Hello, and welcome to the annual meeting of shareh olders of Topicus.com Incorporated. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Chair man Mark Dennison. Mr. Dennison, the floor is yours.
Thank you and good morning. I'm Mark Dennison. I'm the General C oun sel and the Corporate Secretary of Constellation Software. Mark Leonard, Constellation's President, and John Bilowitz, Constellation's Chair of the Board, have asked me to act as chairman of today's meeting. Kemal Baksh will act as Secretary of the meeting. I've asked Shirley Tom and Louise Weltonberry of Computershare to act as scrutineers and to compute the votes of any polls that are taken at this meeting. Due to the COVID-19 pandemic, we are conducting today's meeting virtually via live webcast. Since the meeting is being held virtually, we want to outline a few logistical items regarding the conduct of this meeting. As indic ated in our press release dated March 29, 2022, shareholders of Topicus and shareholders of the company have had the opportunity to submit questions in ad vance of tod ay's meeting.
We've received a large number of questions. On behalf of the shareholders, our panel of questioners has collated the questions received and organized them by theme. Following the formal part of this meeting, our panel will pose those questions to our senior managers during the Q&A session of the meeting. Any additional questions can also be submitted by any meeting attendee using the instant messaging service of the virtual interface. Questions which are already addressed in the questions submitted in advance of the meeting or that are redundant or repetitive will not be answered. Any questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the formal part of this meeting. When asking a question, please indicate your name, which entity you represent, if any, and, if applicable, confirm if you are a registered shareholder or a duly appointed proxy holder.
For each question we answer, we will summarize the question and read out loud the name of the person who asked the question and, if applicable, the entity such person represents. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. When you're asked to vote, you will receive a message on the virtual interface requesting you to register your votes. When voting commences, the polls will be open for three minutes. We will now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I will move and second all motions other than with respect to the shareholder proposal.
The Secretary of the meeting has filed with me proof of mailing of the meeting materials, including the notice of availability of proxy materials in the form of proxy, and where applicable, the notice of meeting and the management information circular. The consolidated financial statements of the company for the year ended December 31, 2021, and the auditor's report thereon have also been mailed to all shareholders of the company who have requested them. Copies of these materials are also available on the company's SEDAR profile and on the company's website. We would be pleased to deal with any questions concerning the financial statements subsequent to the completion of the formal business of this meeting.
The scrutineers have reported to me that we have at least two shareholders present by electronic means and holding or representing by proxy at least 15% of the votes entitled to be cast at the meeting. As such, I declare that a quorum is present for the conduct of business, and this meeting is properly constituted for the transaction of business. Again, voting today will be conducted by electronic ballot. The balloting will be open to registered holders and appointed proxy holders who have properly logged in with their control numbers or invitation code after the presentation of all business items. The first item of business is the election of directors. There are 15 directors to be elected at this meeting. The management information circular made available to shareholders contains information about those 15 nominees.
The nominees are Jeff Bender, John Bilowitz, Lawrence Cunningham, Susan Gayner, Claire Kennedy, Robert Kittel, Mark Leonard, Mark Miller, Lori O'Neill, Donna Parr, Andrew Pastor, Dexter Salna, Laurie Schultz, Barry Symons, and Robin van Poelje. The meeting is open for nominations for the election of directors for the ensuing year or until their successors are elected or appointed. I will now nominate the directors and second the nominations. I nominate each of the persons whose name appears in the Management Information Circular under the heading Election of Directors to be a director of the company until the close of the next annual meeting of shareholders or until their successors are appointed. I also second the nominations. If there are no further nominations, I declare the nominations closed.
I note that as described more fully in the Management Information Circular, the company adopted a majority of director election policy in May of 2009. This policy enables shareholders to vote separately for each director nominee at meetings of shareholders where directors are to be elected. If a director nominee does not receive the support of a majority of the votes cast at a meeting of shareholders, that director will be expected to tender his or her resignation from the board following such meeting. The resignation will be effective upon acceptance by the board and will be disclosed via press release. For more information on our majority director election policy, please see page 20 of the Management Information Circular. I will now move and second a resolution appointing the auditors for the current year and authorizing the directors to fix their remuneration.
I move that KPMG LLP Chartered Accountants are appointed auditors of the company to hold office until the close of the next annual meeting of shareholders, or until their successors are appointed at such remuneration as may be fixed by the directors, and that the directors are authorized to fix such remuneration. I also second the motion. Unless there are any questions, I will move to the next item of business. The next item of business is the consideration of the special resolution of the company authorizing the filing of an amendment to the company's articles to increase the maximum number of directors from 15 - 20. The full text of the special resolution to authorize the amendment to the company's articles is included as Schedule A to the Management Information Circular.
The resolution must be approved by at least two-thirds of the votes cast by the holders of common shares present or represented by proxy at this meeting. Unless there are any objections, I will dispense with the reading of the special resolution and will move and second the approval of the special resolution. I move that the special resolution of the company set out in Schedule A to the Management Information Circular relating to this meeting be authorized and approved as a special resolution of the shareholders of the company, and I also second the motion. I now will put the motion to the meeting. Is there any discussion on this motion? There are not, and so I will move to the next item of business.
The next item of business is an advisory resolution to endorse the company's approach to executive compensation, as further set out in the Management Information Circular. As the vote is advisory only, it will not be binding on the company. However, the Compensation Nominating and Human Resources Committee of the board will take into account the results when considering future executive compensation arrangements. I will now move and second the approval of the advisory resolution. I move that it be resolved on an advisory basis and not to diminish the role and responsibilities of the board of directors of the company that the approach to executive compensation disclosed in the Management Information Circular is accepted, and I also second the motion. Unless there are any questions, I will move to the next item of business.
The next item of business is the consideration of the shareholder proposal which has been submitted by the Pension Plan of the United Church of Canada. Representatives of the United Church of Canada are in attendance at today's meeting to present the shareholder proposal on behalf of the United Church. The full text of the shareholder's proposal, including the shareholder statement and the company's response to that proposal, has been included as Schedule B to the Management Information Circular mailed to shareholders in connection with this meeting. I would now like to invite Mr. Derek Hurst on behalf of the United Church of Canada to present the shareholder proposal. Operator, can I please ask you to unmute the line of Derek Hurst for me, please?
Derek, your line's open.
Great. Good morning, shareholders. My name is Derek Hurst. I'm the pension fund manager at the United Church of Canada. Advancing and promoting racial equity is fundamental to build a diverse, safe, inclusive, sustainable, and productive economy and society. The United Church has made a public commitment to becoming an anti-racist denomination. This commitment is part of the church's ongoing work towards racial justice. As an investor, we want to ensure that our portfolio aligns with the values and objectives of our racial equity commitments and goals. We also wanna see companies in which we invest succeed in the long term. A meaningful and robust approach to racial equity is critical to the success of any company, including Constellation Software.
In the last few years, many companies have proactively developed, implemented, and reported on their strategies to ensure that all of their employees are treated equally and have access to the same opportunities. Constellation Software has a history of lagging behind its peers when it comes to equity and diversity. It was only in 2018 that Constellation appointed a woman to its board, following a shareholder vote on a proposal supported by SHARE. The proposal requested the company adopt a formal policy on board diversity and disclose plans for increasing the number of women on its board and in its upper management. However, despite the fact that the proposal was supported by over 49% of shareholders, the company has yet to implement a board diversity policy.
Not only does this highlight the company's failure to address a widely supported proposal, but it may also underestimate the importance of diversity, equity, and inclusion. Just like any company, Constellation Software has a responsibility to ensure that its employment practices are not discriminatory to any of its employees. It also has shareholders' prerogative to understand the company plans and progress on these issues so that we can make informed investment decisions. We recognize Constellation Software's unique business model, and we believe that advancing racial equity at Constellation should not go against the company's current business structure, but rather support and work in parallel with existing operations and structures. Fellow shareholders, I move the proposal and ask for your support.
I look forward to a more constructive and meaningful engagement with the company in the coming months, so that Constellation can begin to advance and promote racial equity in the way that it benefits its more than 25,000 employees, shareholders, and other stakeholders touched by the company's value chain. Thank you for your time.
Thank you, Mr. Hurst. I will now put the motion to the meeting. Are there any questions on the motion? There are not, and so I will now move on to the voting process. As I mentioned earlier, voting today will be conducted by electronic ballot. I will now take a moment to ask that the balloting be opened to registered holders and appointed proxy holders. The polls are now open, and at this point, all registered holders and appointed proxy holders who have properly logged in with their control numbers or their invitation code and wish to vote will be able to see on the screen the election of directors, the appointment of the auditors. The special resolution with respect to the increase to the maximum number of directors, the advisory resolution on executive compensation, and the shareholder proposal motions that are brought forth at this meeting.
Please register your votes by accessing the voting page and selecting the for or withhold buttons next to the name of each proposed director and next to the resolution with respect to the appointment of KPMG as the company's auditors. Please select the for or against button next to the special resolution with respect to the increase of the maximum number of directors, the advisory resolution on executive compensation, and the resolution with respect to the shareholder proposal. The voting will be open for three minutes, and while you are submitting your votes, we will begin introducing the speakers for the question-and-answer period. Once the electronic balloting closes, the voting page will disappear, and your votes will automatically be submitted.
The full voting results will be published on SEDAR following the meeting, but I can report that based on the proxies which we've received in advance of the meeting, all the matters that were put to a vote today have passed. Based on the proxies received in advance of the meeting, the shareholder proposal made by SHARE on behalf of the pension plan of the United Church of Canada has been approved by the majority of votes cast. While the approval of the shareholder proposal is not binding on the company, the company and the board will, in due course, consider the shareholder proposal further in light of the results of the shareholder vote. The formal items of business as set out in the notice of meeting have now been dealt with. I move that the meeting be terminated, and I second the motion.
I declare the resolution carried, and the meeting is now terminated. The formal agenda for this meeting is now completed. I will now turn the meeting over to Larry Cunningham, who will be leading the question-and-answer session this morning. I ask that all attendees who would like to ask a question use the instant messaging feature of the virtual interface to do so. When asking your question, please include your name, the entity you represent, if any, and if applicable, confirm if you are a registered shareholder or a duly appointed proxyholder. With that, over to you, Larry.
Thanks, Mark. Welcome, everyone. Almost 500 people are attending this gathering. We wanna welcome, in particular, our employee shareholders and are grateful for everyone joining us today. I wanna give a special thanks to our independent board members. In live meetings in the past, this is the moment when they'd all stand up and say hello. The best we'll do instead is recognize them by name, and I wanna thank them for their contributions. John Bilowitz, who's chair of the board, Rob Kittel, who's lead independent director, Andrew Pastor, Susan Gayner, Lori O'Neill, Donna Parr, Claire Kennedy, and Laurie Schultz. A special welcome to the latter two who have just joined the board in the last well, as of today and this past year. Thanks, everyone.
While we're at it, we wanna bid fond farewell to two distinguished directors who've rolled off the board this year. Steve Scotchmer, former lead independent director who'd been on the board since 2000 and made enormous contributions to the company, and Paul McFeeters, who's been on the board since 2014, making great contributions, too, including as chair of the audit committee. For the third year in a row, I'm delighted to be joined for this panel Q&A by two other shareholders of the company, two analysts, Will Pan of Ruane, Cunniff & Goldfarb, and Howard Leung, formerly of Veritas and lately of Fiera Capital. Now, as background, Howard was an equity research analyst at Veritas, covering Constellation since 2016, and recently went over to what some call the dark side, at Fiera earlier this year.
Will has been with Ruane, Cunniff & Goldfarb for 12 years, and he's been a shareholder of Constellation since 2014. I joined the Constellation board in 2017 and was asked to become vice chairman of the board in 2019, and I've been a shareholder throughout that time. Thanks to everyone for submitting questions. We received a very large number of questions, about the same number as we've received in the past two years. We have collated the questions, trimmed them a little bit, edited them, tried to put them in a thematic sequence. If you hear your topic discussed and it's not exactly how you wrote it's because we've integrated multiple questions around the same topic.
Last year and the year before, we were able to ask almost all questions, but we can't guarantee that we will. If we run out of time and yours isn't asked, we apologize. Of course, feel free to use the Constellation shareholder Q&A function that's available all year round on the website. We have not shared any of the questions ahead of time with the panelists, other than one or two that required some computational work. For those, we only shared them with the CFO. We collated the questions into categories and divided them up between the three of us. The categories are acquisitions, operations, and people. We split the acquisitions into two parts, the operations into two parts, and I've got a potpourri section at the end.
The sequence is gonna be, we're gonna start off Will, with Will handling acquisitions part one, and we'll flip over to Howard for operations part one. I'll pose some questions about people, then Will will do acquisitions part two. Howard will do operations part two, and I'll finish up with the potpourri. I am monitoring the Q&As, the questions that come in. If you want to use the instant messaging, we've already gotten quite a bunch of questions, and periodically I'll collate, synthesize those and pose them probably during my round. Thank you all very much again. Look forward to engaging discussion this morning, which will be led by Will Pan. Will, thank you very much.
