Internal versus External growth: impact on operational and ... - CEREG

Therefore, assuming that all the assets owned by the firm grow at the same rate, the internal
<strong>growth</strong> rate Gi(t) solves the following equation :
TA t = [1 + Gi(t)]TA t-1 + [1+ Gi(t)] τ ta (1)
Once both Ga(t) and Gi(t) are computed, we can compute the external <strong>growth</strong> rate Gx(t) for
each company at any given year :
Gx(t) = Ga(t) – Gi(t) (2)
Extending this framework to the case of several combinations and divestments in a year is
straightforward:
TA t = [1+Gi(t)] TA t-1 + ∑ [1+Gi(t)] τ j ta j - ∑ [1+Gi(t)] τ k ta k (3)
with j, the number of mergers and acquisitions at a given year t, and k, the number of
divestments of the given year.
In addition, the accounting methods used to record the business combination (pooling of
interests or purchase method 7 ), the means of payment (cash, stock, debt or a mix), the
percentage of control of the target, and the price paid can significantly influence the data and
introduce biases in our computations. Therefore, we have to adjust the total assets in our
formulas for all the possible cases.
Let’s first take a look at the two different types of accounting methods: the pooling method
and the purchase method. The pooling method presumes that two companies merge as equal,
resulting with either the creation of a new company, or with one company becoming part of
the other. Therefore, both previous entities retain their operating activities and identities.
Moreover, companies that are willing to merge under the pooling method have to meet 12
criteria from the SEC (including similar size and type criteria). No news assets or liabilities
are created by the combination, and the values for the assets and liabilities that are carried
7 After the issuance of FASB Statement No. 141 in July 2001, all business combinations must be accounted for
using the purchase method. However, both methods coexisted before the fiscal year 2002.
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