Jimmy Ling and the Advent of Software Conglomerates
or how industrial conglomerates brought their model to vertical software
Jimmy Ling and the Heyday of the Industrials
My guess is you don’t know who James “Jimmy” Ling is. I sure didn’t before I started to dive into some business history for this piece.
And while Jimmy Ling may have faded out of the public conscience, his life is straight out of a Michael Lewis piece.
A high school dropout from small-town Oklahoma, he emerged in Dallas with the desire and gumption to make something out of himself. And it didn’t take long for him to do just that. An electrician by trade, he soon founded an electrical contracting firm, took it public, and went door to door selling shares. Notoriously, he went to the Texas State Fair, set up a booth, and started selling shares there too.
If this screams securities fraud, nowadays it would be, but in the 1950s, there was no notion of general solicitation protections. And so Ling stood near Big Tex, selling his dream.
And he was pretty good at it, raising about $738,000. By all accounts, Jimmy had an electric personality, the sort of reality distortion field that Jobs became legendary for.
Jimmy Ling had presence. He was there, in the room, and everyone knew it. Famous people like movie stars, presidents, even some striking stranger on the street have a certain bearing, and Ling had that. I liked Ling, admired him at once. He shook my hand and welcomed me to the company. When he was gone, everyone in the office felt he had come down from the heights just to see them.
That first encounter taught me a great deal about Ling’s success. Even when you were with him, he never stood still. His mind raced from one idea to the next. His presence drew others to him. When you met him, you wanted to invest in his new, brilliant project, to be a part of his success.1
So with capital in hand and the sort of aura that you wanted to believe in, that was enough for Ling to get his start for his next act: building one of the largest industrial conglomerates the world has ever seen.2
But let’s back up. Following World War II, American manufacturing was sort of a hot mess. There were plenty of medium sized manufacturers that simply had no ambition or idea how to scale. These companies were growing fairly slowly (if at all), averse to risk, and unsure what to do with their cash flow.
And so a crop of enterprising individuals started to build conglomerates made up of these businesses and build behemoths.
But the industrial conglomerates weren’t simply looking to buy up a group of businesses that essentially served the same markets. At least in Ling’s case, the common thread between all his acquisitions was that there was no common thread.
Jimmy Ling was an innovator of the conglomerate arts, and he thought diversification was the key. The basic theory was that the more unalike one industrial in the portfolio was to another, the less risk the overall conglomerate encountered from any particular end market. Slow down in meat packing? Well in theory the conglomerate should have enough cash flow from other industries to sufficiently derisk performance.
And soon Ling figured out that with less risk and more cash flow from uncorrelated sources would come a higher stock price; that stock price should in theory be greater than the sum of the stock prices of the companies within the conglomerate if they traded individually.3
And so after his spree of acquisitions, Ling-Temco-Vought (later LTV) was born.
Ling was so successful that “you could hardly rent a car, buy a tennis racket, crank up your stereo speakers, or stock up on cans of corned beef hash without putting money into [his pockets].”4
Soon journalists started to write headlines like the one below.
Hyperbolic? Maybe. But with a portfolio of companies spanning the entire industrial landscape, it seemed like theory could become practice.
Part of Ling’s genius was his willingness to experiment far outside the typical financial playbook.
“For example, Ling gained control of Wilson & Co. in early January 1967. Wilson sold meat, but it was clear to Ling there was more to this organization than sausage and steak. The company produced byproducts such as leather for footballs and pharmaceuticals from animal organs. Soon there were three companies: Wilson & Co., Wilson Sporting Goods and Wilson Pharmaceuticals. Not long after the three companies went public, LTV’s piece of the action added up to a great deal more than its initial investment.”5
And while this sort of financial engineering, risk-taking, and conglomerate strategy mystified large parts of Wall Street, soon Ling’s conglomerate was the 14th largest company in the country. And that was plenty big enough for the Justice Department, with staffers already looking for a way to send a message to the industrial conglomerates.
