Canada’s Berkshire Hathaway: The Toronto ‘takeover machine’ you’ve never heard of that is doing things right

Toronto is home to two of the planet’s most aggressive “takeover machines” in the software field. One of them is a dog, the other a star.
Dye & Durham Ltd., a “consolidator” of legal and real estate software firms, has been called “the laughingstock of Canadian capital markets” by New York activist investor Engine Capital LP, one of D&D’s many dissident shareholders.
By contrast, the larger but less well-known Constellation Software, also based in Toronto, is described by the Economist as “the world’s best acquirer of tech firms.”
The practice of mergers and acquisitions, or M&A, is of great importance to the economy.
Last year, the total value of Canadian M&A transactions was $112 billion, according to financial advisory firm Kroll LLC.
Get M&A right, and the economy benefits from the creation of enterprises of diverse capabilities with the size and scope to nurture innovation, better serve customers, and reward shareholders.
But get M&A wrong, as Nortel Networks did on a historic scale, and exercises in empire building cause enterprises to collapse.
With Nortel’s 2009 bankruptcy, Canada lost one of the world’s few global builders of telecommunications networks, leaving the field to China’s Huawei, Sweden’s Ericsson, and Finland’s Nokia.
D&D is frequently in the news for shareholder revolts, poor financial performance, customer complaints of steep price hikes, and a feud over control of the company between its two co-founding brothers, Matthew and Tyler Proud.
D&D sought with its takeover spree to dominate the market in legal and real estate software. But that strategy, fuelled by scores of acquisitions, backfired as customers defected to rivals offering lower prices. It also loaded D&D with debt.
The company’s torrid growth in revenues, up more than 10-fold in the past five years to $451 million in 2023, was accompanied by a nearly 17-fold increase in annual interest payment expenses, to last year’s $122.8 million. And D&D has posted losses in three of the past five years, including a loss of $170.6 million last year.
D&D’s initial stock offering during the pandemic tech mania of 2020 was oversubscribed. But as with many tech IPOs of that era, the company’s shares have since lost their allure.
Its stock valuation has dropped by about 70 per cent from its 2021 peak, erasing some $2.4 billion in shareholder value, with D&D shares now trading at $16.
By comparison, shareholders of Constellation, which is seldom in the news, have seen their stock more than triple in value in the past five years.
Constellation’s revenues have quietly grown to $11.3 billion in 2023 and profits have increased by more than 72 per cent in the past five years, to $763 million in 2023.
The company, which has invited comparison with Warren Buffett’s Berkshire Hathaway, has acquired about 1,000 small, specialized software companies since its founding in 1995.
While Constellation has made a few of the large acquisitions by which D&D has grown, the median value of its takeovers is about $4 million. Its acquisitions are niche firms serving car dealerships, golf courses, spas, and other business segments where there is little competition.
Like Berkshire, Constellation leaves the management of companies it buys in the hands of their existing leadership teams — preferably including the founder.
The company is a patient buy-and-hold investor, or “perpetual owner,” as founder Mark Leonard has described Constellation’s strategy and has lately increased its emphasis on organic growth, or higher revenue from existing businesses.
It is also scouting for late-stage software startups that have burned through their initial financing and need fresh capital or seek funding for expansion.
At D&D, upheaval at the top of the company has frustrated efforts to create a consistently profitable whole from its acquired components.
The company has experienced high turnover among senior executives, and its board is under fire from activist and institutional investors accusing it of poor governance, and too-rapid a pace of takeovers and accumulation of debt.
Setbacks in M&A are a widespread malaise in business and that’s bad for the economy.
Studies have consistently shown that more than half of corporate takeovers fail to achieve the objectives that acquirers expected of them.
Yet corporate boards are reluctant to replace leadership teams that put acquisition-driven revenue growth ahead of profits — until an enterprise hits the wall.
And boards lavish CEOs and senior managers with takeover bonuses. That routine practice encourages CEOs to focus on buying other firms, often with insufficient due diligence, and to neglect their existing businesses.
Canada needs M&A reform. Done poorly, as it so often is, M&A is a misallocation of the country’s financial resources and a source of economic inefficiency.
You can add that to the list of factors in our current obsession with Canada’s laggard productivity growth.