Question

PaperPro had previously acquired PaperExpo, which independently generates $800 million per year in revenues, with no material growth. The consolidated revenues for PaperPro (post-acquisition) are $1.5 billion in year 1, $1.8 billion in year 2 (the year of the acquisition), and $2.5 billion in year 3. If PaperPro closed the acquisition of PaperExpo on October 1 of year 2, what is the apples-to-apples organic growth for PaperPro in year 2 and year 3? How does this differ from reported revenue growth? Assume PaperExpo’s revenues are consolidated into PaperPro’s revenues only after the acquisition close and that the fiscal year closes for both companies on December 31 of each year.

Answer 1

An acquisition is the purchase of all of another company’s assets or the purchase of a controlling interest in the acquiree’s outstanding voting stock. It is a transaction in which the target company’s assets are purchased requires a vote of the target company’s shareholders. The purpose of mergers and acquisitions are basically to grab the synergistic value. A company while working alone generates profit on its own and when that company gets merged with another profitable company the value as well as the revenue gets increased. This is called a synergy effect.

Organic growth or the Internal growth is the rate of expansion through the company’s own operations whereas a company grows by mergers, acquisitions, or other form of takeovers, it is called Inorganic growth or the external growth.

From the question, PaperPro acquired PaperExpo which is already generating $800 million on its own.

For year 2, consolidated revenues were: $1.8 billion or $1800 million

PaperExpo’s stand-alone revenue is $800 million

PaperPro’s revenue: $1800 MN - $800 MN = $1000 MN

For year 3, consolidated revenues were: $2.5 billion or $2500 million

PaperExpo’s stand-alone revenue is $800 million

PaperPro’s revenue: $2500 MN - $800 MN = $1700 MN

Organic growth rate in revenues: ($1700 MN - $1000 MN) / $1000 MN = 70%

Reported revenue growth is the consolidated revenue growth which is expected to be seen from the financial statements itself. Whereas, organic growth is the company’s internal growth rate which is not reported elsewhere.