4. Gulf Aviation generates $800 million in revenue per year, with no material gr

Question

4. Gulf Aviation generates $800 million in revenue per year, with no material
growth. The consolidated revenues for DefenseCo 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 DefenseCo closed the acquisition of Gulf Aviation on October 1 of
year 2, what is the apples-to-apples organic growth for DefenseCo in year
2 and year 3? How does organic growth differ from the growth in reported
revenues? Assume Gulf Aviation revenues are consolidated into DefenseCo
only after the acquisition close date and that the fiscal year closes for both
companies on December 31 of each year.

Explanation / Answer

Organic growth is growing while staying the same size. If you grow sales from $100 million in one year to $110 million the next year, you had organic growth of 10%. But if during that year the company bought another company which had sales of $10 million the previous year, then the increase in sales from $100 million to $110 million is growth by acquisition and there was no organic growth that year.

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