesterday to discuss their succession plans and give the new CEO Mark Miller the opportunity to calm the investors.
In the late 80s, Miller founded a startup which developed software for transit agencies. He ended up joining Constellation when his company was the first company Constellation acquired back in 1995. In just six years after joining Constellation, he became Chief Operating Officer of the whole company. So, he is certainly no stranger to Constellation’s culture, philosophy, and playbook.
As a result, during the call yesterday, Miller largely reminded investors that even though Mark Leonard is not at the helm anymore, investors should not expect to see much changes to Constellation’s strategy going forward. His capital allocation philosophy seems to largely mirror Leonard’s. Miller explicitly mentioned that he is not a fan of lowering hurdle rates.
Predictably, there were quite a few questions on AI. Miller mentioned they intend to be “fast followers”. From the call:
We tend to be fast followers. So our business leaders, particularly our better business leaders are usually quick to respond to changes inside of their markets due to moves their competitors make or new entrants make into the market.
Last week, Miller bought 275 CSU shares in the open market. An analyst asked if they might think about buying back shares. Miller said the following:
we’re not considering buying back shares, and I don’t think there’s anything you can extrapolate into that other than both John and the Chairman and myself acquired some shares. We really just felt it was sending a signal to people that we were very comfortable with the company and its long-term future. That’s all that’s to be read into that.
I don’t mind CSU not buying back shares. If anything, you could argue if they started buying back shares at current prices, it might give a negative or at least a confusing signal about their capital deployment opportunities. However, the very last question in the call reminded me that Miller seems to have the exact same blind spots as Mark Leonard had about buybacks. Notice the interaction between an analyst and Mark Miller:
Analyst: just a clarification, the answer you provided before on the buybacks, is that just a philosophical thing where we’re not interested in buybacks? Or is it a reflection of when you look at the valuation today relative to the opportunities
Mark Miller: From my perspective. philosophical thing. We’ve never been a fan of doing buybacks at Constellation.
The question was such a softball, and yet Miller’s response reminded me Mark Leonard’s 2013 shareholder letter in which he discussed his “philosophy” on buybacks:
“Buybacks are tempting to management and boards: they tend to improve the lot of managers and insiders, while being applauded by the business press. I think they are frequently a tolerated but inappropriate instance of buying based upon insider information. Instead of shareholders being partners, they become prey.”
I wrote the following in my CSU Deep Dive back in March 2022:
It all seems puppies and kittens when your stock just continues to CAGR at 20-30% in the last 10-15 years, but I bet if/when the stock ever experiences a 50% drawdown and many of his millionaire employees become non-millionaires, Leonard will think about “preying” on some shareholders
In some sense, CSU management has the opposite disease of many Silicon Valley tech companies’ CFOs who like to “offset SBC by buying back shares”. Perhaps you get CSU’s philosophical nonsense when your stock never experiences 30%+ drawdown. It is extremely likely that their “philosophy” will be tested at some point in the next couple of decades, and it may prove to be very expensive philosophy if the then management holds onto the idea of not “preying” on shareholders. This doesn’t mean CSU will just let its cash pile up in the absence of compelling capital deployment opportunities in the long term; they will probably return capital via either common or special dividend when they reach such a phase. So, I don’t worry a great deal about their “philosophy” on buybacks.
In addition to “Daily Dose” (yes, DAILY) like this, MBI Deep Dives publishes one Deep Dive on a publicly listed company every month. You can find all the 63 Deep Dives here.
Current Portfolio:
Please note that these are NOT my recommendation to buy/sell these securities, but just disclosure from my end so that you can assess potential biases that I may have because of my own personal portfolio holdings. Always consider my write-up my personal investing journal and never forget my objectives, risk tolerance, and constraints may have no resemblance to yours.
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