Benchmark Lester Electronics

The nature of electronics manufacturing and distribution in an increasingly "flat world" is one of strong competition, building business relationships and synergies, and also one of consolidation, as companies look to improve their horizontal capabilities. Increasing costs of transportation and distribution as well as global currency fluctuations particularly complicate business opportunities and threats. Valuations are further challenged by inflation and changing economies. Lester Electronics "is a consumer and master electronic master distributor, which markets its product across the Americas." (Scenario, University Of Phoenix, 2008) Bernard Lester formed an exclusive supply agreement with Shang-Wa Electronics CEO, John Lin, to sell Shang-Wa's capacitors throughout the US market. CEO John Lin is hoping to retire, and would like to see his company left in good hands; he has recently suggested he is open to growth opportunities so his company could meet the growing demand of his products. He is also hoping to close a deal with Lester on a new joint venture manufacturing facility in Europe.

Lester Electronics has an important decision to make regarding its future and needs to decide if they should acquire Shang-Wa Electronics or if they should sell the company to Avral Electronics, which is an electronic and component manufacturer based in Paris. Bernard Lester formed an exclusive supply agreement with Shang-Wa Electronics CEO, John Lin, to sell Shang-Wa's capacitors throughout the US market. John Lin has recently suggested he is open to growth opportunities and Transnational Electronics Corporation has expressed interest in acquiring Shang-Wa because they see the growth and demand for the specialty capacitors they produce. However, Lester Electronics would lose 43% of their revenue if the Shang-Wa business relationships were to end, and the future of the company would be in doubt.

The scenario is made more complex with the entry of Transnational Electronics Corporation (TEC), which is interested in acquiring Shang-wa, and Avral Electronics, S.A., which is interested in acquiring LEI. This paper benchmarks investments and mergers completed at eight companies in determining possible threats and opportunities for Bernard Lester to consider.

Overall analysis

Each of the eight companies benchmarked for their merger and other strategic investment activities has lessons that can be applied to Lester Electronics and the three other companies involved in the scenario. As with the companies in the scenario, IBM, EDS, Alltel, Sony, Compton Petroleum Corporation, Medco Health Solutions and Motorola, Inc. all share a need to consider mergers and acquisitions as a means of realizing wealth for their shareholders.

Proposed investment opportunities among the four electronics companies in the scenario involve foreign companies in related industries, similar to the first benchmarked company, EDS. Their goals are similar; to increase revenue, complement manufacturing with distribution and merge talents, and with additional pressure on John Lin of Shang-wa to seek a successor before he retires. Issues with both include a need to understand the Net Present Value (NPV) of a merger. Appropriately, neither EDS nor the four electronics companies are considering mergers for the "wrong" reasons as defined by Ross - for diversification or for earnings growth (Ross, Westerfield & Jaffe, 2005).

Similar to the second corporation, IBM, the business opportunities for Lester Electronics (LEI) provide for strategic benefits as well as revenue enhancement if they are successful in either a merger or joint venture with Shang-wa. A merger would add manufacturing to their capabilities (making it a horizontal acquisition) and a joint venture investment would increase their 11% European distribution and add manufacturing capacity. These "economies of vertical integration" (Ross, Westerfield, & Jaffe, 2005) would make coordination of closely related operating activities (manufacture and distribution) easier, and also provide for their complementary resources to best be leveraged. Another issue that is the same for both IBM and LEI is that both are acquiring foreign companies and paying with a weak dollar. This could be a challenge on top of the share premium that must be made to stockholders, as currency fluctuations could impact cash flows, impacting synergy and return on investment (Ross, Westerfield, & Jaffe, 2005). The key difference between IBM and the scenario companies is that its sheer size and cash allow it to make significant investments frequently and have a few misses, whereas for the smaller companies, the investments represent a much larger percentage of revenue and greater risk. They must ensure that the synergies are appropriate and that due diligence is sufficient to correctly value the merger and provide the strategic fit and operational efficiencies desired.

By determining the net present value of Shang-Wa, Lester Electronics will be able to determine if purchasing Shang-Wa is a sound financial move for the company. By comparing the value of the dollar today compared to the value of the dollar in the future Lester can calculate the future cash flow Shang-Wa would generate for them. "Net present value (NPV) is the present value of future cash flows minus the present value of the cost of the investment" (Ross, Westerfeild & Jaffe, 2005, p.10). By purchasing Shang-Wa, Lester Electronics could grow and sell their capacitors to a larger, more global customer base which would improve the company's revenue and expand their market. The growth would cause Lester Electronics to become an industry leader in electronic components, creating value for shareholders and Bernard Lester.

Lester Electronics needs to determine if they should acquire Shang-Wa Electronics or if they should sell their company to Avral Electronics. By determining the net present value of Shang-Wa, Lester Electronics will be able to determine if buying Shang-Wa is a sound financial move for the company. "Net present value (NPV) is the present value of future cash flows minus the present value of the cost of the investment" (Ross, Westerfeild & Jaffe, 2005, p.10). Lester Electronics needs to take into consideration working capital, which is "the difference between current assets and current liabilities" (Ross, Westerfeild & Jaffe, 2005, p.1) when making its decision on purchasing Shang-Wa. By acquiring the company, Lester Electronics will increase long-term debt and equity and decrease fixed assets, while net working capital will increase cash to the company, which in return will help maximize the shareholders' wealth.

Alltel and Lester Electronics share similarities in that they both want to continue to be successful