Latest / The Dutch Investors / #49 | The shared playbook of LVMH and Constellation Software

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#49 | The shared playbook of LVMH and Constellation Software · The Dutch Investors

0:00
SPEAKER_00: A couple of months ago, me and Sunny from Secret Source Investing on Substack did a deep dive into French luxury holding LVMH, most well known for its exceptional brand Louis Vuitton.
0:12
SPEAKER_00: But during our 80-minute conversation, talking through the strategy, something caught our attention.
0:19
SPEAKER_00: LVMH reminds us a lot of constellation software as well.
0:24
SPEAKER_00: Different industries, different products, entirely different consumers.
0:30
SPEAKER_00: But oddly, the same playbook, sort of.
0:35
SPEAKER_00: Let's talk about this and jump straight into the episode.
0:55
SPEAKER_00: Before we explain what and how, we must first understand and know both companies on a basic level.
1:03
SPEAKER_00: So let's begin with LVMH.
1:06
SPEAKER_00: And it actually stands for Moet Hennessy Louis Feton.
1:10
SPEAKER_00: It's reversed.
1:11
SPEAKER_00: Not many people know that actually.
1:13
SPEAKER_00: But LVMH is the world's largest luxury goods holding company.
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SPEAKER_00: It owns over 75 luxury and or premium brands.
1:23
SPEAKER_00: They call them Masons.
1:26
SPEAKER_00: And they span fashion, jewelry, wine, cosmetics, and retail.
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SPEAKER_00: Think Louis Fueton, Dior, Hennessy, Sephora, Tiffany, Takhoya, and Dompernon.
1:39
SPEAKER_00: Then we have a completely different company.
1:42
SPEAKER_00: Canadian Software Company, Constellation Software.
1:46
SPEAKER_00: And it's also a software holding company.
1:49
SPEAKER_00: Most people, besides investors, have probably never heard of, but have come in contact with through one of their thousands of software solutions.
1:59
SPEAKER_00: Instead of luxury brands, they acquire niche, vertical market software companies.
2:05
SPEAKER_00: And they are often small, sticky, profitable businesses that dominate in obscure niches, like regional tax systems or marina management software.
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SPEAKER_00: Not sexy but extremely lucrative.
2:20
SPEAKER_00: What do serial acquirers do?
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SPEAKER_00: Well, both LVMH and Constellation Software are considered serial acquirers, although in entirely different industries.
2:32
SPEAKER_00: But both have the same playbook.
2:34
SPEAKER_00: They both buy companies with strong fundamentals and long-term potential.
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SPEAKER_00: They keep the culture and leadership of these acquired businesses intact.
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SPEAKER_00: They share back-end resources to make operations more efficient, and they reinvest profits into more acquisitions over time.
2:53
SPEAKER_00: And although Constellation has the ability to reinvest a lot more, LVMH has to reinvest lots in brand building as well, but they do acquire lots of businesses.
3:03
SPEAKER_00: I mean, they own over 75 other masons.
3:07
SPEAKER_00: And their playbook is a very specific, very disciplined, but difficult model.
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SPEAKER_00: It's about letting each business thrive within a larger ecosystem.
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SPEAKER_00: In LVMA's case, that might mean helping Tiffany open a flagship store in Tokyo.
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SPEAKER_00: Or in Constellation's case, it might mean optimizing pricing for a business-to-business billing tool in the Netherlands.
3:34
SPEAKER_00: Different products but the same philosophy.
3:37
SPEAKER_00: So here's how they play the same game.
3:39
SPEAKER_00: Both LVMH and Constellation Software do a few things almost completely the same.
3:46
SPEAKER_00: First, they let their brands run the show.
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SPEAKER_00: Execution is decentralized.
3:52
SPEAKER_00: Whether it's Louis Vuitton or a tech software company in Germany.
3:56
SPEAKER_00: Each brand, each company, keeps its leadership, culture, and creative direction.
4:01
SPEAKER_00: Of course, there's always the exception, but most of the time this is the case.
4:06
SPEAKER_00: But behind the scenes, LVMH and Constellation are like the central backbone that help with capital, strategy, and systems, and LVMH and Constellation Software support these businesses when needed.
4:20
SPEAKER_00: Both companies are also founder-friendly.
4:24
SPEAKER_00: These companies are magnets for founders who want to sell without selling out.
4:29
SPEAKER_00: You don't hand over your life's work to a bureaucratic machine.
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SPEAKER_00: You join a group that actually protects your identity and helps you grow it.
4:38
SPEAKER_00: So they buy great, hopefully founder-led businesses, but founders also come to them.
4:45
SPEAKER_00: And this is a massive benefit and advantage for these serial acquirers.
4:49
SPEAKER_00: Point 3 is they're built to absorb shocks.
4:53
SPEAKER_00: If one brand or subsidiary struggles, the machine keeps going.
4:58
SPEAKER_00: There's no single point of failure.