Hi, everyone. Thanks for having me. It's an honor directing questions to the group. So my first round of acquisitions questions mostly has to do with smaller acquisitions and returns. First question is, you know, this may differ by groups. This is open to everyone. How close are you all in terms of desired coverage for your M&A teams? Are there many gaps remaining? Are we at a point where, for instance, a measure like acquired revenue per M &A employee is increasing?
Do you want me to take that? Will, I'll start off with that. Thanks for the question. Just before I start, I just wanna thank all of the employees across the company for all they did through the pandemic and worked really hard and through difficult circumstances. That's really important not to forget that. Making sure our customers got what they needed done, and we really appreciate that. As far as sort of understanding, looking at, like, this interesting metric, looking at sort of capital acquired per M&A resource, isn't something I particularly focus on. We really have been, you know, as mentioned previously, focusing on decentralizing our M&A as much as possible.
Sort of just making sure that more people understand how to do it has been more my focus, at least inside of our group. I think many of the other leaders as well do that. Which again allows us to continue to do smaller acquisitions as well. That would be sort of my cut on it.
Yeah. Will, it's Jeff from Harris. I could add, I'm not sure we'll ever be satisfied with our overall coverage. I think, you know, we're always finding opportunities that, you know, I think we would have liked to have seen earlier in the process or perhaps, you know, had a chance to see it at all. I think, you know, to Mark's point, we're very focused on building the skills and the discipline in more and more capital deployers. I think from a coverage perspective, you know, I'm not sure in my lifetime we'll ever be or Will, I think we'd actually be satisfied with the coverage.
I think we're always surprised at the number of VMS companies that are available for sale, and I think, you know, keeping track of them and building long-term relationships with them is always a challenge. I think it's something that we're just always continuing to work on as we continue to build out our M&A function.
Great. Related to that, your outside shareholders are curious about the number of targets in the database. You may not be able to answer a question like that, but can you give us an idea of the trends? Does it continue to grow in number? Is it asymptoting?
Let me take that, Will. It's Mark Leonard, and excuse my voice. Unfortunately, I contacted COVID over the weekend, which is a good reason, or at least the benefit of having a virtual meeting is that I can attend. We will always add new prospects to the funnel. It's just that the quality is gonna go down over time. You're obviously gonna find the pretty ones first, and it's like any market, you eventually hit diminishing returns. We for sure will hit diminishing returns as we add less and less attractive prospects to the funnel.
Thank you. Broader environment. Is the decline in share prices of many tech companies reflected in valuations you're seeing in the private market? This is open to everybody.
It's Barry Symons from Jonas. I'll start. We haven't seen it yet. The decline has only been relatively recent, but obviously we're watching it. As far as any of the conversations we're having, we haven't seen a decline in expectations around valuations.
Yeah. Will, it's Jeff. I would say the same thing, I think. We have not seen any noticeable change in the valuation conversations that we're having with, I'd say, at least the majority of the prospects that we're talking to.
This is.
Yeah, Mark, I'll just say.
Rob speaking, Topicus. Yes. Here in Europe, the same as well.
Mark, you were saying?
I was saying same for us. We haven't seen any noticeable difference as well.
Okay. Zooming out a little bit, the next question is, how do rising interest rates and inflation factor into your thinking on investment hurdle rates? I think your hurdle rate for small to mid-sized acquisitions has been unchanged for a long time. I realize that your focus is on buying assets for life, meaning that short-term fluctuations in the rate environment aren't all that relevant. If there were a change to your long-term structural outlook for rates, would it not make sense to adjust your hurdle rates?
Yes, it would make sense.
The funny thing is that for a long time, you didn't, you know, adjust them down when interest rates were low. You could argue that you guys were sticking to a, an absolute hurdle rate that was generally higher than prevailing rates and didn't move with them. It's curious to hear you say that you would actually raise them now. Do you think that you were responsive to rates in the past?
I think we weren't interested in generating low rates of return, and so I think there's sort of downward inelasticity. Whereas I think on the upward swing, it works the other way. It's a bit like owning a home. Very few people like to sell their home at a loss. It takes really crushing interest rates to force people to sell on the downside, and they'd rather wait it out and own it for a long time, even if it isn't ideal, until prices come back. We're kind of the same way with hurdle ra tes. We really don't like dropping them. We feel that it's crossing a Rubicon when you drop them.
Thank you. Related to changes in hurdle rates, if you do one day change the hurdle rate on smaller investments, will you tell outside shareholders?
I don't really see any upside in telling them. If it happens, hopefully you'll see a change, and it works. You'll see a change in the incremental return on incremental capital in the business. Changing hurdle rates isn't the same as getting higher rates of return on investments. It's a precursor to it, but for sure, you won't get higher returns if you don't increase your hurdle rates. Yeah, I don't think there's any advantage to signaling it other than in results.
Fair enough. Next question. Revenue in U.S. dollars has grown at a 14% compound rate over the last five years, while euro revenue has grown at 23%. Does that reflect a more competitive acquisition environment in the U.S. or something else?
Mark, you're operating both sides of the pond. What's your experience been?
I think, yeah, just generally there's been, you know, our coverage has improved in Europe, and I think that's part of the reason that we're seeing that. That would be my sense. That takes a long time to do, and it isn't something that you do overnight, and I think we've just gotten a little bit better at that. I think that's what's made the difference from our perspective. I think our headcount has shifted substantially away from being in North America. I think 67% or 66% of our headcount is outside of North America as well, and that was definitely not the case five years ago. It would be flipped the opposite way. That's my sense, Mark.
Great. A more short-term question, this I suppose would be for Robin. Why is acquisition activity muted at Topicus during the quarter?
Could you please repeat again?
I think the question is just about why there was less acquisition activity at Topicus during the quarter. Not a lot of capital deployed.
That's correct. But I think we don't look at just quarters. We look for years, we look for multiple years. We do this for long term. I can already tell you, if you go on our website, that we did close more deals in Q2, so it's not something specific. It's just, the pattern we always see. It goes up and down, and we try to improve over time if you look through the quarters, so it's not something specific. I think also you could see in our filings last year, we had a tremendous growth as well. If you take that into account, we monitor a certain growth rate over time, and I still think we're doing what we are planning to do.
Great. Belarus specifically put out a statement that it would withdraw from Russia. Our understanding, though, is that it was cautious about investing in Russia in the first place. How does the team more broadly think about no-go countries or countries where it's wary to place capital as the company internationalizes?
It's a great question and you know, it's a difficult one to answer because there's a little bit of you know, a qualitative decision-making involved in it, right? You know, we look obviously at each opportunity in each geography on an individual basis and make a decision. We felt uncomfortable with what was going on in Russia, and it kind of crossed a bit of a line there from our perspective and decided that that was the right decision. We'll continue to think about other geographies that way too, based on the situation they're in and opportunities within those geographies.
I can't tell you that's a very simple answer, but that one just went a little bit beyond where I would've liked it to have been. We made a tough decision on it, which was difficult to make internally too, because we had varying opinions across the world on how we should approach that. If you surveyed our leadership team in various countries or in 42 countries, they, you know, you wouldn't necessarily get a consensus opinion on what you should do there. It's a decision that we sort of made here corporately as to how we should approach it. That's pretty much all I can say on it, I think, you know, other than what you've seen we've released publicly on it. Thank you.
My sense, Will, it's Mark Leonard, is that various business unit managers have different positions on this, and we don't have to all have the same opinions on everything. Their opinions are often colored by the local environment, and in instances in Romania, the younger people are trying to help out and involved in some. There's a beeping on the line. If someone put their phone on hold, maybe you could take it off of hold. Anyway, to continue the response. You know, we let our business units have their own autonomy.
It is one of the hallmarks of what we do, and we try not to burden them with bureaucracy and push down the values of that for instance, head office might hold dear, to a place that is far different than Canada. You're gonna see a kaleidoscope of opinions on issues like Russia.
That's right. In the past, you've mentioned internal debates on Keep Your Capital. The program has certainly spurred acquisition activity across the company, but would you now call it an unmitigated success, or does it have tangible or intangible drawbacks? This is open to anybody.
Yeah, I think they have pretty balanced views on it. There are clearly successes and failures. Whenever you put pressure on something like capital deployment, you're gonna get capital deployment. It just may not be at high rates of return, and it may not be in a fashion that makes you proud of how the groups have interacted as they competed for acquisitions. It's definitely not an unmitigated success. As you say, the amount of capital deployed is increasing.
Hey, Will, it's Jeff fro m Harris. I think I would say that, as Mark spoke to you before, I think it's a great example of the autonomy that exists within Constellation. I think each of us in our groups approached it differently, and I think, you know, we took the parts of it that we liked and sort of if I didn't like certain parts of it, I chose not to implement those parts of it. I think overall, we continue to deploy more capital and have more people involved in deploying capital. I think that part of it's been a success. I think to Mark's point, with any program and whenever you apply pressure, there is always unintended consequences or things perhaps that rear their head that maybe you didn't think they would.
I think, you know, Keep Your Capital is no different from that perspective. I think, again, it's just a great example of the autonomy across Constellation, where each of us has like applied it differently within our organizations, but still driving for the same success, which is an increase in our disciplined deployment of capital.
Great. Thanks. Final question in this section. How has the performance of recent cohorts of acquisitions compared to historical averages in terms of things like realized returns, hit rate versus the underwriting assumptions, organic growth profile, et c? What about for the recent larger investments that you've made relative to their historical averages?
We're not gonna talk about that. What I can tell you is that we monitor the rates of return and the hit rates and all those other things, on at least a quarterly basis at the level of the board, and obviously in far more greater detail down at the operating groups. We're always looking for trends and things that point us to ways to improve. A, we're aware of it, and B, we're not gonna share it.
Great. Thanks. That's it for my first section on acquisitions. Howard, over to you.
Thanks, Will. I'm gonna talk about spin-offs first. Got a number of questions on those, especially with Topicus, but with other spin-offs. The first question is, the spin-off of Topicus was an experi ment of sorts. It might create a stronger sense of cultural identity and ownership among Topicus employees, which might translate into better performance. From your perspective, what have been the results of this experiment thus far, or is it too early to say?
Robin, you're on the hot seat.
Well, I think, we're now, more or less, a little bit over one year down the road. I think, for the concept, the spin-out worked pretty well. The idea was to acquire larger quality companies, and we succeeded to add a larger quality company to our group. They keep their own autonomy, and, you know, we try to learn from them. They try to learn from us. It's a process which takes time. I think the spin-out enabled us to do this, to remain disciplined investors, but still add larger quality companies. We're evaluating. We're trying to see what we did well, what we could improve if we one day would consider another spin-out.
I think so far it has worked, and yeah, I think it has been satisfying so far.
How about the goal, you know, a few years ago, spin-outs was talked about at the AGM, and, you know, one of the goals was to really align shareholders better with employees. Has the new structure with Top icus achieved this goal, you think? And why or why not?
Shall I take it, Mark?
Yes, please.
Yeah, I think if you think about aligning shareholders and employee shareholders, it's pretty clear that, you know, if you're an employee of Topicus, you feel closer to what we do. We're in Europe. We know the countries. We know the businesses. We know the people. I think that's an advantage. We did apply the Constellation bonus scheme also to Topicus, so people will invest part of their bonus in Topicus. You know, pretty clear is the stock price is going a little bit more up and down with Topicus than I think with Constellation. That has different elements to it, and that's something we would like to see that our valuations would run in line with what we think is the long-term intrinsic value of the company going forward.
You know, we knew that our stock might be a little bit more volatile, and that has its impact also, I think, on buying shares for our employees. I think so far it's early days, so we will monitor it over time.
I'm sure things are gonna change, especially now with the preferred shares conversion, and you know, opening up to the rest of the group, you know, on spin-offs. How is your thinking with possibly future spin-offs with the operating groups within Constellation seeing an improvement in employee morale or cultural identity if they were to become standalone entities?
Tell you what, Howard, why don't I interject with a setting of the scene for why we do a lot of these spin-outs. Usually, it's an opportunity to buy a very significant company, one that we couldn't justify if we were buying it for cash. What we're doing is we're putting in some cash, and we're using the shares of the spin-off as partial payment. That creates alignment with the large company shareholders and gives them the upside on those shares once we spin the business out. They get a blended set of proceeds.
They are clearly more aligned than they would have been if they sold to us for cash, and we could be more competitive with private equity who do this a lot, where it isn't that they're gonna spin it out and make it public, but they're gonna sell the whole thing, hopefully at some huge multiple, to the next buyer and the group that has sold to them a portion of their business will have a second payday. Our second payday is that the company goes public, and they can continue to be shareholders in the companies that they founded and built. They can feel a sense of pride that it's now an independent company and that it's gonna remain public and not be subject to takeover as long as Constellation is a significant shareholder.
