Constellation is Constellation Software. An earlier version of this article misidentified it as Constellation Brands.
My recent column describing the “perfect company” elicited several nominees from readers. They’re worth sharing and may even provide the basis for constructing a portfolio.
As a recap, a colleague once defined the perfect company as requiring no incremental capital, yielding functionally infinite returns, and maintaining a long-term view. The perfect company’s leader must excel at allocating capital, chiefly through serial acquisitions of businesses thereafter managed in a decentralized structure based on trust.
Acknowledging that such companies are rare, readers suggested numerous examples. These 10, listed below in alphabetical order, were mentioned multiple times:
2. Alphabet (Google)
3. Berkshire Hathaway
4. Constellation Software
6. Fairfax Financial Holdings
7. Illinois Tool Works
8. Johnson & Johnson
10. Roper Technologies
These companies operate in industries generally requiring zero or modest incremental capital — insurance, sciences, technology and software. That meets the first hurdle.
Their leadership is strong, often iconic, and certainly long-term. Berkshire’s Warren Buffett, Constellation’s Mark Leonard, and Fairfax’s Prem Watsa have personified their companies for decades, and all developed a deep bench of like-minded managers. A succession of impressive leaders has run all the others, such as the Rales brothers at Danaher and the Markel family at their eponymous company.
Acquisition discipline is evidenced by high returns on capital deployed, the companies’ opportunistic character, and their relative obscurity. As for the latter, only a few of the thousands of acquisitions made by these 10 companies are marquee names on the order of Adobe’s Photoshop, Alphabet’s YouTube, or Berkshire’s Dairy Queen. Most people haven’t heard of the majority of the businesses these companies have acquired. ISCAR, Pall, Quipp, Vertafore anyone?
Acquisition frequency and scale vary. Constellation, for example, has made hundreds of small acquisitions while Illinois Tool Works has made perhaps 1,000. Adobe, Danaher, Fairfax, and Markel have made dozens or scores of purchases, some of considerable size. The others are all over the map in number and sizes. One thing these investors have in common is that they wait for their pitch.
All of these companies are organized along decentralized lines. Headquarters delegates substantial autonomy to the heads of the various businesses. Trust permeates their cultures.
The data back up the impressions. For instance, these companies repeatedly lead the pack in rankings of attributes of the perfect company, such as capital allocation prowess and decentralized trust-based cultures.
Not coincidentally, all 10 companies rank high in attracting long-term focused (“quality”) shareholders. They also rank high in the caliber of their shareholder communications — a logical add-on of the perfect company from the shareholders’ viewpoint.
In short, readers have helpfully identified “perfect companies” in the sense my colleague described. Whether these companies are perfect investments depends on their prevailing stock price. But they certainly warrant a close look.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. Cunningham owns shares of Berkshire Hathaway, Constellation Brands and Markel. He is a director and vice-chairman of Constellation Brands. For updates on Cunningham’s research about quality shareholders, sign up here.