Make your 2012 fee budget — bid CSU

It slipped by me at the time, but Constellation Software (CSU:TSX) took itself off the market two weeks ago, having announced last April that it was considering “strategic alternatives”. With two large shareholders in OMERS and Birch Hill Equity Partners (on behalf of TD Capital Canadian PE Partners), most assumed that a sale would come to pass last summer.

At the time of the “for sale” press release, with the stock at $65/share, the market cap was around $1.385 billion; before any takeover premium. That’s a hefty M&A bite for most software or service firms, leaving only big players such as INFOR as viable bidders. I’m sure that Merrill and BMO did a good job on the sell-side, but with a tough debt market limiting PE options and an apparently unwilling management team, the outcome might not have been much of a surprise. At least with the benefit of hindsight. Just because it has been a great investment post-IPO doesn’t guarantee a successful sale transaction, unusual as that is to say.

Now that the stock is over $84, thanks in part to a new 5% dividend that pushed the quote up despite being pulled off the market, perhaps there’s still a deal to be done at CSU. The two original backers still own 40.3%, or just over 7 million shares. What better time for a bought deal? It worked for Macdonald Dettwiler and CAI years ago, with improved liquidity rewarding existing and future shareholders. The stock is up almost exactly 30% from the time of the April “alternatives” announcement, which is kinda what a traditional M&A premium looks like to most of us.

So, if you run the tech practice at a local i-bank, dust of your bought deal letter and fire it off. Get the control block folks a bid north of $80 and they might just hit it. At 4% commish on almost $600 million of jointly-held stock, you’re staring at a $24 million fee pie. Keep 35% for yourself, and the 2012 revenue budget is made…and it’s not even the end of January.

Now that MKS is gone, Joe and Jill Retail need a new tech dividend name. And the dividend-oriented mutual fund managers will like the fact that it’s got a decent market cap to it, with stable cash flow. But with just 7,300 shares/day trading hands on average, how can any PM ever build a useful position?

Go get ’em.

MRM