That's the scene that we're trying to set. That's the dream that we have for these things. We hope it will allow us to buy very large companies that we wouldn't otherwise get the chance to buy. Now maybe the cultural question can be addressed if any of the managers feel comfortable talking about it in the evidence of.
Despite the lack of evidence, because all we have right now is Topicus as an example, and you've already heard about that. They'll be speculating, but they may wanna talk about the cultural implications of spin outs. Then again, maybe not.
I can maybe just throw in some sort of thinking on it. I think what's interesting with an employee base is Constellation has continued to grow over time and it's probably harder for the employees to identify with what we do as a whole, right? You know, we're in so many different countries, so many different markets, doing small acquisitions, large acquisitions, and so many different verticals.
I think that the advantage we had when, you know, at least when I was smaller and I was one of the founders of our transit business with the ability of kind of, you know, getting the whole team wrap their head around what transit was all about, which was getting someone from point A to point B, you know, whether they're going to the doctors, whether they're going to the, you know, or to go to school, go to work, what have you. It was kind of a nice message to say to that group of people, right? That's important to a lot of employees.
I mean, you talk to someone coming on board, they cared about, you know, maybe reducing the carbon footprint through, you know, being part of this tech company that was trying to help these things happen. I think that's something that you gain from this, but again, I'm speculating and what advantage that gives you beyond getting a large transaction done, you know, it's hard to quantify. I think from my earlier days, in doing that, which was nice to tell the relatives. You're trying to explain what Constellation does to your average employee. It's a bit of a longer story, right? I think there might be some value and some benefit from that. It's been nice that Robin has done Topicus to give us a bit of an idea.
It's more of a geographical spin out of course, than a vertical spin out. That's, Mark, what I'd add to it.
No, that's pretty interesting, especially, I know you know just throwing it back to you, Mark, for a bit. I know there's been some groups where you've actually put together like Modaxo and Lumine. You were trying to put together the vertical groups again, right? You know, is that goal, maybe not the end goal is a spin out, but just to align what you said culturally, is that the main goal?
Yeah. Attracting great employees to a mission, you know, that we're gonna help move people around the world with our transit pieces is very interesting, right? I think that that's helpful regardless of this. It is a bit of a test of does that help you do that whereas, you know, sometimes you focus on proximity of the company rather than the vertical it's in, rather than that. It's been, and there's a lot involved in doing that, making a decision to create a global brand around a business because we do like having small and focused groups of businesses on specific customer segments, you know, in geography. But we're seeing some benefits of that. Again, time will tell.
It's been a couple of years we've done Modaxo right now. I do like using that approach. Again, time will tell how valuable it'll be for us in the long run. Clearly having a conversation with someone who's in that industry who actually can really see that this makes a lot of sense, that to help us maybe get a large investment done in their business would be, it might allow us to do that, because they can kinda get their head wrapped around that rather than being part of Constellation as a whole. A quality business for sure.
Makes sense. The next one is on looking at organic initiatives from Topicus. When Topicus was acquired, you know, one of the things that was hoped to learn from was the success with respect to investments in organic initiatives. Have you had some learnings in this regard that you've been able to apply across other businesses? Are there any examples of lessons learned that you're willing to share?
Robin here. We're like I said, it's early days, so we're trying to collect learning from them, and they are trying to collect learnings from us. I shouldn't say them and we. We're now all one company, but as you know, we're three standalone entities within Topicus. We are studying their organic growth initiatives and trying to find out how they do that. The Group CEO, Daan, is also being active on different academies within Constellation or within TSS. We try to spread them, and I think we see that slowly taking up.
Again, our approach was we leave those companies as standalone companies, and we have curious employees, and those who aren't curious, we hope they go over and try to replicate what is replicable within their business unit. We definitely see that they do things differently than we did at CSI or TSS. That's intriguing. It's also trying to get your head around it first, and then we hope to see some business units picking things up. I think there is an interest. We try to crack their code and try to make that as quick as possible so that you can really replicate it within other businesses.
You know, when I looked at the Topicus OG and their kind of track record, one of their success factors was being able to, you know, foster the entrepreneurship culture within each company and iterating and testing new ideas. Do you know, in your opinion, Robin, do you think that's very hard to do to TSS employees, you know, trying to foster that? Or do you think that can be something that you know, does it take a long time to kinda build that? Or do you think it can be something to be achieved in the next year or the next two to three years?
Yeah. My guess would be that it will take time to build that and to replicate that. As you said, you know, I think both companies have entrepreneurial spirits. I think both companies also do things in a different way. We knew that when Topicus joined our group. Different ways of being successful in vertical market software. But because it's really different than what we originally did, some people are in the beginning may be curious, others are maybe scared, I don't know how you should call it, but I think that's trying to find out. Like I said before, there will always be curious people who will try to find out. You know, we found out also that Topicus and TSS on certain projects work together.
They won tenders together, tried to work in certain markets, together. Also, that is something we didn't do, usually. Topicus also does some acquisitions which are more synergistic in nature, something we don't always do, and they do. They have a proven track record of how to make that successful, so we're studying that as well. Yeah, companies have different background, different skills. It's not always easy to just say, "Oh, we do it like that," and we copy it and we spread it all around. It's something that needs to grow.
Makes sense. Thanks. You know, maybe one for Jamal and Mark on the administrative burden. This question asks, how much of an administrative burden was the Topicus spin out on the head office? How did that influence your thinking on when spinning out another operating group?
Go ahead, Jamal.
Yeah. I think the largest investment of time of head office was more around structuring of the spin, the preferred shares, et c. That was more legal as opposed to myself and Mark obviously as well and the team. After the spin, the amount of administrative burden, I would say, you know, we haven't added any headcount at head office to do the MD&A or the financial statements. Maybe we have to work a little bit harder, but I would say it's not significant. Yeah. I would say. Then the structure and all the time and effort to put in place that structure, I'm sure we can leverage off if we were ever to do it again.
Mark Dennison, how many years did it take off your life?
It was an interesting year for sure. You know, one of those things where you have to be careful what you ask for because it was quite a challenge and it was a good opportunity to learn quite a bit.
Yeah. We did stuff that had never been done before. My God, people hate that. Whether they're the authorities or the legal establishment, it just makes them feel very uncomfortable.
Well, reading the prospectus, I know all the work that was put into it and all the diagrams, so thank you for putting that in. Moving on to the VMS Ventures, these questions are on that initiative. First one to Mark Leonard. With the announcement of the VMS fund, now you've returned to the venture capital sector. What lessons and tools from your first experiences as a venture capitalist are you taking with you into your second foray? What aspects of VC are you going to avoid?
We used to call a lot of the participants in the venture industry when I was in it adventure capitalists. They were often, you know, sons of rich people and that kind of thing. You know, you get to talk about really cool technologies and it's a lot of fun. I'm having a delightful time working on the stuff. I've also been able to work with Dan, who's very involved, and so we talk every week. It's been great. Do I feel any more confident than I was 25 years ago? No. The solving the diligence and selection process by focusing primarily on internal entrepreneurs is wonderful. It really leverages our time.
If we have a sponsor who puts up their hand and says, "This is a really good person, we should seriously think about backing them and their idea." If we get that kind of referral from a portfolio manager or business unit manager, it's almost certainly gonna happen. That is the diligence. Then obviously we'll stay close and we'll monitor and we'll coach. Yeah, we're doing venture capital like we're outsourcing diligence and market sizing and most everything else to our business units, and they're gradually figuring that out. I'm hopeful that it will be a success despite my lack of increased competence.
You know, on the investments, it sounds like you've already made some. You know, what have they been like? Any commentary on the pipeline opportunities, the fund is seeing?
Yeah. You know, because it's a venture capital, everyone wants to know. This is a rounding error in Constellation, from an investment point of view. We have not yet closed an investment. The vast majority of the investments we've looked at to date have actually been outside investments. So for the most part, rapid growth companies that are quite small, that our business development people have surfaced, that don't wanna sell, but do want capital. The challenge is to explain to those companies that we're gonna be shareholders forever if they take our money. The sad thing is that entrepreneurs have been trained over the last 20 years in the build to flip model. Very few people are thinking build world-class companies forever. It is incredibly sad.
I look around for venture groups that even have that as part of their pitch, and the only one I can see who explicitly talk about building world-class companies forever is Sequoia. Maybe that's the reason that they are so successful is that building great companies approach as opposed to building great exits approach.
Yeah, I think we've glorified the unicorns over the past few decades. Is that in your view the biggest bottleneck so far, or would you say it's, you know, the lack of willing team leads or trying to find sponsors? What would you say is the biggest bottleneck right now in terms of trying to close the first investment?
I think it's educating internal entrepreneurs about the opportunity, the chance to build, their own business with their own team, and, educating the business unit managers and portfolio managers, about what it means for them. 'Cause of course they fear losing their most entrepreneurial talent to a startup.
Right. Is it hard to find team leads who, you know, while not having to survive on what you call ramen pay, have to take a big risk and sacrifice work-life balance but have fewer ways of exiting if their idea succeeds? Are you finding that's a challenge?
You know, I've written about it a bit, and I think our entrepreneurs aren't gonna be as young as the average venture-backed entrepreneur. I think they're gonna be more experienced. I think they're gonna be knowledgeable. I think they'll know the vertical, and I think they'll know how to operate in vertical. So on the one hand, these are people that are gonna be responsible and their instincts are gonna guide them well. We're not buying options, which is how a lot of venture capitalists think about their investments. We're making investments. The other side of the coin is, I don't think because we're not pus hing people onto ramen pay, I don't think they're foregoing much.
They're foregoing the current Constellation bonus, which if you end up staying for a long period of time and you progress well inside the corporation, you can do extremely well with. You have way more upside starting something and the degree of interest, passion, drive, fun that you're gonna have for giving it a two or three year shot is gonna be enormous. If you do get traction and it does turn into a corporation, you're gonna be so proud of what you've created and the team that you built and the business that serves clients and all those other good things. I think the upside is just phenomenal.
The downside is if you wanna come back to, you know, your vertical, after you've given it a shot and you've learned a ton of stuff, the likelihood of being accepted back is extremely high. You're gonna be way more valuable than you were before you went through this crucible that has hardened you and sharpened you.
Right. Trying to get them to see that the same way that you do, I think it's important. The VMS's effect on organic growth, we have a question here. You know, the initial press rele ase said that really it's a $200 million investment o ver a 3- 5 year period. Constellation does not expect the fund to add meaningfully to overall organic growth. The fund's objective is to develop and refine organic growth process, which can eventually be rolled out more broadly to Constellation's operating groups. Do you expect these organic growth processes to contribute materially to organic growth in the long term, so 5+ years from now, even if the VC fund direct impact on organic growth is modest?
Yeah. If I didn't think so, I wouldn't be doing it. You know, I'd go and have a venture capital fund outside of Constellation.
Yeah. Fair enough. Maybe this one wraps up this section pretty nicely. You've experimented with spin-offs, venture fund, KYC. What guides your philosophy when deciding what to try and what not to try experimenting?
You know, one of the surprises that came out of our work at VMS Ventures was the number of organic heroes, business unit managers and portfolio managers who have track record of creating new products and new businesses, who have looked at it as another tool for them and approached us with a sort of process orientation. That's probably the most exciting thing that happened. These people have a sense for opportunity spotting. I think opportunity spotting is a skill set, and it's pretty easy to get focused on tiny incremental improvement. You do it every day, and you end up getting better and better and better. When you actually start looking for asymmetric upside opportunities with low downside, it's a different mind set.
It's funny, the board was asking about bet sizing this quarter. Of course, that all comes to mind. What's the size of the bet? What's the probability of payoff? In the venture world, if you can find those asymmetric upside type opportunities, you can do extremely well. I'm not sure I answered your question, but it was fun talking about it.
Well, I get the skew of returns. It's not normally distributed, that's for sure. Maybe I'll wrap up this section and I'll turn it to Larry to take some questions and talk about people.
Thanks, Howard. A few questions from the instant messaging. One, picking up on one of the points that was just discussed on the ventures fund. This is Joe Dowling from Invesco, who submitted this question that starts off by thanking everyone for the exceptional stewardship of shareholder capital. Then he wants to know, there's a sentence in the release on the ventures fund. Quote, "Eventually, we hope this will help CSI reach high single-digit organic growth rates." He just wonders what was the thought process behind high single-digit. Is that based on empirics, case studies? Is it probabilistic? Is it just possible? Could you just explain a little bit of the background on that high single-digit phrase.
You obviously have to take into account a bunch of things, like, inflation, and GNP growth rates. Basically, our thinking was we want to exceed it by a reasonable margin, GNP growth rates, and IT growth rates. If we're not doing that, then we're probably losing market share. Now, market share isn't necessarily an objective in and of itself. Often customer share and customer intimacy are far more important, particularly in our world, where we sell a bundle of software and services to customers and allow them to have, for a relatively good price, some pretty good software, and for an increasing services investment, exactly the software that they want.
