248  Analyzing Performance accounting policies. Strip out any distortions created by these effects to arrive at a better forecast of organic revenue growth. Exhibit 12.7 demonstrates how misleading raw year-to-year revenue growth figures can be. Compass (based in the United Kingdom) and Sodexo (based in France) are global providers of canteen services in businesses, health systems, schools, and sporting venues. As shown in the bottom line of the ex- hibit for 2017, total revenues at Compass grew by 15.1 percent, and revenues at Sodexo grew by just 2.2 percent. The difference in growth rates appears dramatic but is driven primarily by changes in currency values (pounds ster- ling versus euros), not by long-term stable organic revenue growth. When we strip out these and other distortions, we see that like-for-like organic rev- enue growth at Compass (4.0 percent) still exceeded Sodexo’s revenue growth (1.9 percent), but by a much smaller amount. In general, for large multinationals, swings in currency values and changes in corporate portfolios can make historical revenue growth extremely volatile, so benchmarking is difficult. At Compass, reported revenue growth fell from a high of 15.1 percent in 2017 to just 1.8 percent in 2018. This stands in stark contrast to the company’s relatively stable organic revenue growth: between 4.0 and 5.5 percent over the same time period. The next three sections discuss in detail each of the major sources of distor- tions— changes in currency values, mergers and acquisitions, and changes in accounting policies. For each, we consider its effect on performance measure- ment, forecasting, and, ultimately, valuation. Currency Effects Multinational companies conduct business in many currencies. At the end of each reporting period, these revenues are converted to the home currency of the reporting company. If foreign currencies are rising in value relative to the EXHIBIT 12.7  Compass and Sodexo: Revenue Growth Analysis % Compass Sodexo 2016 2017 2018 2016 2017 2018 Persistent revenue 5.0 4.0 5.5 2.0 2.5 2.0 Rugby World Cup – – – 0.5 (0.6) – Organic revenue growth 5.0 4.0 5.5 2.5 1.9 2.0 Currency effects 5.4 11.3 (4.6) (0.4) (0.8) (5.9) 53-week year in United States – – – – 0.7 (0.4) Acquisitions and divestitures 1.1 (0.2) 0.9 0.1 0.4 2.9 Reported revenue growth 11.5 15.1 1.8 2.2 2.2 (1.4) Analyzing Revenue Growth  249 company’s home currency, this translation at better rates will lead to higher revenue numbers. Thus, a rise in revenue may not reflect increased pricing power or greater quantities sold, but simply depreciation in the company’s home currency. Compass and Sodexo are two companies exposed to foreign currency. The companies have similar geographic mixes, with nearly half of each company’s revenues coming from North America. Since each company translates U.S. dollars into a different currency for its consolidated financial statements, how- ever, exchange rates will affect each company quite differently. Compass translates U.S. dollars from its North American business into pounds. Given the weakening of the pound against the U.S. dollar ($1.51 per pound in 2015 versus $1.30 per pound by 2017), Compass reported an in- crease in revenues of 5.4 percent in 2016 and 11.3 percent in 2017 attributable to the weakening pound, shown as “currency effects” in Exhibit 12.7. For So- dexo, exchange rates had the opposite effect. As the euro strengthened slightly against the dollar, Sodexo translated revenue from North America into fewer euros, leading to a 0.4 percent drop in euro-denominated revenues in 2016 and a 0.8 percent drop in 2017. Note how movements that helped Compass in 2016 and 2017 reversed themselves in 2018. Failing to acknowledge these currency movements can lead to a critical misunderstanding of a global com- pany’s ability to grow organically. Mergers and Acquisitions Growth through acquisition may have very different effects on value creation than internal growth does because of the sizable premiums a company must pay to acquire another company. Therefore, it is important to understand how companies have been generating historical revenue growth: through organic means or through acquisition. Many large companies provide data tables such as the ones for Com- pass and Sodexo in Exhibit 12.7. Without voluntary disclosure, stripping the effect of acquisitions from reported revenues can be difficult. Unless an acquisition is deemed material by the company’s accountants, company filings do not need to detail or even report the acquisition. For larger acqui- sitions, a company will report pro forma statements that recast historical financials as though the acquisition were completed at the beginning of the fiscal year. Organic revenue growth, then, should be calculated using the pro forma revenue numbers.3 If the target company publicly reports 3 For example, Sodexo purchased Centerplate in November 2017. Since 2018 includes a full year of rev- enue from the Centerplate acquisition and 2017 does not, the company’s consolidated revenue cannot be compared with the prior year’s revenue without adjustment.