Director of Equity Research
Strategic Acquirer Focused
on Strong Management and Culture
Roper Technologies, Inc. (ROP) is a diversified operating
company focused on acquiring and operating good businesses that generate high
returns on investments. Our investment in Roper is the outcome of studying the
company for several years and acting when the combination of due diligence and
market opportunity finally crossed.
Great Operator, Good Businesses, In Niches
The history of Roper dates back to the early 20th century with the founding of the Geo. D. Roper Corporation, eventually assuming
the name of the Roper Pump Company. The modern version of Roper begins in 1981
when the company was reorganized into Roper Industries and began a series of
acquisitions that took the business into fluid handling, test and measurement,
and analytical equipment. Over time, Roper has transitioned away from
industrial, energy, and process industries to focus on software and other
With the appointment of Brian Jellison as CEO in 2001, Roper
entered into an era driven by a simple, yet effective, performance culture that
guided the company's strategy. Jellison's key emphasis was to acquire
cash-generative businesses, let them run as independent entities, and focus on
cash return on investment (CRI). The lynchpin expressed by Jellison's approach
is to only acquire businesses that can overcome these hurdles quickly. He
eschewed turn-around businesses, was always willing to walk away when the fit
was not right, and wasn't afraid to pay full price for the right company.
Jellison took this approach because he knew that the combination of a good
underlying business with a strong management team that embraced the CRI culture
would allow for expanded margins and more organic growth than what the acquisitions
had historically generated.
Sadly, Jellison passed away in 2018. He was replaced by
current CEO Neil Hunn who, despite the tough circumstances of his appointment,
has maintained Roper's strong track record and strategic discipline. With the recently
announced sales of three of its companies (as discussed below), Roper will
operate 44 separate businesses that mostly operate in small, distinct niches.
Roper's largest business generates approximately $800 million in annual
revenue, which is less than 20% of total sales.
Because of Roper's emphasis on good businesses with high CRI,
the company has gradually focused its acquisition activity on software
businesses and those with network/marketplace elements (at Weitz, we see
network/marketplace-oriented businesses as those that facilitate transactions
between buyers and sellers without taking much, if any, inventory risk). The
types of businesses Roper focuses on often require little investment capital
and typically have recurring, or predicable, transaction-related revenues. Even
when Roper acquires a more product-based business like the 2012 purchase of
medical equipment producer Verathon, there is often a razor/razorblade
characteristic (selling a product that requires a specific ongoing consumable),
high services content, or both.
Roper signaled that its emphasis on software and technology
was more permanent when its name changed to Roper Technologies in 2015. Its success
in acquiring software and network/marketplace-oriented companies allowed it to re-segment
operations in 2019 to provide more transparency to investors. Roper's four segments
are Application Software, Network Systems and Software, Measurement and
Analytical Solutions, and Process Technologies.
While Roper is an active acquirer, it has not typically
turned over its portfolio. We believe the company's recently announced sales, as
well as four others since 2015, represent a continued emphasis on higher-return
businesses and give Roper an opportunity to redeploy capital in acquisitions
with even more appealing characteristics. On a pro forma basis, presuming the completion
of the recently announced sales and prior to deploying the roughly $3 billion of
proceeds, the Application Software and Network Systems segments will represent
approximately 65% of revenues and 70% of Roper's EBITDA (earnings before
interest, taxes, depreciation, and amortization). Though we are not forecasting
any further divestitures, it wouldn't surprise us if the company eventually spins
off the Measurement and Process segments. While those businesses no longer “fit”
with the targets Roper evaluates today, they collectively have attractive
economics with EBITDA margins above 30% and little need for capital.
The Roper culture could be summarized as “think long term,
do better than last year, drive organic growth, provide complete transparency, and
hire over yourself.” These attributes are reinforced through institutional
structure and management principles. A defining characteristic of the company
is that it is unapologetically decentralized — there are fewer than 100 people
at Roper's Sarasota, Florida, headquarters. In an era of platforms and forecast
synergies baked into acquisition multiples, the company does not have common enterprise
resource planning (ERP), human relations, or other management systems. Over the
years, we have attended meetings with sell-side analysts and investors who
repeatedly ask management why they don't implement more centralized policies such
as purchasing, accounting, etc. Roper's management has been consistent in their
position that the benefits of such programs are outweighed by the downsides of
bureaucracy and less transparency at the operating company level.
While Roper encourages adoption of best practices, hosts
roundtables for the leaders of its businesses, and works to ensure good ideas
are broadly disseminated, it leaves all major decisions to the managers of the
operating companies. Roper's management team is not passive, however; the team
spends its time helping its managers develop strategic plans, identify and
recruit talent, and act as a resource for advice and accountability.
One of the unique elements of Roper's culture and
decentralized process is that it doesn't have a budgeting process for compensation
purposes. The mantra to its operating managers is to grow revenue and EBITDA
organically, and there is no cap on compensation. While every compensation
system has its flaws, the Roper team believes its approach encourages long-term
thinking and complete transparency. They believe their process enables them to
identify problems early, as a manager has fewer ways to game a budgeting or
compensation system that is not overly complex. Another interesting feature of
the Roper culture is that business unit leaders are not paid for results from
acquisitions — this allows these managers to spend all their time thinking
about and planning organic growth strategies.
An underappreciated element of Roper's longer-term strategy
has been its ability to identify for acquisition businesses with large share in
relatively small niches. In these areas, there is not often a large profit pool
to attract significant competition. And due to the relative lack of scale of a
standalone niche business, there can be fewer strategic buyers, making it
easier to acquire new businesses.
Another advantage is that Roper was early to identify the
divestiture of good businesses by the private equity (PE) sector. Of course,
Roper's focus on software and marketplace/network businesses means it is often
competing with PE firms for acquisitions, but it allows management to
understand the lifecycle of businesses owned by these firms. Because the Roper team
has often met with and performed due diligence on a company being acquired, it
is likely more familiar than the businesses than other interested parties may
be. This gives Roper the confidence that they understand the basis of a fair
price which, to outsiders, may look somewhat expensive.
Roper's long history of holding good businesses indefinitely
and letting its managers have considerable autonomy sets it up as an acquirer
of choice for good, sought-after businesses. One of the admirable
characteristics of Roper's approach to acquisitions is the consistent
application of its criteria. Though no business with as much acquisition
activity as Roper has a perfect track record, we don't believe the company has
deviated from its core focus of buying good businesses with high CRI potential,
and Roper has yet to purchase what we would consider a “turnaround.”
Niches, Culture, Acquisitions = High Quality and Long-Term
After performing due diligence on the company and its
various businesses over the course of several years, our team concluded that Roper's
strong operating units, excellent culture, and unique acquisition strategy add
up to a business that fits in well with our Quality at a Discount investing
approach. The company sits on the upper end of our quality score matrix — our
proprietary quality scoring system that accounts for competitive position,
return on invested capital (ROIC)/capital efficiency, reinvestment runway, cash
flow consistency, management team, and financial leverage. Our belief in Roper's
high-quality nature eventually culminated with the company's stock price
reaching a discount to our estimation of intrinsic value, creating an
opportunity for us to add it to several of our portfolios.
Past performance is not a guarantee of future results. All investments involve risks, including possible loss of principal.
As of 09/30/2021, Roper Technologies, Inc., constituted a portion of the net assets of Balanced Fund, Hickory Fund, Partners III Opportunity Fund, Partners Value Fund, and Value Fund as follows: 1.2%, 0.0%, 0.0%, 0.0%, 2.4%.
Holdings are subject to change and may not be representative of the Fund's current or future investments.
The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through the publication date, they are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.