Now, not every customer can afford that, but for our very highest end customers, we can provide them with incredible customization of their core application to meet their strategic needs. Frequently, big customers have IT as a strategic wedge that they use against competitors, and that's only gonna come with custom software.
Thank you. Another question from the instant messaging, this one from Adrián Hernández, who says the accounting at Constellation has become a bit more complex since the Topicus spinoff. In the last quarter, there were additional non-controlling interests from the Adapt IT investment. Should we expect more acquisitions with non-con trolling interests going forward?
Well, I certainly hope so. Control is very much in the eye of the beholder or in the eye of the accountant, actually. For instance, I think that when we have a minority economic interest in a company, we should not be consolidating it, even if we have the ability to appoint, for instance, a new CEO, if we don't like the way things are going. The accountants feel otherwise. I ignore them and they ignore me, and we have to publish what the accountants make us do.
Third instant messaging question, this one from Mihir Kara. I guess it's for Jeff, but maybe others can opine. Why finance Allscripts with debt given the cash on the Constellation balance sheet, and could we see more of this going forward?
Thanks, Larry. Yeah, I think it's simply just a matter of how you get to the hurdle rate that we were trying to get to. I think if we were to try and do it using all cash, we would not have been able to do it. In this case, we use somebody else's cash. It just helps us get to the return that we're looking to get to. I think for some of the larger transactions that we would be doing, I think it would be relatively common for us to use that structuring to be able to achieve the hurdle rates that we're trying to achieve.
I think, in all honesty, I think we each of us would love just to be writing 100% cash check for those businesses. That would be actually ideal in our capital world where we're trying to deploy lots of capital. I think fundamentally, that's not always possible, so this is a good reasonable alternative.
The last instant messaging question before I go back to the submitted questions. This is from Chris Freed from Pennsylvania in the U.S., who says, "I'm a U.S. shareholder, and that means I can only buy Constellation shares over the counter," which he says is not that easy. What prevents Constellation from being listed in the U.S. on a U.S. stock exchange?
It has been a cost and litigation issue. I've talked to people who have been dual listed, and they say that they get way more litigation out of the U.S. markets than they do out of the Canadian markets. That you add another layer of cost for being public in multiple locations. There is the ability to buy on a TSXV or for Topicus and the TSX for American shareholders. Interactive Brokers, for instance, will operate on those exchanges and is a highly reputed internet broker if you're looking for a way to buy the shares directly on the Toronto exchanges.
Thanks. Yeah, I'm a U.S. shareholder, and I've bought the stock. I didn't experience that kind of problem. I'd be happy to talk to you, Chris, if you wish. Shifting now to the people segment, it's logical then to announce how many people are in our audience. We're now up to nearly 600, which I think is a record for a Constellation annual meeting. Here's the first question I suppose is for any of the operating group managers, and it's: Do you prefer that when you acquire a business, do you prefer that the founder stay or leave, or does it depend? And does the person staying or leaving make it easier or harder to do the integration?
Finally, when the founder stays, what's the critical thing for that person to learn to have a good experience within Constellation's culture?
Let's put Damian on the hotspot so we can hear his dulcet Australian voice.
Thanks, Mark. I think for that question, we prefer, you know, if somebody wants to stay, if a founder wants to stay and become part of what we're doing in Constellation, we really welcome that. A lot of founders do stay and thrive. We've got a number of our portfolio managers have come in when they've sold their business to us or they've worked for a company that has been sold to us. That's something that we value. You know, but if in other cases, the founders are looking to exit the business, and if they don't want to continue, that's fine as well.
We usually always look within their teams to see what the opportunities are for members of those businesses to step up or to take other roles. Our preference is to sort of hire and grow from within. In addition to that, there's other opportunities to bring great talent in from outside and also share talent across the groups as well.
Barry, you've had pretty good luck, with founders who've stayed becoming really important to your group. Maybe talk about that and about the founders who left and why they left and that sort of thing.
Yeah, sure. Happy to do that. We've, you know, obviously had some success both ways. A lot of it comes down to when you actually acquire the company, and if they're selling to retire or do something different, then obviously it's never gonna work. But if they're selling because they've sort of hit a wall in terms of how much they can grow the company or how much capital they wanna put into the company or whatever the case may be, then those are ideal situations where you can work with them and get them to take some of our best practices and share with them some of the things we've learned over the years to help them grow. We've had a number of successes that way.
I think the most important thing is their willingness to learn and adapt. Some people say they wanna do it and are willing to try, but in the end, aren't really willing to do it. Other people soak it up like a sponge. When you get someone who soaks it up like a sponge, it's just a wonderful thing, and we have great success with that. If they don't, then you know, we usually can find a good way to sort of part ways on good terms and move forward. 'Cause ultimately, every founder we've come across, or virtually every founder we've come across, they've loved their business, loved the employees, loved the customers, and so they wanna really make sure it ends up in the right hands.
As long as we're thinking about that as we work through the journey, then it usually works out in a good way, whether they stay or go. A lot of times they do stay, and they do enjoy the best practices. I think one of the things that we've seen is some of these or most of these founders have never really built great networks outside with other, you know, founders, CEOs, managers. Just that ability to talk to other people that are in the same boat has been wonderful for them, and we hear that quite a bit. That's kind of what I would add to it.
Mark, do you wanna talk about quadrants and how that sort of factors into your thinking about bringing along founders and replacements?
Yeah. It's a great comment. I think what everybody said too, right bang on, right? You know, whatever. You know, with founders, we're really happy if they can stay, but we're really proud to say that, you know, if the founder isn't staying, it's usually one of the people who work for them who's promoted to run the business, which I think the founders are appreciative of, the ones especially that aren't sticking around. We're running a big event in London in September, and we're gonna have 1,200 of our employees come to it, and we're gonna run 1,500 different sessions, each 45 minutes long, about 107 simultaneous boardrooms running.
We're gonna cover pretty much every aspect of how you would run a vertical market software business. So many of the leaders of the businesses and their reports will be coming to it as well as talking about mergers and acquisitions. It's just a great learning environment, right? It's not the lecturing environment. We're up there speaking to you and telling you what you should do. It's go learn from each other because there's so many different situations we see across our businesses, and there's no way we have the answers for everything that can be done, and we're perpetually learning from them as well.
Really sharing those best practices is really important to us, and it's hard as a CEO or a founder of a business, you know, to really get that kind of a network that you can learn at that accelerated rate. I mean, the last one we did in 2019, we had 600 people there. Just the new companies that came to that, wow, that. You know, that's what you say you do at Constellation. It's nice for them to actually see it live in action and get to meet those people. That's one of the things we try to do it.
We have a bunch of leaders on this call that are coming too, which is wonderful as well, and our board members, so.
The objective of this event isn't to give everyone a very large three-ring binder to take home. It's to provide them with a series of small sessions that they'll attend, and they'll get to meet people who are specialists and hear about how they do what they do in their specialty and to make personal connections, 'cause that's how we think our best practices travel, through those personal connections. Having an M&A session like we do with X hundred people and me and Bernie up on a podium, it's a way of communicating data, but it's not the same intimate interaction that you get with a dozen of your peers who are passionately interested in whatever topic it is that you happen to be talking about.
Because of the way the sessions are arranged, you're only gonna have an audience of people who care and care now. The care now is incredibly important because your businesses invariably have bottlenecks, and your bottleneck is the place that you go to address your short-term problem. Your bottleneck is everything, and you just need help. After you debottleneck that bottleneck, you have a new bottleneck, and you move on to that one. The specialty that you'll need will be different. You can't go back to the same people. This is just an incredible resource and so very proud of what Mark's done here.
Well, thank you all very much for that, illuminating discussion, which reflects that and segues into the next question. Constellation operates through about 1,000 different separate business units, and they operate in 125 countries. The total employee base is above 30,000. Can you give a rough sense of the distribution of the employee base across the world? Say, how many in Toronto, Canada, North America, the other continents?
You know, I don't think we track that stuff. We probably could have a rough idea by pulling P&L by geography and dividing by, you know, number of, the cost per person, that sort of thing. Jamal does toss up, sort of, total population, which I think is 36,000 now, right, Jamal? Yeah. Or more.
Yeah. That's right.
Yeah. Very hard to sort of do it on the basis that you're asking for. I love doing ad hoc reports, and so if we had a particular issue, and we really wanted to know how many people we have living and working in Chile, I'm sure we can get it. I despise perpetually required reports that no one ever looks at again. That's the kind of thing that I think you get, when you embed geographic reporting requirements and things of that nature, if that's not the way you organize. Now, obviously, if we had country heads for individual countries, then it would be quite different. We don't. We have business unit managers, and some of those businesses are international, and some are very, very local. Some of them are even state related, individual states.
Thank you.
Jamal, if you-
Does anyone have a question?
Yeah, Jamal, if you happen to have any of those numbers at your fingertips, feel free to spit them out. How many Canadian employees?
Yeah, we do have to provide something to our insurance brokers about sort of geographic split. This seems like 2021 numbers. What you said makes sense. Like, 40% of our headcount is in Canada and U.S., and I think 45% of our revenue is in Canada and U.S. It's to use our revenue breakdown, it seems sort of a similar revenue per head number is probably acceptable. Yeah, right now it's 15% in Canada, 25% in U.S. Next biggest one would be the Netherlands with 11%, and then it's small numbers after that.
Excellent. Thank you. Well, the next question is partially answered by that one, but the broad general question was what portion of the workforce can now or soon be expected to work remotely on a permanent basis? I guess, does that vary by group or geography or other factors?
I think the problem with the question is that you said expected. We don't have any particular ability to see the future that's better than anyone else. Can maybe the general managers give us a sense of what the current remote employee percentage is in their groups, or is that not an easily knowable number? I see a bunch of head nodding saying, "No, it's not easily available.
Yeah.
Mark, it's probably for Larry.
I would say, Mark, that while the benefit of being autonomous, having a lot of autonomous businesses is we were able to adapt to the situation per country, per state, and we pushed a lot of that autonomy down to how they manage it and how they interacted with whichever the government regulations were. As we come back to the office, the autonomy has given us the flexibility to address that on location by location basis, as opposed to having a broad edict from above that might not have worked in a number of different countries.
Yeah, I think, Larry, another way to think about it is, yeah, we don't specifically have policies that require, you know, remote work or in-office work. I think, you know, the Harris organization has always tried to be very flexible related to what makes sense for the employee and the business, and the customers in that business. You know, we were quite flexible, and we had a you know, large remote workforce pre-pandemic. We probably have a larger remote workforce post-pandemic or currently where we are in the pandemic. But these decisions, again, back to our decentralization and autonomy. These are decisions that are made by the businesses in the geographies that they're in.
you know, corporately, we might be educating with best practices on some ways to function better remotely or some best practices for more of a hybrid workforce. These are decisions that we allow and really don't even get involved in that are made locally by business, by country, by individual. My general sense is going forward, there will be more people working outside of offices than in offices. Again, you know, I think if I was to go to Israel right now, I think a lot of our Israeli employees are back in the offices, whereas I was in the Ottawa office yesterday, and I. It was a big day. I saw five people.
That was a big day versus, you know, the 300 that are typically there.
I know Jamal is trying to sublet the head office, so if anyone out there would like to get some palatial space on the cheap, we're trying to move it.
Well, thanks again. Now the next question turns to challenges of recruiting and retaining employees. I know it's gonna again vary by geography and by business unit and so on. The basic thrust of the question is that a lot of software companies in a lot of geographies are intensely competing for talent, and a lot of software companies find retaining and attracting people to be among their greatest challenges. Is this also true for Constellation? Is it true across the board, or does it vary a lot? Do we have any particular advantages in terms of career development opportunities or other things that makes it less of a challenge? What other tools do you guys use to meet the challenge to attract and retain talented people?
I mean, I can take a shot at that. I think it comes back to we're a bunch of business units that operate in different countries all over the world, and basically each of those businesses is faced with this challenge, right? You know. It isn't something we centrally can have much influence over. You know, who they choose to hire and based on where they're located and what their current needs are, is really up to them. You're not talking about business units with hundreds of people in most cases. They're business units with dozens of people. So they tend to have some interesting challenges because they might not have a dedicated HR person or a person in charge of, let's say, the recruitment department because there is no recruitment department.
Maybe every manager is trying to do that. I think it's important to realize that when you think about our organization, and we talk about a lot, but the decentralized nature of it means those challenges vary by location. I mean, clearly you'll hear all the usual things. It's really hard to find really good technical resources. It's also really hard to find good, you know, vertical market software people who really understand the industry as well. That can be a challenge because they just aren't even there. That isn't necessarily a question of how much you're willing to pay for them. It's a question of they just don't exist. That's what I'd add to that.
Yeah, Larry here, Robin. I agree with Mark. I think, one, you asked for two. I think our decentralized model with a lot of autonomy, so when people feel at home in the business, when they feel comfortable in the market, work with people they're used to work with, I think that is one of the tools as well. So we like to. Mark used to call it human scale business units, where you know your colleagues, where you don't have huge hierarchies and where you can do what you love to do. I think that's one of the strong tools we have as well.
