One Step Up #52
This week, we look at Constellation Software (Org Design), Dollar Stores in the US, state of the Chinese tech-ecosystem, Newsletters and Principles of Effective Storytelling
Advise for this week: Reset
Almost everything will work again if you unplug it for a few minutes, including you.— Anne Lamott
Constellation Software & Org Design
CSU headquarters sets targets for the “hurdle rate” that CSU needs to make from an acquisition. This sets the price and multiple that CSU is willing to pay for a target and is a metric that even the most junior person in the org can understand. Next, the Operating Groups are split up into competencies. These have blended over time as now all Operating Groups can extend into various industries. But based on existing competencies, you still see a fair amount of concentration (Jonas in fitness, Harris in utilities as an example). This allows for compounded knowledge in specific verticals while still enabling any Operating Group to acquire an attractive company that meets the hurdle rate.
This structure allows Constellation to continue acquiring niche VMS businesses wherever they are located. Junior employees are aware of the hurdle rates and can make decisions on smaller businesses quickly without having to go through much bureaucracy. As acquisitions get larger, a few more folks may get involved but its still constrained to the operating group and usually a smaller subgroup within the broader OG. Above a certain very large threshold and also based on industry sector, HQ will get involved. All of this is spelled out clearly with a focus on long-term capital appreciation. Senior employees have to invest a certain amount of their salary into the stock and hold for a period of a few years. This incentivizes everyone to act like an owner while preserving that flexibility to act on opportunities no matter how small or large as long as the hurdle rate is hit. Any changes to compensation, incentive structures, hurdle rates, and big shifts in strategy (acquiring non VMS businesses, spinning off operating groups, etc) are all centralized at HQ.
Now some might say, CSU is facing an existential threat from Private Equity funds buying more VMS businesses and more acquirers looking in the same markets. However, none of them can replicate CSU’s org design. Because of this, CSU can acquire 100 companies that may total the same value as 1 PE acquisition and do that across industries, geographies, and scale at an increasingly accelerated pace as CSU’s arm of target companies grows. Now ask Vista if they will purchase a golf club software business for $10M. See what they say.
One line to explain just HOW good they are:
We do very good in good times, and fabulous in bad times.
Dollar General is one of the most profitable stores in the rural US. Sometimes, it’s the only store in the town that offers grocery products. In fact, there are more Dollar Generals than there are McDonalds, which highlights the sheer ubiquity of the company. The Dollar Stores are in places where Walmart won’t go, and that gives them strength, and a grip-hold on communities.
Low SKU count, relatively few employees, low margins, low prices and how they use framing bias + the bear case.
Insured by the mafia. You hit me, we hit you
Parallels b/w the CCP and The Godfather, how the Chinese tech-ecosystem grew with the help of the CCP, differences b/w regulation in the US and China.
See, the CCP mafia is a simple organization, and the rules of the game are pretty straightforward. The Chinese mafia craves control above all else. You can do whatever you want, wherever or however you want. But, you can never, ever, ever, ever, never have your own agenda or outshine the don. If the don wears Calvin Klein underwear to a party, you wear Rupa; you don’t wear Victoria’s Secret for men and flaunt the elastic. If the don says don’t work with the Americans, you don’t marry them, you send them lemon, chillies, beetle leaves, turmeric, cut a chicken on their doorstep and put a curse on them. And most importantly, you don’t talk shit about the don. It’s that simple.
Like Don Corleone says in the opening, “And if an honest man like you should make enemies, they’d be my enemies. And then they would fear you” and offered protection to Bonasera. It was the same in China. The CCP offered protection to its national champions such as Alibaba, Baidu, and Tencent. It banned or made life difficult for US-based tech companies like Google, Facebook, Dropbox, YouTube, and WhatsApp wanting to compete with the Chinese tech companies.
It promoted homegrown tech companies, gave them money, government contracts, and protected them from enemies. All it asked in return was obedience. No regulations, no nothing. They could do whatever they wanted as long as they obeyed. And things were good.
It's an interesting phenomenon for individual investment researchers to be able to publish market-moving research, and it's worth dwelling on. Once a newsletter has a reputation, and its readers have collectively high assets under management, it becomes much more likely that they'll affect a stock, but even a fairly obscure publication can have an impact.
There are two economic models that drive subscribing to a newsletter, and make it a bit like picking a stock. If it’s undeservedly unpopular, you get an edge by reading it. If it’s too popular, you want to read it and bet against it; you’re peeking at your opponent’s hand. There are institutional investors who subscribe to research they know is wildly overrated specifically so they know the thought process of whoever is on the opposite side of the trade, and this model can work with newsletters, too. Ironically, this means that the worst position is to be good but fairly-rated—but there can be value there, too. Part of the analyst's role is to provide good frameworks, not just good estimates; there's value in understanding a company well even if it doesn't present an immediate trade.
Principles of Effective Storytelling
Underrated skill - which I think possibly needs to be taught to everyone at an early age, irrespective of interests and which field they want to delve into further.
Some great points made:
Be clear - what are you trying to communicate
Infuse novelty, create contrasts and suspend reality
Till next time!
Word up it’s porky pig they call me P-Double
Al G. step to me he don’t want no trouble
I was famous before the internet
since 1935 I been gettin’ respect
this pig is lit, I’m super legit
every time I’m out in public people asking me for pics
You? Nobody knows you when you walk the street
how your last name Rhythm and you still off-beat?
From beginning to the end I’m here for all the smoke
your squad ain’t all-stars your squad is all jokes
end this with one bomb, most famous of all quotes
this battle is now over, that’s that’s all folks