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Since its founding in 1995 with the acquisition of Trapeze Group, Constellation Software’s consistent rise has drawn its fair share of admirers and copycats in the marketplace. Analysts love to examine how the Canadian software acquirer has managed to grow revenues by about 25% a year on average. In their most recent feature on the subject, The Economist refers to Constellation as “tech’s Berkshire Hathaway” and delves into the recipe for the company’s sustained success.

The story touches on key aspects of why Constellation Software is different from private equity and venture capital investors, how we select the companies we acquire, and why we choose to leave the businesses we buy to operate much as they did before post-acquisition. Acquired Knowledge has expanded upon some key themes from the piece for those looking to learn more about Constellation and its subsidiaries, including Volaris Group.

How is Constellation Software similar to (and different from) Berkshire Hathaway?

Constellation often draws comparisons to Berkshire Hathaway for its focus on investing in companies with “moats” – a strong and lasting competitive edge in the marketplace. Both Constellation and Berkshire Hathaway leave the companies they invest in to operate much as they did before. Both companies grow primarily through acquisition, take a long-term approach to investments, and are well-known for their expertise in allocating capital. But there are also some key differences between the two companies.

While Berkshire Hathaway is invested in a wide range of industries (utilities, manufacturing, railroads, retail, etc.), Constellation and its operating groups focus on vertical market software companies that provide mission-critical solutions to some of the world’s most important industries, such as agriculture, transportation, communications, and education. Where Berkshire Hathaway makes headlines by buying large stakes in publicly traded firms like Apple and Coca-Cola, Constellation generally acquires a 100% stake in companies. Many of Constellation’s acquisitions have been smaller companies, but in recent years it has acquired several larger companies. Similarly, Berkshire Hathaway CEO Warren Buffett is the well-known public face of his organization, while Constellation Software CEO Mark Leonard is known for his low profile and maintaining a humble, behind-the-scenes leadership style.

Why is Constellation Software such a successful acquirer of software businesses?

The Economist concludes that, like Berkshire Hathaway, being the most successful company in any given industry comes down to one thing: practice. After completing more than 1,000 acquisitions to date, Constellation’s M&A experts have become skilled at recognizing patterns that help predict a software company’s future success. As one of Constellation’s largest operating groups, Volaris has acquired over 200 companies and maintains a presence in more than 40 vertical markets, acquiring dozens more companies each year. Each business that joins us adds to the pool of talent and expertise that our leaders rely on to maintain their competitive edge.

Many of the leaders who now acquire companies for Volaris were once business owners themselves, making it easy for them to communicate the deal structure and manage expectations during the sales process. Evaluating hundreds of transactions has sharpened our knowledge of the software industry landscape, allowing us to assess whether a business is well-positioned to succeed in a specific vertical or geographic market and help provide the resources it needs to get there post-acquisition.

A deep understanding of how software companies operate has also streamlined the due diligence process, giving us a clear understanding of what metrics, financial indicators, and operational details are most predictive of a company’s long-term success. All these factors combine to create an efficient acquisition process and come with a guarantee that the business will never be sold again post-acquisition.

What makes a company a good fit for Constellation Software?

The Economist examines the types of businesses that Volaris and other Constellation operating groups acquire. In the past, many acquisitions have been smaller companies with strong management teams that are founder-led. Volaris sees the potential for growth in smaller businesses that are close to their customers. Small, vertically-focused companies can offer niche expertise that can be difficult to replicate. That is especially the case when they specialize in particular technologies or market segments, which can help an acquirer gain entry into new markets or grow its position in existing ones. That’s why – unlike some buyers who are unconcerned with keeping the existing management structure intact – Volaris often retains the senior leadership teams that built a successful business in the first place.

Creating industry-specific portfolios to handle our acquisitions in vertical markets where we have a strong presence also allows Volaris to focus on the specific needs of those companies and build out benchmarks that give our businesses a competitive edge in their respective fields. While we’re open to acquiring companies that serve any industry, Volaris is always looking to expand in areas where we already have a presence and strengthen our businesses in that sector by encouraging them to share best practices. To facilitate even larger deals, Constellation’s operating groups have considered unique funding strategies, like spinning out larger portfolios into their own publicly traded entities. For example, as part of the purchase of WideOrbit, Volaris Group’s communications and media portfolio, Lumine Group, went public in 2023.

Why does Constellation Software maintain a decentralized model where companies remain autonomous?

Even though businesses acquired by Constellation become part of one of the largest tech companies in the world, each one is encouraged to continue to operate as a small business. Forcing companies to integrate puts the focus of management further away from the customers they’re serving and splits resources that could be better spent if they’re allocated with more local focus.

Autonomy allows the acquired company to maintain its existing corporate culture and operational practices. This can be crucial for retaining employees, particularly key talent who may have joined or stayed with the company because of its culture. Disrupting the cultural norms of a successful company can lead to dissatisfaction, turnover, and reduced productivity. Additionally, the acquired company often has specialized expertise that has driven its success, and autonomy helps preserve that knowledge.

The smaller companies Volaris buys have thrived for decades on their innovative mindset and entrepreneurial agility. Companies that acquire can run the risk of stifling these qualities if they impose too much control. By keeping the company autonomous, we continue to benefit from the innovative culture that made the business attractive in the first place. Then, by bringing leaders from those companies together throughout the year to exchange ideas and share their successes and difficulties, we can further spur creativity and collaboration.