Jimmy’s acquisition of Jones & Laughlin Steel Company turned out to be his undoing. The company wasn’t worth the price, but Jimmy might have still survived if not for an antitrust investigation around the acquisition and a palace revolt amongst his motley crew. Ling flamed out.
Forced to resign in 1970, Ling never really found his footing again. He pretty much lost all his wealth, as LTV quickly collapsed.6
So why are we talking about Jimmy? Well there’s reason to believe we are entering a new era of conglomeration in vertical software (and software generally) with certain players having fun links to Jimmy. And more than that, I think it helps set the stage for the lessons modern conglomerates have learned from the heyday.
Perhaps it’s helpful to take a brief look at why industrial conglomerates fell out of vogue.
The Diversification Discount - A bunch of smart people did the math and found that most conglomerates traded at about a 10% discount vs. if their individual companies were traded separately.
There’s a lot of theories around this. The most popular tends to orient around the idea that management teams often become bad stewards of capital and allocate into bad investments which tend to offset the value of the conglomerate’s stronger companies.7
Investors are capable capital allocators - The theory here goes that there’s no reason a conglomerate should manage your investment decisions. Investors are capable of assembling their own portfolio and don’t need a conglomerate to do so.8
In stark contrast, cross-reference Mark Leonard’s pivot away from a dividend in 2021.9
Prima facie, these are reasonable explanations. However industrial conglomerates might just be particularly bad structurally for conglomeration. These are asset-intense businesses. That makes recessionary conditions extremely hard to navigate due to fixed costs and one bad purchase of a middling steel company can ruin you.
Conglomerates haven’t gone out of vogue altogether. The CPG industry is run by conglomerates, the heights of fashion are run by the Louis Vuitton conglomerate. Especially internationally, the chaebols in Korea and and Indian conglomerates are often massive. And of course, in practice, many of the most valuable tech giants function like conglomerates (although heavily constrained by antitrust at this point).
So perhaps, the fall of industrial conglomerates had less to do with the overall business model and more to do with unique macroeconomic factors in the 70s combined with asset-intense business models.
And in fact, that tends to be the realization that certain industrial conglomerates have come to.
In the firesale that followed Ling’s downfall, an enterprising venture capitalist looking for his next big swing bought 3 defense contractors from LTV. Jimmy Ling and Joseph McKinney, the acquirer, were well-acquainted with each other. After all, they had been partners in a VC firm, Electro-Science Capital.10 And so Jimmy asked McKinney to take on the companies, McKinney did, and Saturn was born. Operating with the same industrial conglomerate model, it didn't take long for Saturn to make more acquisitions. McKinney soon acquired Tyler Pipes which became a massive success. He soon changed Saturn's name and Tyler Technologies was born.
The history between Tyler’s inception and its acquisition of its first software product doesn’t matter too much. They were an industrial conglomerate. It’s only after 1998 that it gets interesting. 1998 is the year that Tyler acquired their first suite of software products.
It’s hard to get a grasp on why Tyler decided to make this move.
And after that move, Tyler began to go all in and somewhat contrary to their conglomerate roots, they chose one specific vertical software market: the public sector.
On its face, the public sector does seem monolithic, but given how the American government is structured, it turned out that there’s plenty of room for diversification.
Focusing first on the most local of governments: municipalities, Tyler began an acquisition spree spanning software for city departments, schools, tax appraisal, and more. And overtime, they emerged as the market leader.
Tyler’s DNA was birthed out of accretive acquisitions and it’s a muscle they’ve continued to exercise to this day to become essentially a vertical conglomerate in a highly fragmented market. It’s beyond the scope of this piece to dive deeper into either Tyler’s history or its full path to the modern day.11 What is fascinating is the very idea that an organization with roots in the industrial conglomerate era decided that vertical software was the perfect place to exercise the model.
With that said, there’s two important trends that the 2023 version of Tyler is focused on.