5:00
SPEAKER_00: Well LVMH is highly dependent on Louis Vuitton, I get that, but they do own 74 other masons, so it's a lot more diversified.
5:10
SPEAKER_00: But of course, like everywhere else, there are exceptions to the rule.
5:15
SPEAKER_00: And with dozens or hundreds of different revenue streams, different industries, different segments, different brands, their diversification is what makes them resilient through economic cycles, changing in tastes and competitive threats, at least in theory.
5:33
SPEAKER_00: Capital allocation is the real product here.
5:37
SPEAKER_00: Neither LVMH nor Constellation is just selling handbags or software.
5:43
SPEAKER_00: They're in the business of capital deployment, and that's the actual skill.
5:48
SPEAKER_00: Both use free cash flow to reinvest, hopefully intelligently, into acquisitions, into brand building, infrastructure, or share buybacks to a limited extent when the valuation lets it.
6:02
SPEAKER_00: And they're always thinking of opportunity costs and hurdle rate.
6:07
SPEAKER_00: And other than the four I have already mentioned, there are a few other similarities that are worth noting.
6:14
SPEAKER_00: For example, both companies make long-term investments in things that take years, sometimes decades to pay off.
6:20
SPEAKER_00: In LVMH's case, it's brand equity and heritage.
6:24
SPEAKER_00: In Constellation's case, it's the lifetime value of sticky enterprise software contracts.
6:30
SPEAKER_00: Or, this one is pretty huge, most conglomerates scale by forcing integration.
6:35
SPEAKER_00: One ERP, one HR system, a single logo, and LVMH and Constellation Software do quite the opposite.
6:44
SPEAKER_00: They scale through autonomy, trusting each business to operate its best without meddling from the headquarters.
6:52
SPEAKER_00: It's anti-corporate.
6:54
SPEAKER_00: Although, some things for obvious reasons do get centralized depending on the type of company.
7:00
SPEAKER_00: Also, both companies have a great strategy, but it all comes down to something intangible.
7:06
SPEAKER_00: Culture.
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SPEAKER_00: Both firms have deeply embedded operating philosophies that get passed down internally.
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SPEAKER_00: New employees and acquired businesses are expected to absorb the culture.
7:19
SPEAKER_00: Another point that can't really be overstated is that LVMH has shown its willing to walk away from overpriced deals.
7:27
SPEAKER_00: Remember how they try to renegotiate the Tiffany acquisition during the pandemic?
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SPEAKER_00: And Constellation does the same.
7:34
SPEAKER_00: With strict internal return hurdles, it won't compromise on.
7:39
SPEAKER_00: In a market where fear of missing out often drives these mergers and acquisition decisions, both companies are a case study in price discipline.
7:49
SPEAKER_00: That said, the nearly 16 billion euro price tag for Tiffany Co.
7:55
SPEAKER_00: is still needs to prove itself and it wasn't a case of overreach.
7:59
SPEAKER_00: The jury is still out on that one.
8:01
SPEAKER_00: But it does look promising.
8:04
SPEAKER_00: Lastly, LVMH sells emotion.
8:07
SPEAKER_00: Constellation sells utility.
8:10
SPEAKER_00: Yet both rely on a mix of art and science to steer their decisions.
8:16
SPEAKER_00: The art being intuition, brand, taste, and people.
8:21
SPEAKER_00: The science being cash flow, return on incremental invested capital, and data.
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SPEAKER_00: It's not about the numbers alone, and it's not just gut instinct.
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SPEAKER_00: What sets them apart is their ability to read both the hard stuff, like the financials, and the soft stuff, the story, the future, the brand, behind the business.
8:43
SPEAKER_00: And they know that long-term success lives at the intersection of the two.
8:48
SPEAKER_00: At first glance, LVMH and Constellation software couldn't be more different.
8:54
SPEAKER_00: And one could argue that one is higher quality than the other, but that's not the point here.
9:00
SPEAKER_00: One sells champagne and leather, the other billing software and just sticky software solutions.
9:07
SPEAKER_00: But dig a little deeper, and you see the same foundation.
9:12
SPEAKER_00: Both companies focus on buying good businesses, leaving them alone to do what they do best, and stepping only in when necessary.
9:22
SPEAKER_00: Neither LVMH nor Constellation depends on a single product, a single brand, or a single market.
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SPEAKER_00: And that makes them durable, and that matters more than ever in a world that's constantly shifting.
9:35
SPEAKER_00: As investors, we're always on the hunt for companies that think in decades.
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SPEAKER_00: We'll be honest, they're not perfect, they make mistakes, but they've built repeatable operating systems that give them the time and structure to learn from them without falling apart.
9:53
SPEAKER_00: And that's the kind of business we like to own.
9:56
SPEAKER_00: Of course, there's so much more to learn from LVMH, and to see and hear what we think of the company, its pros and cons, you can listen to our LVMH deep dive right here for free on your favorite podcasting platform.
10:11
SPEAKER_00: That's it for today.
10:12
SPEAKER_00: Stay curious, keep learning, and happy investing.