# Does Organic Growth Matter ## It is the receipt Organic growth proves the acquired companies keep developing under new ownership. Without it, the parent is a buyer of other people's earnings (REQ, Jul 2025, p.101). > [!quote] Niklas Stenberg, CEO of Addtech > Doing acquisitions is something that many can do, but achieving organic growth is proof that you do something that develops companies. Over time I think this is an important way to evaluate if the model is successful. Bo Annvik of Indutrade adds the second-order arguments: organic growth is a receipt that you are credible and competitive; without it a company stagnates and cannot recruit the mix of experienced and young talent it needs; and it **de-risks the strategy** by reducing reliance on the acquisition side. Nico Delvaux of Assa Abloy: one extra point of sustainable organic growth "is the difference between a good company and a great company." Compensation follows: Lagercrantz includes an organic-growth bonus; Lifco's group and subsidiary goal is that **organic EBITA growth exceeds GDP growth** in the relevant geography over a cycle; Topicus bases its corporate bonus on ROIC and net revenue growth; Assa Abloy links variable cash pay to EPS, EBIT, cash flow and organic growth. ## The case study: Lagercrantz vs OEM Two Swedish companies at almost identical starting points in 2002 — Lagercrantz SEK 1,463m sales / SEK 27m EBIT (2% margin); OEM SEK 1,534m / SEK 40m (3%) — that then chose opposite growth engines (p.106–110). | | Lagercrantz | OEM | | --- | --- | --- | | Sales CAGR since 2002 | 8.6% | 6.0% | | EBIT CAGR since 2002 | **20.3%** | 15.7% | | Average organic growth since 2005 | 2% | **5%** | | Share of growth that was organic | ~25% | ~60% | | M&A as % of funds from operations | **76%** | 11% | | Cash returned to shareholders | ~33% of OCF | ~50% of OCF | | Average deal size | SEK ~50m | SEK 10–20m | | Total return 2002→2023 | **10,000%** | 5,000% | (OMX Stockholm All-Share returned ~400% over the same window — *both* massively outperformed.) They were valued on par on EV/EBIT until **2015**, when the market re-rated Lagercrantz. Margins developed similarly; the difference was that one company kept redeploying and the other returned the cash. > [!tip] The conclusion REQ actually draws > Organic growth is essential — **especially relative to peers**. A company showing zero or negative organic growth while its peers grow will have the market question its internal dynamics, and the valuation gap follows. But superior returns as an acquisition-driven compounder still require a sustained acquisition engine. The market often doesn't distinguish acquired from organic margin expansion; what it rewards is **stable or increasing** margins (p.111, p.113). ## What long-run growth is actually made of BCG and Morgan Stanley, on S&P 500 top-quartile performers 1990–2009: over **1 year**, multiple expansion is the biggest driver of total return (46%); over **10 years**, revenue growth alone explains 74%, and with margin expansion around 90% (p.85). Sales growth is the driver of EPS, and EPS is the driver of the share price — REQ finds R² of 0.86 between EPS CAGR and TSR for Nordic compounders 2007–2023 (p.87). Assa Abloy's EPS and TSR CAGR converged around 2003 — nine years after its 1994 IPO. In the short run there is no relationship; in the long run the return *is* the EPS growth (p.89). ## Why it matters Organic growth is the single best available proxy for whether decentralisation is working. It is also the number companies quietly stop disclosing when it turns — see [[Red Flags in Serial Acquirers]]. ## Related - [[Acquisition-Driven Compounders MOC]] - [[The Dual Engines of Growth]] - [[Red Flags in Serial Acquirers]] - [[Valuing a Compounder]]