If I could add, you know, it might be harder to attract people externally because we don't have a huge brand that others may have. Definitely once people are in the company, I think we touched on earlier that we've got 36,000 employees. You know, it wasn't that long ago it was 10,000. People can see the growth, they can see the career, the compounding career opportunities that we have. We've got capital to deploy, but we need to. Well, there are a lot of opportunities for internal people to step up. I think that helps us retain better than the industry average. Both the autonomy, but also that compounding nature for people to grow their careers within the company.
Some people are naturally attracted to the buy and hold forever, right? They're not gonna be part of a company that's gonna be flipped in a handful of years by some, you know, yeah, some person who says a company is trying to do that. I think that helps us a little bit to attract a certain type of employee.
I would have a-
I just have a variation. Okay.
This is Dexter. My comment is that it's become harder to retain staff, especially during this pandemic, because work has become more a computer and a paycheck rather than a gathering of friends that you know and a social life that you have and you know sharing common ideas. It's actually been more challenging during the last couple of years. We've seen higher attrition you know because of the pandemic. Because Amazon can hire somebody in any one of our operating units in any geography, and it's you know kind of hard to compete with some of these you know companies like Amazon and Netflix and LinkedIn. That's been one of the challenges that we've had.
The natural next question is there a difference in terms of attracting, retaining, and so on between the M&A or the investment personnel and the operational software personnel? This question said it had a preface saying it looks to me like you have higher employee turnover in the M&A area, and they say that, you know, that's very common in consulting firms and investment banks. Is that? How does that fit in with Constellation's expectations or hopes?
Hey, Larry, I can start there. It's Barry from Jonas. Yeah, I don't know where the data's coming from because I can only talk about what we see in Jonas, and I wouldn't say there's a huge difference between our M&A turnover and our operational turnover, for lack of a better word. But maybe it's different at different groups. You know, as far as we think about it, you know, we don't like turnover most of the time. Obviously, some turnover is good and some turnover has to happen because people wanna retire and all that stuff. We really try and mitigate it and make sure we create an environment and culture that people wanna be a part of. You know, it's a challenging market out there, as Dexter noted.
You know, we look at the stats every quarter, every year, and we haven't seen a meaningful difference in our turnover. Going back several years, it's been relatively static. I hope it stays there. I hope it gets better, actually, is what I really hope. You know, we'll see. We'll continue to track it. You know, we do all the things that most good companies do. We do exit interviews. We try and find out why things are happening. We look at it on a business-by-business basis because, again, we're very decentralized, and we're always trying to figure out what we can do better. It's an ongoing challenge that I don't think we'll ever get to the bottom of, and we'll just have to keep, you know, working and fighting it.
Here's a question I'll just read. You have identified a tension between the decentralized organizational structure on one hand and the demands for non-financial information from some institutional investors on the other, such as concerning the racial composition of the workforce. How do you resolve this tension to give investors the information they want without weakening Constellation? In terms of racial disparities in particular, how do you assess whether the businesses have a fair and equitable culture both before and after they are acquired?
I don't think there's any upside in answering a question like this, Larry. Obviously, we count on the general managers of the businesses to do what's fair and right in those businesses. If we don't think they are good people, and what was it the United Church accused us of? Being racist, and they're anti-racist because we don't publish our numbers. I think that's just absurd. To put an obligation on a Pakistani manager to measure the number of particular ethnic groups working in their business because a particular religious pension fund wants us to do so, just doesn't feel right to me. You know, we will think through this issue. We're gonna consult across the groups.
We're gonna try and figure out what's the right thing to do. We're gonna come up with a plan and then go back to them and talk about what we intend to do. You know, it's just an issue that just catalyzes divisiveness, I think, in our organization and undermines autonomy. I think we'll probably leave it at that.
Okay. Thank you. Final question of this segment before I turn it back over to Will in acquisitions. It's addressed to Mark. If you had to trade roles with another Constellation employee for one year, which role or person would it be? Further, are certain roles more gratifying than others? For instance, would you imagine the business unit leaders are happier than the portfolio managers or vice versa?
It's me that you're asking?
It was directed to you, but I wouldn't wanna exclude anybody who wants to volunteer to switch jobs to opine on this.
Yeah. Well, obviously, I'd prefer to switch jobs with John. His looks like, you know, a pretty easy job, and, you know, he could do mine better than I could, so, you know, that would be really appealing.
John, you ready to make the trade?
That's silence itself.
Yeah, silence speaks for itself. Thank you.
Vis-à-vis portfolio manager versus BU manager, I think the inherent satisfactions of business unit management would appeal to me in retrospect more than portfolio management. I love investing, but that's because you can measure the outcomes so precisely. The actual management of a business unit is soft and fuzzy and has so many different inputs. It's just an amazing challenge. The closeness that you will have to a small group of people, for whom you're carving out a life, and whether they be employees or customers, you're helping them design their future. It's incredibly rewarding, I believe. Probably not as financially rewarding as being a portfolio manager, but in terms of life satisfaction, it's gotta be way up there.
However, I will point out somethi ng that the research shows, which is that if you have an a as a boss, it undermines everything else. You need to have a good boss. If you're gonna be a BU manager, make sure you've got a great portfolio manager as a boss.
Anyone else wanna opine on switching roles with some other colleagues?
I'd just say, Larry, you know, solving customers' problems, pain points, it's a real. That's just the most fun thing you can do. When you're doing something that really matters to a customer, you can actually see the impact on what you've done to help them do their, you know, their thing better. There's nothing better than that's for sure, because you're making a difference, and you're helping them run their business, grow their business, make some process that was taking a lot of people much simpler to do. That's hard to beat that.
I would concur with Mark, and I found it most enjoyable when I was kinda solving problems and you know, making innovations and moving things forward. You know, at our level now, it's you know, mostly you know, at the high level, you don't get to make any real change other than you know, try to inspire other people to you know, to be curious and to solve problems in a different way that other people haven't thought of.
Well, thanks so much, everyone. That wraps up the segment on people. We now turn to round two of acquisitions with Will Pan. Will, thanks again.
Thanks, Larry. This next set of questions that we got about acquisitions is mostly to do with large acquisitions and non-VMS acquisitions or the potential thereof. First is, CSI seems to have had more success recently with larger investments. To what extent is this a result of changes in the company's behavior approach recently versus luck in a small sample size? How successful have you been, for instance, on inserting yourself into the broker channel and seeing a greater proportion of large deal flow?
Bernard, do you wanna talk to it?
Yep. Great question. We, as most people already know, started our initiative for, I guess, increasing our coverage with investment bankers so that we can start getting some more deal flow in the larger brackets. To a very large extent, we have inserted ourselves successfully. We've brought in Farley Noble, who was working for us for the longest time within the Jonas Group, even at the CSI level. He's managed to reach out to a whole lot of investment bankers that some we've worked with before but even more so solidified our relationships with them. The deal flow has been increasing. We have managed to see far more than we have before.
As we mentioned earlier in the call, expectations are still very high for large transactions. We haven't really seen much change in that. However, we have managed, as you saw that with the recent announcement, the recent acquisition, we have managed to close one. Will that continue to happen in the future? It's really hard to tell. There's no way to predict that. We have managed to solidify that relationship. The deal flow is better. We're seeing a lot more. We'll just take it one at a time. As far as non-VMS is concerned, Mark, do you wanna take that?
I mean, the absurdity of non-VMS is that there are hundreds of thousands of Harvard and Stanford and MIT and God knows what all else MBAs hustling around trying to find places where you can generate alpha. The likelihood of us being able to find another place to generate high rates of return on significant amounts of capital in a predictable way for decades is bloody low. I would tell you, don't count on it, but we're working on it.
Great. Well, maybe we'll return to that with another few questions later. Sticking on large acquisitions, I might judge from your answer, Bernie, that we already know the answer to this one, but there were a lot of questions about the interest rate increases that we've seen from central banks and whether that might cause a pullback on sort of appetite from private equity firms to compete with you. At the same time, I suppose you face the same issue. Has there been any structural change you think in the market due to higher interest rates or higher interest rate expectations?
The math says that when interest rates go up, prices have to come down. I actually just read a report a couple of weeks ago showing that as interest rates dropped from the early 2000s to today, the multiple on EBITDA, on cash flows increased. Not a completely straight diagonal line either way, obviously, ups and downs. I think we're still at record low interest rates right now. I mean, they have increased a little bit. For the numbers to actually have an impact on acquisitions, still waiting to see that. Don't forget the big issue now is that. What's the number? $1.7 trillion of dry powder out there amongst private equity.
Until that number starts to drop, I don't think we're gonna see any major changes unless, again, interest rates really start to pop a lot higher than they are today.
Great. Thanks. This is actually a question that you've addressed at prior AGMs, but broadly speaking, why have you or the company changed your mind on the use of non-recourse leverage maybe a few years back? Was it for philosophical or competitive reasons? How much non-recourse leverage are you comfortable using in larger investments? And are there any changes to your views on leverage at the holdco level?
We use infinite amounts of non-recourse leverage. It's a tool. If the expected value of the equity that we invest alongside that non-recourse leverage is attractive, and we get to invest a significant amount of equity, then yeah, you know, hallelujah. It's just a tool, another tool, and it's one that our competitors use, and if we don't use it, we're not gonna succeed. There was a second part to your question, Will. What was it?
What about holdco leverage?
Right. Holdco leverage was really the bet sizing question that we addressed with the board. What we said was we would use holdco leverage. We would think about it as equity when we put it down into the acquisition vehicle, and we would be willing to leverage the acquisition vehicle. At the holdco level, we would limit the amount of leverage we would take on the core business, and we would only do so if it was a very attractive acquisition prospect. Then we looked at the ones that might qualify, and there were two public companies for investments of that size where the ticket was such that it would put us in that position. It's a very limited opportunity set that you're talking about.
Great. Thanks. Next question is, the recent acquisition of the business unit from Allscripts was the largest in CSI's history. Can you provide any additional perspective on it, such as how it came about, how you're able to obtain an attractive price, ways to potentially stabilize the revenue base or deal with expected long-term decline? Might you consider disclosing separate financials for this business for the first year of post-acquisition as you've done for some other large acquisitions?
That's Jeff Bender, whether he, A, answers the question and, B, discloses any information in the future.
Sorry, I didn't know that was my choice for the future, but I appreciate knowing that now. To answer your first question, Will, honestly, with Allscripts, you know, we've had a relationship with them for probably a decade. It's a great example of how we actually want to nurture, I'd say all of the accounts in our funnel. I'm not sure all of them always meet that bar or that threshold. But again, you know, we had one of our more senior business development professionals, you know, again, making contact, building relationships within that company for a decade. Then it just came to the right time, right opportunity where, you know, there was actually something that we could do.
You know, I think we were always interested. I think in Allscripts' case, they were thinking about their future and what they wanted their future to look like. We were happy to be able to put together a transaction that met both of our needs. I think, you know, from a pricing perspective, I just think, again, it's like anything else. I mean, you have to have a price that we're willing to pay and a price they're willing to accept. In this case, we were able to figure that out. People can judge for themselves whether they think it was a good financial transaction. We need some more time to figure out, right, what our return will be.
You know, I think from an overall revenue perspective, I think, you know, we understand the asset that we're acquiring with Allscripts. We now actually call it Altera. I think we hold out a great belief that it has a tremendous customer base and a tremendous product suite. We're very confident that we can continue to service that existing customer base. I would like to say better than, maybe better than the prior Allscripts, but again, that's probably a matter of opinion. We're digging in, again, visiting customers, looking at the product and making sure we can do whatever we can. I think it.
You know, it would be naive to expect a business in that industry, in that position, you know, for us to sort of just assume that it won't be declining, you know, in the near term. You know, the decisions that these large hospitals and physician practices make are made years in advance. You know, you're stepping into a cycle where a lot of decisions have already been made, and really you're just waiting for them to sort of finish as these systems take a long time to change. I think really our impact will be felt in the future years, not necessarily in the next, you know, 3 months, 6 months or 12 months. That's not a very realistic way to do that.
I'll be happy to talk to Jamal about whether we think and the board, whether we think we should be showing separate disclosures, or not.
I believe you've had a, you know, similar experience perhaps with QuadraMed in the past. You know, our other healthcare assets where, you know, you foresaw declines. To what extent do they inform, you know, what the trajectory may be for this business?
I think there's no question that our experience in healthcare, which actually started with QuadraMed back in 2013, definitely gave us the comfort and the understanding about how this market works. I you know, I call it the long tail of healthcare. I think actually a long tail exists in many of the vertical markets that we operate in. I wouldn't say it's necessarily unique to healthcare.
you know, if you've visited a hospital and you understand how critical the EHR solution is to that hospital and how integrated it is into all of their other solutions and how expensive it is for them to replace it, and again, how all of the clinicians are using it on a daily basis, you get a much better sense of what it is that you have and again, what you can do with it.
