Roper

"Jellison wanted to focus explicitly on high-margin, high cash flow assets as far away from the oil and gas industry as possible. He wanted asset-light businesses with cash flow that increased over time. This involved substantially higher levels of debt leverage in the process, all of which required approval from Roper’s risk-averse board."

"At Roper, it’s the simple mathematical realities that matter: rising cash flow, improving already high gross margins, earning a rising return on assets, and gravitating new investment toward better businesses. Rising returns on rising cash flow levels is the holy grail of compounding. It’s not complex, but it requires patience for sure—patience rewarded with tremendous value creation."

"Jellison saw it more simply, starting with the basic fundamentals of the software sales cycle. Contracts were typically paid up front with the cash often received before the revenue was even booked, such as in a subscription model. Deferred revenue meant that Jellison could run his company on zero or negative working capital. That entire concept made him almost giddy. There were no factories to invest in, and there was very limited cyclicality to worry about. A large installed base made it harder to get disrupted, at least quickly. And most of these companies weren’t all that well run, meaning Roper could help them to improve operations—in the sales and marketing organization, for example. Jellison could take that 5 percent unit growth, and through operational improvement, he could translate it into nearly 10 percent profit growth. He then could utilize cash to purchase similar assets that would add another 5 to 10 percent to the top line, translating over time to 15 to 20 percent annualized profit growth. He did this without using equity and maintaining investment-grade debt."

"Traditional software companies, like Oracle or Microsoft, generally favored internal new product investment. When they did do acquisitions, they wanted a high-growth profile—certainly above 10 percent, and rarely near the 5 percent ballpark that Roper was more than happy to take. Jellison found the biggest mispricings in less sexy, slower, but still solid growers. These were usually software companies in highly niche markets."