Expansion into state governments
Following the acquisition of NIC - the company’s largest acquisition at a price tag of $2.3B - Tyler is expanding into state governments with software and a payments processor. There’s large transactional revenue that flows throughout states and Tyler is accruing the fees.
This marks a new market for Tyler as they have been far more concentrated at the local government level
The Cloud Transition
Currently, 75% of Tyler’s customers are on-premise. Tyler has focused heavily on shoring up their cloud offerings and is looking to convert their customers to cloud solutions over the next decade.
They’ve invested heavily into R&D as a result.
So while Ling’s closest tie to the modern day is pretty opinionated in the market they are tackling, it’s partly because of how fragmented and diverse the market they operate in is. Plenty of characteristics of the conglomerate model are still here. Tyler is all about cash flow. And with that cash flow, their strength in accretive acquisitions, and the opportunities in other markets, there’s a solid chance that Tyler will over time look to diversify across verticals.
But Tyler’s not the only industrial conglomerate that has pivoted their entire model to software. And Roper is even more explicit about their goals.
Roper got its start as an appliance manufacturer (their washing machines are still in existence), missed the heyday of the industrial conglomerates, went public in the late 1980s, and then began to pursue a traditional industrial conglomerate strategy. And while they too were heavily focused on industrials, over the course of the 2000s, Roper began to dabble in enterprise software, with an emphasis on vertical software. And soon the dabbling became a foundational strategy. With the strategic change, they slowly began to sell off industrial holdings, until finally in mid 2022, they went all in by selling nearly their entire industrial portfolio. With cash in hand, Roper’s next acquisition came 4 months later with the purchase of Frontline Education from Vista Equity.
This is Roper’s preferred playbook to date, and one they see as very different than Constellation. Constellation has been heavily focused on inorganic growth from smaller founder-led companies. They’ve pursued the long tail of vertical businesses, often only doing 1-10m in EBIDTA. Correspondingly, that has also meant Constellation has invested in a massive acquisition engine and integration efforts in order to capture this long tail. You can read more here. In contrast, Roper prefers to pursue larger acquisitions from the private equity markets.
Functionally, Roper views private equity as a sort of finishing school that prepares software companies to be cash-flowing machines yet with prospects for organic growth. Roper is then happy to acquire, spit off free cash flow, grow the company at a decent rate, and then lever up for the next acquisition.
It’s a unique spot that they’ve carved out, and one that has not seen much significant competition thus far. In theory, however, it seems to be the model that most software conglomerates might end up following.
The Age of Software Conglomerates
There’s a dichotomy between what software brings and how it’s valued.
Software at its best brings innovation to industries. It rewrites the information layer for an industry or industries and generates second-order insights for its users. But innovations aren’t valued for innovation’s sake. They’re valued upon their ability to produce cash flows because of the business model. As a result, we’ve seen a dramatic correction for software companies in the public markets who are deemed to be spending too much of that cash flow to grow.
So the talk of the town is that private equity is going to scoop up a lot of these companies, rightsize them, and then cash out on an IPO.
But what if we are entering an era where a large share of sub-10B dollar companies end up as part of a software conglomerate?12 And instead of emerging as independent public companies, they emerge as gems within a broader conglomerate?
What if the overall road to growth becomes a lot trickier, larger tech companies don’t know what to do with their cash flow, and the landscape begins to favor conglomerate type models?
Roper, Tyler, and Constellation (albeit with real differences) have shown it can work. Their investors approve of their capital allocation strategies, they can get more favorable rates in the debt markets because of the diversification, and there’s no shortage of tech companies with great products and business models. Most importantly, these conglomerates have built muscle in delivering value to shareholders through accretive acquisitions.
Roper in particular seem to be delighted to bring this sort of model to the technology sector.
And we're just excited to sort of introduce, if you will, or bring to the software world, the technology world, what's lived in industrial forever, which is this compounding mindset. This dual threaded organic growth and acquisition strategy, it's a combination of the two that makes us special. And we're just excited to tell that story.13
And if we zoom out for a second, there’s plenty of reasons the model makes sense.