I think over the course of, you know, since 2013, you know, I think we've learned a lot about what's important to our customers and how we can, I think, direct our R&D investments to give them the things that really matter to them, that really extend the life and the longevity of the solution to give them the real value that they're looking for. I think, again, we feel very comfortable that we sort of know how to engage them, how to do that, and we believe that the Altera solutions provide us the opportunity to basically do the same thing.
Great. Thanks. I'll throw it open to some of the other operating group managers. You know, Harris must not be the only group, with or contemplating assets that are shedding revenue but still expected to post good IRRs. What do the other groups think of acquisitions of this typ e?
Mark.
Yeah. Robin
Awesome.
Mark, you want to go first? Yeah, I look at it as a mix. We buy small companies, we buy mid-sized companies. Once in a while, we buy a large company. We buy great companies growing. Sometimes we buy companies stable, and sometimes we buy companies shrinking as well. Even those shrinking companies have different situations. You know, one day it depends on how fast it shrinks and how long it takes and how many customers you have and how much value they deliver. Also there are different kind of companies. I see it in the mix, so I wouldn't buy them just having only of these kind of companies. But I think in the total mix, and they make good returns.
In the extreme, one day you turn the company into a bag of money, and you have to redeploy that again. That will require additional effort long term on M&A. Again, in the mix, sometimes we buy them. Overall, we like to have good quality in our total portfolio. That's what we try to do. For example, a high quality business we bought with Couplet is via our spin-out.
I was gonna say just generally, whether it's small or if it's large, and one of the things that you need to be thinking about is, you know, sometimes you should stop doing some things, right? There is really good in there, and it's getting it, finding what that is, and stopping doing the things that don't make sense for the business, which is really hard to go through with a leadership team. I don't think Allscripts might not be the best example of that potentially for us. I mean, definitely that's something I try, we try to get our leaders to think a little bit about. It isn't always a bad thing to have a business shrink in size, especially if you can find something in there that's of value and you can build off of.
When you're a buy and hold, in a buy and hold forever, position, it gives you know, that opportunity might be in there. When you think about an asset like that.
Great. Thanks. Moving on to another large acquisition, GeoSoftware from CGG was another fairly large acquisition that was shared between two operating groups. Can you tell us a little bit about what that negotiation was like, and does the broader group think this could be a template for future shared deals?
Can I answer, Damian, or do you want to pick this one up?
I got it.
I mean, like Jeff said before, we have been nurturing this prospect for a very, very long period of time. TSS had contact. The seller was looking for a buyer and had faith in us because we had a long-term relationship. Damian is with Vela already present in this business. For me, it was a kind of experiment to see if we could join forces on this. We had the opportunity to buy. They had the knowledge. They also had the global infrastructure in this industry. How did it work out? We have a joint board, and Damian and I decided to keep it very simple. We're part of the same group. We trust each other, so no lengthy shareholders agreements or whatever.
As you might recall, I just came out of the spin-out. If you read that investor relations and governance agreement, I didn't want to go there again. We kept it very simple, a relationship built on trust. We're in part of the same group, and we try to make happen here that one plus one is at least more than two. That's what we try to do. It's the first time I think at least we did it. I don't know if it had happened before within Constellation. It's again an experiment, and we like to run those experiments, and we will evaluate over time. It's not always easy to do things together, but I think being part of the same group and I think to find each other over time, we're moving in the right direction.
You want to add something, Damian?
Yeah, I concur with what you said. I think it's probably a unique situation. We've got great respect for the team at Topicus, and we've come together. The investment's going well, and we're you know, experimenting in working together. In most cases, it wouldn't be required, but you know, the investment and the cooperation's going well.
Great. Look forward to seeing what happens there. There are some specific questions about non-VMS potential investments. You mentioned that it's been difficult to find. There's a lot of competition out there looking. Could you give potentially some update on how far you've gotten over the past year? Have you had a close look at any, even been outbid on anything?
I took a hard look at a thermal oil situation. I was looking at close to a billion-dollar investment, and it was tax-advantaged, so it was clever structure. It was at a time when the sector could not get financing, and unfortunately, the oil prices ran away on me. I was trying to be opportunistic in a sector that was incredibly beat up. There's an example.
Interesting. You know, does that fit any sort of template on business characteristics you would be looking for outside of VMS software?
Very large tax assets, because we pay an awful lot of cash tax, and it's going up because of the new regulations in the States. In this particular case, we would have had the return through dividends from a public company, and hence, those dividends would have flowed to us in a tax-deferred way. From a cash flow perspective, incredibly attractive. What are the characteristics there? Complexity. You know, where it's a troubled situation with peculiar circumstances and there's lots of complexity, I think we can compete better than the average investor, particularly when people are willing to take capital forever.
Interesting. The other question, last question is, if larger VMS investments prove attractive and fruitful, would you still pursue other markets outside of VMS?
No, of course not.
Great. That's it for this section. I'll hand it over to you, Howard.
Thanks. Thanks, Will. In this section, I'm gonna start with some questions about the board, actually. Maybe to Mark and John. This question is about the board's increase in the number of board members. Could you elaborate on the increase in number of board members from 15 - 20, which seems large? Any thoughts on decision-making in an increasingly larger group, how to guard against problems of management by committee like groupthink or certain personalities, ideas dominating? Oh, Mark, I think you're on mute.
I guess I'd throw the question back at you and say, is there any evidence that the larger the group, the more likely you are to have groupthink or the more likely you are to have diversity? I don't know of any studies that suggest groupthink is tied to group size, but perhaps there are some. I think the advantage we have is that we're a fairly contentious board. We prepare literally hundreds of pages of stuff a quarter, and we get it out there with long lead times. Then we handle questions. Obviously, the board sees it as its role to question what management's doing. We spend our time fielding questions and defending our positions and things of that nature.
Obviously, with the insiders, what we have is enormously detailed knowledge of Vertical Market Software. These people, the insider directors, are gonna ask different questions than the outsider directors. The outsider directors are more likely to come up with things that are sort of out of the box and very different in terms of questions. That's fine. That reflects their background, and that's the advantage of diversity of thinking, which has very little to do with diversity of other things. In terms of size, I think the way we picked 20 versus the 15 was we let the lawyers pick a number. That was the thinking that went into it.
In terms of having room to add directors, you know, it obviously, if we can find really good directors and we struggled for years to find really good directors, we're gonna jump on them. You know, we had no intention of adding a significant number of new directors this last year, and we didn't have enough seats. Steve stepped down early so we could add Laurie and then. We were able to convince Claire to hold off until the AGM to join the board. You know, these were spectacular adds, I believe, to the board. You know, if we came across someone who we felt had the potential to add value as a director, we would definitely do so.
I've written about what I think directors do. I mean, the obvious question to you, Howard, is do you think directors are important to a company? If so, why?
Well, I wasn't expecting to be put on the spot, but, I guess, I mean, you know, the governance, there's a governance role that you talked about versus the coaching role. You know, I think it depends on the company whether they need more of the governance or more of the coaching from the directors.
That, that's just the best response ever, Howard.
From your letter.
I could talk to portfolio managers across mutual funds throughout the world and get that same response. It depends on the company. Damn right. If you think the directors add value, and if we have performed well, presumably we have pretty damn good directors, and I certainly think we do. You saw our published criteria years ago for what we were looking for in directors, and literally no one surfaced any director candidates for us that met the criteria. We managed to find a few eventually, and again, literally years. Then the pursuit of such directors is non-trivial. How do you convince these accomplished people to come and join a board where they're certainly not gonna get rich? They may be able to invest, but as I pointed out in my write-up, you know, it's not like Constellation is cheap.
It's not like you can count on having a 10-bagger in 10 years at Constellation. It's not gonna happen. This competition for director talent is just unbelievably difficult. We're so lucky to have gotten the people that we've gotten, including the inside directors, who, as you know, have enormous amounts of their net worth tied up in the business and real skin in the game. I'm delighted with our board. I know it's large, and there is some research that shows the larger a board gets, the less effective it is. It isn't compelling research. At the very low end, it suggests that anything above three or five directors. I can't remember.
Five.
You know, actually deteriorates corporate performance, which I thought was kinda fun. The big banks, obviously, who run oligopolies in Canada and have large boards, seem to have generated very high returns on equity despite having very large boards. Perhaps that's a regulatory phenomenon as opposed to a board phenomenon.
Yeah. It'd be funny if Constellation was one of the big five tech companies regulated by the government. In any case, another question about the board. A shareholder wants to know, what does the agenda at a typical board meeting look like?
The actual agenda usually kicks off with a one-hour presentation. It's really the only significant presentation at most board meetings, where we do what's called a mature PAR. We look back at a company that's at least five years in our portfolio. We used to pick them randomly, and I love that because one quarter we'd be looking at a company that had three employees when we bought it and what happened to it, and another quarter we'd be looking at one that had 300 employees. I thought it really drove home to the directors what we do, which is we don't buy world-class companies that are number one in their market and dominate their space and are kicking out huge wads of cash.
We buy nice businesses that are really good to their customers and really good to their employees, and we help them run the businesses a little bit better by sharing some best practices and encouraging them to keep learning and growing and applying what they can learn from others inside the group. That was painfully obvious when we randomly picked the companies for follow-up in the mature PARs, as we call them, post-acquisition reviews. We switched because directors like to spend their time on things that are important, and looking at three-person acquisitions clearly is below the pay grade of directors. Now we just look at big good ones and big bad ones.
When I say bad ones, I mean we're talking ones that generate double-digit rates of return, but just not their hurdle rate as a rule. There are a couple below that, but not much. I have no real fault with moving to looking at the larger mature acquisitions. I just think we lost something when we did that, which was forcing people to confront, you know, when you do 100-something acquisitions a year, they aren't gonna all be wonderful businesses that are optimized and performing well.
That makes sense. Acquisitions is, you know, at the heart of Constellation. Reviewing that, I think makes sense.
That's the first item on the agenda, and then we usually do minutes, and then it's usually a bit of a slam dunk, and then we do questions. We usually approve the financials and the quarterly stuff. Then we do questions, and Jamal will go through the numbers to the extent that there are questions that on a consolidated basis make sense. If there are questions on the numbers at a lower level, then the operating group managers often end up talking to them. Then Bernie talks about M&A and usually pulls together some stats on how we're doing and whether we're seeing diminishing returns in our marketing activities and things of that nature. What our win ratios are, et c, et c.
We treat M&A like a business, and we have metrics for it the same way that we do for our operating businesses. Usually the board has asked Larry to pose a series of questions to me, and he iterates with the board to figure out what the level of interest is in various questions that they're posed, and he ranks them and sends them to me anonymously, which enables directors to ask questions that I might otherwise roll my eyes at, if asked in person. I think it's a really valuable process. Usually after I cool off for a day or two, I recognize what the directors are asking and that in fact I need to empathize with their concern or what they're interested in.
I try and address it, either with data or pointing them at previous material that we've created around those particular questions and issues. We have a little bit of director professional development in the package, and if there's questions on that, we field those. There's a whole raft of one-pagers for acquisitions that were done in the quarter. That's part of the package. There's the IRR material on the older acquisitions. Other than that, there may be a special topic, and it varies from meeting to meeting. If I've got a bee in my bonnet above and beyond what the board has asked about, I may lob a grenade into the meeting to see if anyone's paying attention.
Often we'll end up spending some time talking about that.
Sounds like a fun full day affair.
Just a life.
Yeah. Thanks for sharing all of that. I'm gonna move on to the questions about SaaS now. At the past AGM, this question is about the spending of the VC-funded competitors. You know, their strategy hypothesized was that they would one day go public and be valued at high multiples of revenue, making it rational for them to spend, say, $5 up front, generate $1 of recurring revenue. Given the recent changes in valuations of rapidly growing unprofitable software companies, I guess, you know, maybe it's too early to see any change, but do you expect any changes in this behavior to make, you know, more rational competitors?
You know, I'll open this up to everybody, so you can talk about your experiences with SaaS as well in your business units.
I actually wrote about it this quarter for the board. We have in the director professional development section what we call venture capital-backed disruptors in verticals. We profile one of them and look at how much money's been invested and what they're doing and what their revenue run rates are and things of that nature. The underlying thesis in these companies seems to be that switching costs are very, very high, and that if you come to dominate the market, you'll literally have the vast majority of the market share, so a winner-takes-all kind of idea.
If the market is big enough and you dominate the market by getting out there early and giving this stuff away for free or bribing people to take it, because of the switching costs, it will never get ripped out, and at some stage you'll be able to jack up the price once you've established a de facto monopoly. It's monopolization of micro markets in a very pre-designed fashion. The underlying assumption is that no other VC will try to do the same thing. What you end up with is the airline industry, which everyone knew was gonna be a big industry. Everyone wanted to travel, everyone invested in airlines. Same thing with automobiles. When you have large and obvious markets, you get way too much money chasing an industry.
