Charts better than tea leaves on GLD

These people are only interested in acquiring Software businesses, so it will be just a case of when and how much, perhaps Torex will make an offer too?

Constellation's Acquisition Criteria

We only buy good Vertical Market Software ("VMS") companies. Occasionally, we buy a great one. We use history (not forecasts) to determine whether a company is good or great.

Great Businesses

The great businesses that we buy are not glamorous. They invariably have an outstanding manager, who may or may not be the owner. These great businesses have that rare combination… consistent profitability and above average growth. They are the product of a lifetime of exceptional effort and talent. The vendors may be selling for health or estate planning reasons. They love their companies, and it is important to them that their business be operated in a manner consistent with its history and values. CSI recognises the value of these rare companies and will not interfere in these businesses in search of elusive synergies.

We are pleased to hear from brokers or principals of great businesses that meet the following criteria:

1. A mid to large sized VMS business, i.e. a minimum of $1 million earnings before interest and tax.
2. Consistent earnings and growth.
3. Generating a good return on equity.
4. Experienced and committed management.
5. Offering price that has been determined.

Although we prefer to buy 100%, we will buy less if the vendors wish to continue to participate in the success of their business. We will not engage in the unfriendly takeover of a great business. We can promise confidentiality, and will usually respond with an indication of interest within a day.

Good Businesses

There are a lot of VMS companies that have the elements of greatness, but haven't yet been able to establish a consistent track record of profits and growth.

If a company is the #1 or #2 market-share holder in a niche vertical market, then they've met our (somewhat arbitrary) criteria to be categorised as "good" ... but to be a suitable acquisition for CSI, they also need to have:

1. Revenues of at least $5 million.
2. Hundreds or thousands (not tens) of customers.
3. Unimposing competitors.
4. An offering price that has been determined.

When we buy a good company, we get involved in establishing values and processes for that company. However, with a head-office staff of 7, we are not equipped to step into the day-to-day management of our subsidiaries. We rely on the managers and employees of our subsidiaries to run their businesses, albeit with some coaching from CSI. We teach the employees about the economics of their business and we install a company-wide profit-sharing program based upon those economics. We benchmark the company against our other businesses, and we suggest areas for improvement. We bring together functional managers from across all of our businesses to share best practices, and our general managers meet quarterly to review results, and discuss their mistakes & successes. We often find that the managers of these good companies have years of practical experience, but lack formal training. We have a variety of formal training programs that we encourage them to use.

In short, we try to find the reasons that a good company hasn't become great, and address them. Some managers of good companies find this exciting and challenging and invigorating. Others say that "our business is different" and cling to the old ways that produced high market share and poor profits. The latter managers leave us, and the former flourish at CSI.

With these criteria in mind, should you want to contact us, please call me at (416) 861-2275, or email me at mleonard@csisoftware.com

#1200 - 20 Adelaide Street East, Toronto, ON, CANADA M5C 2T6