Software companies can spit off enormous cash flow in contrast to industrials without as much fixed capital.14
High growth past a certain revenue point is really hard, especially in niche markets. Conglomerates need some growth, but not high growth.
A conglomerate model insulates any specific company within the portfolio from direct criticism.15
vSaaS companies provide natural diversification in line with historic conglomerate’s priorities.
Conglomerates will have certain advantages in determining how to properly allocate cash flow stemming from management teams heavily focused on accretive value through inorganic growth.
Customers might favor interfacing with a trusted conglomerate - especially when a conglomerate seeks to comprise a whole stack like data.16
Software conglomerates will likely trade at a premium vs. their basket of individual companies. Constellation certainly is.17
And one more from BucknSF: The software industry is maturing and it’s somewhat inevitable in this next phase that we take lessons from the industrials around efficiency and accretive acquisitions.
Posit for a moment that the current Fed environment holds and we don’t go back to zero percent interest rates. Growth becomes hard, 10 billion dollar exits become rare if not mythical, and yet plenty of companies have more cash than they know what to do with.18
Mission-aligned conglomerates might offer the benefits of the public markets for vSaaS companies without their deficiencies. Companies get liquidity, early teams get exits, and the public gets access.19 You can already view a lot of Constellation’s current strategy as rewriting certain aspects of Jimmy Ling’s playbook for software.20
Ling comes for Software
As this comes to pass, and especially if more conglomerates emerge, it will have huge ramifications on the vertical SaaS market. Some of those I will leave to the imagination, but given how incredible vSaaS businesses are and conglomerate prioritization of vertical software, I think you can sort of sketch out a market where vertical SaaS exits are more common than horizontal ones, private equity takes plenty of bets on public vSaaS companies that have encountered slowing growth, and conglomerates purchase more of these companies from private equity.
Conglomerates then act as permanent holdcos and take a sense of pride from the returns on cash that these right-sized businesses can generate and the diversification they can build from playing in a mix of vertical markets.
It’s probable that new conglomerates will emerge. Plenty of these might begin as single companies who then decide to pursue this strategy relatively early. After all, every industrial conglomerate was at one point a solitary company which saw the opportunity to diversify. You could imagine new conglomerates emerging with a mandate and blessing from their early investors to pursue opportunities in other verticals.
All of this could lead to a paradigm shift throughout software and fintech: either go public for 10B+, or you naturally end up in a conglomerate, probably of your peers.
These conglomerates could take different approaches, taking advantage of different business models innate to different technologies: the data conglomerate, the vertical fintech conglomerate, the iPaaS conglomerate. Or more likely, they could simply pursue diversification across both business models and verticals served.
The financing ecosystem could reorient towards this thesis quite easily with late growth stage investors getting more active in forming and ushering in conglomerates and becoming more akin to kingmakers - taking active stances on the proper exit paths for their portfolio and making the appropriate introductions at the right time.
A more speculative bet? SPACs could quite easily reemerge as ready vessels for new conglomerates with dedicated management teams and theses on how to blend product innovation with capital discipline.
Would this change anything at the earliest stages of investing? I don’t think so. In fact, it could be a propellant for a new generation of software companies with a path to get to a 500-750m valuation but not an easy path beyond.
Software conglomerates at this point are proven as viable and have a solid claim on a maturing sectors next act.
Or as Jimmy once said in 2000 when asked if conglomerates were dead.
“No, they’re not dead,” Ling insists. “Every day there’s a form of conglomeration, all these dot-dot companies spinning out more dot-dot companies spinning out yet another. As long as there are values, perceived or imagined, you’ll have people trying to cash in on those values.” What does he think of those values today? “That end of it, I don’t know,” he admits. “But I do know that there are values in what we’re doing.”21
So bring on the conglomerates. And don’t forget Jimmy. He would have loved what’s coming in the next software era.
Ling was also eminently quotable:
Don’t tell me how hard you work, tell me how much you get done.