If you don't end up with something that is truly high barriers to entry, high profitability, it ends up being a bloodbath for everyone who invests, maybe with the exception of one or two. If you look at automobiles in North America, there were three that survived up until 2008 and two bit the biscuit. Ford is the only one of over 2,500, I believe, North American automobile companies, most of whom went bankrupt before the market really took off. That was a fascinating example of the fact that markets are willing to finance activities long before there's evidence of revenues and profitability.
I just gave a lecture at the local business school on the topic of what happened in automobiles and the radio industry and the television industry and newspapers. It was basically a lecture about Roy Thomson, and he's one of my business heroes. He loved growth industries, and they slapped him around something fierce. It wasn't until he was in his mid-forties that he had any money, and that was because he basically figured out how to run a local newspaper, which was not a rapid growth business. It happened to be one that he picked up alongside of a local radio station. It's a lovely story about how being early in a rapid growth market can be a prescription to really hurt yourself.
You have to pick your spots. Understanding the degree to which switching costs are significant in these verticals is absolutely critical. When you have consumerized software with very low adoption cycles, that are very easy for people to get up to speed on, then the switching costs tend to go down. I think a lot of the low-end SaaS stuff that we're seeing has those characteristics. Anyway, we'll see. We learn about it every quarter, and we try to figure out where the places to win are.
That makes sense. Just a general question about how much of your business is on-premise versus SaaS. Do you have it kind of from a consolidated view? You know, maybe I'll open it up afterwards to the operating groups too. I think you're on mute, Mark.
Oh. No, they were waving at me 'cause I was talking, not because they had consolidated views. I don't think we have any kind of. Well, I know for a fact we don't have any kind of consolidated view. I would say certainly we have way more, SaaS-type, technology model, software than we ever had before, and it grows much faster than any of the traditional models, etc , etc , et c. Most of the new companies we buy have some sort of, SaaS product lines, etc . It's a wave. You gotta ride the wave. It doesn't mean you have to anticipate the wave and be way ahead of it.
I know, I'm gonna ask Barry, 'cause I know a few years ago you had talked about, you know, SaaS rewrites in your operating group, because there was more, maybe more pressure there. You know, are you still seeing that, you know, recently? You know, how are those rewrites going if you're still doing some?
Yeah. I mean, the pressure's always gonna be there 'cause we have competitors who are out there with products that are full SaaS-based products. In certain markets, you can't really compete with an on-premise-based product. The fitness industry is one where, you know, there's a lot more SaaS. The salon and health and beauty market is another one. We've continued to invest in those. We have products that are SaaS-based products to compete with our competitors in those markets. You know, it's case by case. Some of those investments have done okay to good. Some of them have not. In the end, all of them have sort of found a way to become profitable, but the IRRs on them, you know, vary from probably single digits to, you know, things that are 30, 40, 50% IRRs.
It's all over the map, but it depends on the market you're in. If the market has moved to a certain place and it's become the de facto standard, you have to be there, or you will cede market share. It's, I guess, our job to figure that out hopefully in advance and then make the right rational business decision whether it makes sense to try and compete in that market, and if you can get an economic return that's worthwhile. Sometimes your better option is to cede share and take that capital and deploy it elsewhere. We try and make those decisions. I wish I could say we're 100% perfect, but that would be a lie.
We do the best we can, and sometimes we win, sometimes we lose, but we try and learn every single time and get better for the next opportunity.
I'm gonna move to a question that all analysts, I'm sure, are asking in the past few months, inflation. Has inflation provided an opportunity to pass through larger than typical price increases? Recognizing an aim to charge customer prices commensurate with value, does an inflationary environment enable passing through prices at or above the rate of price inflation?
Jeff, why don't you start, and we'll sort of work our way through the GMs. I mean, the one comment I'd make up front is, if you like your customers, you hate putting through price increases, right? It's always hard. So, you know, you've got cultural issues here with putting through price increases. Jeff, do you want to talk to what your group's doing?
Sure, Howard. I think obviously, you know, pricing is something we encourage the businesses to be always thinking about. I would say it's probably one of the top best practices that we try and share around all the different ways to look at it, how you might accomplish it, you know, how you might do it differently. I think this year for sure, because I think we saw more pressure, although in the end, I think at least in the Harris group, maybe I didn't see as much pressure as I thought on wages. I think we were encouraging the businesses to, you know, to sort of, I say, you know, go full circle on your thinking.
Whereas, you know, if your input costs, you know, mostly being wages are going up, then you need to make sure that that's coming full circle around in your pricing, whether it's your maintenance pricing or your license or your service pricing. I think we're always having those discussions. I think to Mark's point, you know, when you get into, you know, decentralized businesses and you get people really close to customers, I think, you know, those are difficult and delicate conversations. I think again, it's just a constant education and reminder, and sharing of stories and data that helps them be comfortable with their decisions. Again, you know, reminding them that it's all about value creation and value capture.
I think, you know, the one thing I would say for almost every one of our businesses is we do a phenomenal job of creating value for our customers. We don't always do a great job of capturing it. I think, you know, pricing is one of the main mechanisms for us to try and capture it. I think it's just, again, having those conversations.
I think, you know, if inflation remains high, which I mean, again, I don't try and forecast it, I think, you know, these conversations will continue to happen, and they're probably happening, I would say, more now than they were in the past, perhaps because of the current levels of inflation, both impacting wages and then obviously, you know, for us trying to make sure it's reflected in our, you know, pricing.
Do any other operating groups want to, managers wanna chime in?
Yeah, this is Dexter. It's mostly the same at Perseus. You know, what I found was that you know, we do have constraints in some of our contracts, especially with the you know, larger institutions that you know, there's a lag on what the 12 month inflation rate was and what the current inflation rate is. You know, we pay special attention to it to make sure that we're ahead of inflation and with our customers. You know, I always you know, tell my managers is that you're making the software bigger every year, and so without inflation, that should you know, reward you with a price increase since you've increased the efficiency of their business, and they should be willing to do that.
The advantage we have with our products is that, you know, we are a minor part of most companies' budgets. You see, you know, an increase. I never, you know, have anyone pronounce it as a percent increase because that raises eyebrows. If it's, you know, let's say CAD 1,000 on a CAD 3,000-a-year product, they look at that CAD 1,000 and like it's not a big problem. Although it's a large percentage, it's not a big additional expense.
Right. No, that strategy makes sense. It's good you bring up that point about being a small part of the operating budget of your customer. You know, now I'm sure the customer is seeing pricing, their own costs go up, you know. Do you still feel reluctant to pass on the cost if their operating budgets are under pressure?
Well, you know, we provide service, and so we deserve to get compensated for you know, the quality service we provide them that helps them run their company. You know, they have their own customers that you know, they can you know, if they choose to also you know, change what they charge or. As long as I feel that we are giving them quality service and a quality product, I have no issue on at least staying even with inflation, if not above.
That makes sense. Looking at inflation, I guess, this question is about the cost of the operating groups and CSI. Observing rising wage inflation, does the corresponding increase in pandemic-induced operating efficiencies such as travel, office space, remote employment, Jamal's sublet offset the effects, and how much does this vary across CSI's business units? Are any operating groups seeing overall expense pressure or, I guess, overall savings, what this question is asking due to the pandemic?
Howard, it's Jeff from Harris. I think there's no question during the pandemic, we saw significant cost savings. I think, again, you know, mostly, you know, travel is a large part of what we do that basically went from, you know, again, full on run rates to, like, literally 0, for quite a period of time. I would say it is starting to increase again. If I even look at my own activity, I'm, you know, starting to do some trips. You know, there's more events. Mark talked about his London event coming up, right? You know, these things are starting to return to normal. I think the costs that had basically gone to 0 will start to show back up in our P&Ls. I think that.
You know, I think we were benefiting from higher margins because of some pandemic-related expenses. I think some savings might materialize. I think some people and some groups might change the way that they've done things. I must admit, you know, now that I've done a little bit more travel, I forgot how inefficient it is traveling and how efficient it can be when you don't travel. I think, you know, I mean, we always encourage people to, I think, not just return to what they were doing before, but to, again, take the opportunity to step back, reflect, and learn on what you didn't think was possible that is now possible.
I do think you'll see more expense move back into certainly the Harris P&L because as we return to traveling. You know, from the inflation and the wage perspective, its overall impact, I think in any short period of time, I think you definitely could see an impact if there's a misalignment in timing. I think over the course of time, which again is typically how I would look at it, I think I don't see any material changes in our margin profiles because of it. I think, you know, eventually it will work its way back through the system and back through pricing, 'cause again, it's all about value creation and value capture.
I think, you know, inflation aside, we're still creating value, and I think we just need to find different ways to capture it. I think that's how I sort of see it going forward.
That's great. Moving to a question about cybersecurity. You know, you have said that at a previous AGM, that data security was your biggest risk. Is that still true now? And how do you manage it or mitigate it?
Yeah. Just from a Volaris perspective, I mean, it is something clearly we think about much more than we did a few years ago. We've just increased the number of resources that spend time on the problem and tried to push them close to the businesses as possible. It is something that we do keep an eye on and have tried to encourage our leaders to put the right resources and systems in place to manage it. We're probably a bit better at dealing with issues now when they come up because we've had some experience with situations, albeit they're, you know, all slightly different, to try to resolve the issue. Some feedback coming in there.
Anyways, that's sort of my take on it.
Makes sense.
Yeah, I think, Howard, from the Harris perspective, I would say, you know, back to this, again, decentralization and autonomy. I think if you went back a decade, I think this is an area where we would have just left the businesses make their own decisions and their own investments. I think there's an example of something that over the course of time has changed. There's more, I think, corporate oversight and requirements, whether it be for reporting or for systems to be put in place. I think, again, it's just, you know, as that threat went from sort of, you know, not that significant to more significant, I think it's something that we sort of adapted the way that we do things.
You know, to Mark's point, there's just a lot more people focused on it, a lot more systems that are in place, you know. Whereas we don't typically dictate, you know, what business units have to do in all cases, you know, this would be an area where we are much more forceful on what they have to do and how they have to do it.
That makes a lot of sense. It's similar to accounting standards. Some things have to be standardized, even in a decentralized, you know, autonomous corporate structure. One last one from me is about the culture. I know, you know, I think Mark shies away from the C word, but the culture of CSI is well-defined and communicated over the years. As a minority shareholder, this gives us much confidence. How do you maintain or implement this on a level of the latest acquisition as well as future large ones with preexisting cultures? The larger you get, the further you go from the people who helped build culture.
Should I take that one, Mark? Do you want me to give it a shot?
Sure.
Yeah, I mean.
I was gonna say-
Feel free to go ahead, and in fact, I think all of you should. Just the one point that obviously we have businesses in disparate geographies with different religions and different cultures and different ethnicity. Culture is gonna be very different in these places. I think prescribing culture, good luck. Then-
It's been inter-
Values. Go ahead. How do you share values with your newly acquired business? That is something we have to do pretty quickly.
Yeah. It's been interesting for, you know, during the journey because I've been doing this with Constellation since 1995 and, you know, did acquisitions initially in the U.S., and we had a Toronto office, and we had an Arizona office, and also then ended up with doing our first international acquisition for Constellation, which was back in 1999, 2000. It's in Denmark, and I moved over there with my family, what have you. I'm really glad I did because I recognized just how different it was, and I was very even careful back in that early stage of my career at Constellation to try not to say we have a culture. We would adjust to each culture that we were, you know, as we're moving around. Going between Arizona and Denmark was quite a change.
In Denmark, we had a chef and a cook actually prepared meals every day, and all the staff sat together and had lunch together. In the U.S., they were using the machine that you put quarters into, right? To get stuff to eat, right? And going through the drive-thru. The messaging had to be different, how you communicated, how you presented an idea. I think it's very important to understand we are a culture of cultures, and it's one of the reasons I think that our performance is what it is because we allow each of these businesses not to become part of Constellation, part of Volaris, part of any of our operating groups, but to still maintain their own culture and operate within their local country.
I think we have offices in 43 different countries. Everywhere you go, I think you need to be cognizant of that and adjust your messaging. When you come to a quadrants event we talked about earlier, where you have people from, you know, 36 countries there and sit in a room and talk about something like diversity, it's a very interesting discussion. Everybody has a very different opinion on what that actually means to them based on where they're from and what their situation is. We're very careful not to step over that line. As far as what we do from a, you know, I think Mark said what our values are. I think trust is the biggest one. We need trust.
We believe in measuring them all so that, you know, they can even though they're doing their own thing and running as separate organizations, we measure them all and sort of track how they're doing versus each other and sort of leaderboard them and things like that. Those are around very simple metrics, growth and profitability, you know, that are easily achieved. I'll pass it over.
Maybe any other groups want to chime in? Maybe I'll ask Robin because, you know, there's TSS and then there's Topicus, and, you know, they obviously have separate cultures. You know, what are your thoughts of, you know, whether their culture will become closer to one another or, you know, what's kind of your thoughts on the cultures of those two or those three different companies?
Yeah. I just got thrown out and back in, but apparently it's about culture. Yeah, I think the nice thing is, like Mark said, yeah, it's different culture, different countries, different verticals. Nice to see is now we have two large businesses in the Netherlands, very small geographies, very small country. You clearly see the differences in culture. Like I said before, both companies have been successful in vertical market software but have their different history, ways of doing things, have their own paradigms. I think that's great. If you can be successful to the left or you can be successful to the right, I think that's not important to us, as long as you meet your plans, if you do what you should do and what you...
It doesn't mean that you should simply stick to what you're doing. I think we all have a general common culture of trying to improve, trying to learn, and being curious. I think that's the common culture we like to see, being open-minded. But clearly we could see there were different cultures. We knew it, and we saw it, and we still see it.
Ben, you're probably the person logging the most miles visiting far-flung business units. What are your observations on the various cultures of your BUs?
I think that it's Mark's comments, Mark Miller's comments I think hit it, described it very well. That the autonomous nature of the cultures in the businesses and then that varies country to country and segment to segment from an sort of an industrial business to a finance business. There's different cultures there. I think it we do allow that brand identity and that culture that each company comes in to continue, but it's enhanced with probably the financial performance and then also the ability to see what their peers are doing. That creates a you know sets a high bar for performance. You know, they wanna everyone wants to be in the high-performing quadrant. That's all I...
I mean, obviously countries, you know, different countries, the complexities of culture and just letting, again, the autonomy in that country deal with, you know, what they need to do within the framework of, you know, the parent company's values and our requirements, you know, legal requirements, et c.
No, that's. Those are great perspectives. I think, you know, as Mark Miller put it, you know, the metrics are very clear, you know, in terms of what the business units need to achieve. You know, kind of whatever path they take to get there, that makes the most sense. That's it, for me. I will turn it back to Larry to take more questions.
Thanks, Howard. A couple more questions from the instant messaging today. The first of which comes from Jason Craft. Question is for Mark, and it picks up on the theme we were just discussing. What have you learned about the Japanese market? Specifically, do opportunities exist there, or are there barriers to culture too high to acquire VMS companies in Japan?
Yeah. It's probably the highest cultural barrier I've encountered. The advantage of doing business there is they have phenomenal beef. I have not been very successful in finding lots of businesses for us to acquire. We've acquired the one, and we're flirting with a couple of others. Despite quite a bit of effort, we have yet to break through.
The next question from the IM, it's coming from Mark Ghobrial. I think I'm pronouncing it right. One reason I'm asking it, 'cause he's got this wonderful preface that says he is a student of this very special painting you're creating. The question is. I don't know if you're familiar with this or not, but it's on the top going back to the topic of bet sizing. Do you have any views on the validity or utility of the Kelly criterion as popularized by Edward Thorp?
Well, I don't think there's any question that it makes tremendous sense. I think human nature argues against using it because we're so sensitive to downside as individuals and we're less motivated by upside. I think there are some people who you know manage to logic their way through that and make significant-sized bets. Now, our inherent business model has never really made us confront this issue. When we did the TSS acquisition, we sort of went out on a limb and took down a significant amount of debt, but we refinanced it pretty quickly, and so our exposure was fairly sh ort-term. We have yet to put ourselves in a position where we're going full Kelly.
Yeah, the nice thing about Kelly is you can actually come at it both theoretically and practically by doing a little bit of mathematical modeling. I encourage you to do that because it really makes you focus on how wide the outcomes can be around the optimal Kelly criterion. It's kinda fun.
Back to the submitted questions, the final segment of the session, and being mindful of the time, it's 18 minutes till noon. That'll take us up to noon. Takes us to a three hour mark. A few questions then, we call them a potpourri, miscellaneous, otherwise unclassifiable. First of these, on buybacks versus dividends, how do you consider the potential leakage through the DWT, dividend withholding taxes, for some of your investors? Wouldn't buybacks be preferable when your share price is at or below intrinsic value?
The challenge here is treating all shareholders fairly. Dividend withholding tax is an issue, and it's for sure an issue when we do spin-outs, where people who get spun out securities could lose a third of them to DWT. Structuring around these issues is unbelievably difficult. When you've got a whole pile of non-taxables, they have very different motivations than a bunch of employee shareholders, and they have very different motivations than a bunch of long-term oriented capital gains hopeful investors. I don't think you can make everyone happy. I think the best you can do is signal what your intentions are so that people can do their tax planning.
If they recognize that there's gonna be a series of spin-outs and that they are gonna lose a big chunk of value to the Canadian government on DWT or the U.S. government, if they're taxing the dividends on the way in, or to various other foreign governments, they can make the choice as to whether they wanna be a Constellation shareholder when the spin-out happens or when a significant dividend happens or when a buyback happens. Obviously, one of the things that factored into our thinking when we said no more large dividends was that tax was a burden on a bunch of our shareholders, and that we were better to keep that money and deploy it on their behalf, even if we only achieve sort of S&P-type returns with that cash.
Yes, tax obviously is huge for us, and you can tell from the Topicus transaction that we put enormous energy into making it as tax efficient as we could. One of the things you can do, rather than lose a third of your shares if you're a foreign shareholder in a spin-out situation when we're deploying a bunch of shares where you think there may be significant upside, is you can pay cash tax. We've thought about how we might set up an escrow account to cover off the DWT, and that could well be a possibility in the future, for people who have that barrier to a tax-free spin-outs. We can do tax-free spin-outs in Canada. There are a bunch of rules around them.
We can do, to some extent, tax-free spin-outs in the U.S.. The rules are even more convoluted. The further afield we go in terms of geography, et c, the harder it is to make all of these rules line up and allow us to thread the needle. Yes, my heart bleeds for you. I hate prepaying the tax man. I don't mind paying the tax man, but I don't like prepaying him a whole lot. We will work really hard to try and serve our taxable shareholders. I have a less of a sense of affiliation for our shareholders who are indexes and closet indexes, but this is a personal opinion, and many of our directors don't feel the same way.
Because they aren't making a conscious decision to own Constellation, they're owning the index. They're concerned about generating a 6% real rate of return over the next 100 years, not about being a Constellation shareholder. It isn't like they've consciously decided, and therefore I don't feel as responsible for their outcome as I do for people who have a concentrated shareholding in Constellation, because they know someone who works there. It might be a son, it might be a nephew, and they're just invested. I mean, those people, we have a responsibility to try and optimize their outcomes. It's at least that's how I think about it. There are obviously other voices around the board table.
Thank you very much. The next topic is high-performance conglomerates, that several shareholders this year recalled the study and the discussion of high-performance conglomerates that you did a couple of years ago, and the various tools and strategies that could be discerned from that study to support the durability of such a high-performance. They just wonder if we could be updated or revisit that topic in light of activities at Constellation recently, such as spin-outs. Are spin-outs a tool that help to sustain the performance, the high-performance of a conglomerate?
Certainly. Henry Singleton used them several times. John Malone used them several times. Ralston Purina used them frequently. They are a tool. There's no doubt that they have contributed to spectacular performance. I'm blanking on one of the others that has used them as well.
Danaher?
Yes, yes. Danaher used them, several times. I don't know that the spin-outs have been as successful as Danaher per se, in that particular case, but they've definitely used them.
Next one. Can you share some of the board's thinking about the eventual successor as president for Mark Leonard? They note that the board has recently separated the functions or the persons who occupy the roles of chairman and CEO, so we put in a successor in effect to Mark as chairman of the board. On the rest of the things that Mark does, this investor says, you know, "Berkshire Hathaway's board just has decided to split Warren Buffett's job into a couple different board chairman, CEOs, CIO, and his shareholder position will change. Does the Constellation board think about splitting Mark Leonard's job into multiple different functions?
I have no idea, you know, what they intend. What I would observe is that if there are a series of spin-outs, maybe the job gets smaller and may not need splitting. The other point that Mr. Buffett made on the weekend was that he didn't feel that his successor would have the same rein that he had to act quickly and write big checks. You know, I fear the same thing for whatever poor bugger is my successor. You know, I get away with a lot 'cause I've been around for a long time. Whoever takes over may not have that same track record benefit.
Final question of the session, and I think anybody is welcome to join in. It's a pre-mortem exercise. The date is 2030, and Constellation's valuation or share price is half, or it's just in line with what it is today, and something has obviously gone wrong. What do you think the main contributing factors were?
That's a fun one. Let's start with the most investor-oriented of our internal managers. Robin, a flat stock price for a decade.
I think we would look beyond a flat stock price for a decade. If you really look long-term, and we continue to build what we've been doing, and as I said before, the Topicus share went up and down. It was quite volatile. We didn't get too much distracted and I still think we keep our eyes on the ball and that's what we should do and what we have been doing. I think experimenting, that's what I believe in. Continuing to do what we do, and if the stock price is flat at a certain time, it might be attractive for our employees. That would be my view on it.
Jeff said something almost exactly the same yesterday, something to the effect like our shareholders expect us to keep doing what we've been doing. I agree totally. If we keep doing what we've been doing, deploying capital at relatively high rates of return, could the stock price be at exactly the same level a decade from now? The answer is absolutely yes. The prime example that pops to mind is Jack Henry, which from 2000 - 2010 was flat. If you look at their results, the business grew, and it grew well, and it increased its share of wallet. It increased its breadth of product. It took out competitors. Just a magnificent company, well run, whose stock price didn't budge. Now, the Nasdaq didn't exactly do great during that period either.
That would likely also be a contributing factor to us having a flat stock price a decade from now. It could well be that the cost of capital that people are applying to equities goes up significantly. Accordingly, you know, even though we grow the free cash flows, they are present valued at a lower number. I don't think it would be all bad. You've got to look through stock price to intrinsic value, and that takes a lot more trust and belief. We'd have to sell that hard to our employee shareholders, 'cause we're asking them to buy shares every year, and they've gotten in the habit of those things going up pretty much every year.
I suspect your questioner had more of an operational concern as opposed to a capital markets concern in mind. Maybe to the other GMs, can you think of a single source of unpleasant dreariness in our businesses?
I could toss in that if we talked a bit about succession, Mark. If the board selected a successor to you who strongly believed in centralization and reducing costs to drive efficiency over the short term, the long-term impact could be very bad for the business because it would structurally change it dramatically. I think it's Constellation's single biggest risk is moving to a different model like that, where we have much less autonomy and much greater central control as to what happens and eliminate smaller businesses because it just all looks so great in Excel or PowerPoint. In the long term, it would be fundamentally damaged over the next several decades.
This reminds me. Your comments remind me of two things, Mark. One is ITW, which was my favorite high-performance conglomerate of all time during a certain period of its history. Basically what you just described happened to them. They had an activist. They had two or three CEOs turn over fairly quickly, and they ended up going for margin, and they lost their organic growth engine and their M&A engine. They ended up being a more profitable company. It's not like it's performed badly, but it lost the magic. That was sad. The other.
It's easily done.
Sorry, go ahead.
It's easily done, I was gonna say. It's not something that would require a lot of work to do. You could do it in a very reasonable period of time.
Yeah.
Over a year, right? Let's say.
The other example that came to mind was Nick Howley. I was just down in L.A. He got an award, the Henry Singleton Award, that's given to an exceptional CEO. Nick is a phenomenal CEO who runs a company called TransDigm, which was one of the ones we studied as part of our high-performance conglomerates. The point that Nick makes is that he leads a volunteer army. Nearly all of his managers are very, very wealthy and have, because of the structure of their compensation scheme, ended up cashing out a lot of their equity interests because they're sort of set up as either options or dividends or recaps or things of that nature. There's a natural not compounding, but definitely financial gain alongside shareholders.
Good alignment, but poor tax efficiency on the one hand, but lots of cash in your jeans on the other. As Nick says, he only gets to keep the people who really wanna stay and who love what they're doing, not the people who have a big investment that they're trying to look after. I think that's one of the differences between what TransDigm has done and what we've done. You know, the managers that you hear today have their net worth tied up in the business. They care a lot. The conversations at the boardroom table are real. It isn't just, you know, putting in your time. This is generational wealth that they've created, and they care about it hugely. I think we're very fortunate. Incredibly fortunate.
Larry?
Thank you, sir. It's just about noon. Three hours. What a wonderful, productive session this morning. I wanna thank Will and Howard and all the people who submitted such good questions and the entire panel here answering them. I learned a lot. I always do with this group. Now is a good time to sign off because we got up to a peak number. Usually after three hours, the audience starts to decline. This audience has increased all the way up till now. It's 645 people who were here. Again, I'm very grateful to everyone. Thanks for the opportunity. I'll turn the meeting back over to Mark.
I think Mark had mentioned in the notes that he didn't need it turned back over to him, and so we might as well just say goodbye to everyone and thank them for attending.
Okay.
Bye-bye, everyone.
Certainly. This concludes the meeting. You may now disconnect.