If this quote reminds you of Elon’s now (in)famous, “what did you get done this week?”’ you’re not alone.
This is a highly contested theory.
I really have no idea why there isn’t a Jimmy Ling biopic. It’s the perfect mix of intrigue, Wall Street defiance, Texas swagger, hubris, and tragedy that deserves to be on the Big Screen.
This is the vice that LTV ran into.
The irony here is the reliance on index funds for a large amount of investors. Investors often don’t want to be capital allocators.
One of our directors has been calling me irresponsible for years. His thesis goes like this: CSI can invest capital more effectively than the vast majority of CSI's shareholders, hence we should stop paying dividends and invest all of the cash that we produce, even if it means lowering our hurdle rates…
I have stopped arguing. I have converted, and with the fervour of the newly converted, I am busy demonstrating my new-found faith.
I can’t find anything else out about this. If you know anything about Electro-Science, I would love to learn and connect.
Rational Reflections had a more extensive breakdown here.
Fascinating enough (and also discovered through RR), Charlie Munger has been at work trying to build a competitor to Tyler through his company, Daily Journal Corporation.
From the 2022 Annual Meeting:
Becky Quick: In the annual report, you noted that the prospects in software now seem especially interesting, would you care to expound on that thought?
Charlie Munger: Well, I’m glad to. What’s interesting is that the courts of the world have been in the Stone Age, and there’s no reason where lawyers should go down through heavy traffic and wait for some little motion, it should all be done on Zoom and so forth. And the filing should be done electronically… What there is a huge market for the automation of the courts, and it’s early. That’s the good news. It’s a big market and the bad news is it’s a slow damn tough way to grind ahead in software because it’s very bureaucratic…RFP, Government bodies. It’s a huge market, and it’s intrinsically going to be very slow to get done. That’s the good news and bad news, we have a huge market and it’s going to be slow and bureaucratic. There isn’t any doubt about what’s going to happen, the courts are going to get more efficient and get with the modern world. And also the district attorney’s offices and the probation offices.
I assume that many companies do get rightsized in private equity.
Roper Technologies, Inc. Presents at The Raymond James 2022 Technology Investors Conference
Roper’s core business metric CRI, tells the story here. CRI derives from the cash return as a percentage of gross investments. Investments includes equipment, plants, and all sorts of fixed costs to keep the business producing cash flow. In software, that is significantly lower than industrials. Hence the full pivot towards software. In vertical Saas, where net churn rate is even lower, returns look excellent.
Something that has been a huge pain in the public markets, even for great teams and products.
Funny enough, Benn Stancil had a similar realization a couple weeks back, writing about data companies.
“As the data industry settles, I believe there could be—and probably should be—a couple similar conglomerates that focus on data services. By bringing various pieces of the stack together under a single roof, these businesses could sand down the rough edges between an ETL product and the observability service that’s supposed to monitor it, or a visualization tool and the data discovery platform that catalogs it. Permissions and access controls could be managed centrally and directly. Charges could be rolled up into a single unified bill. Metadata standards could be mandated, not negotiated. And if customers wanted to use a different vendor for a particular piece of the stack, no problem—it won’t be quite as seamless as staying in the family, but won’t be any worse than the experience today.”
Would love to provide some charts around this and test this aspect more. Alas, time fails.
Thiel once quipped to Eric Schmidt that tech companies can’t pay out dividends. The minute you pay out a dividend, “you’re admitting you’re no longer a tech company.” If tech companies can’t pay out dividends, can’t use cash flow to grow their core business, what do you do with that money? Stock buybacks and accretive acquisitions are the name of the game. It’s also what plenty of activist investors are trying to accomplish, with Elliott taking a stake in Salesforce this past week. And if 40B dollar companies aren’t great at it, what are companies in the 2-5B dollar range are capable of?
And the public might get access to companies earlier in their lifecycle with corresponding upside.
Constellation has been on an acquisition and spinout spree.