Financing Solution

Financing Solution

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Phoenix University

MBA/540

Dr. John Denigris

June 28, 2007

Financing Solution

Workshop 6

Situation

Lester Electronics is a consumer and industrial electronics parts master distributor. Lester was founded by Bernard Lester back in 1978 after entering into an exclusive distributor contract for the United States region with a small Korean manufacture of capacitors name Shang-wa. Lester Electronics went public in 1984 and is now traded on the NASDAQ; its revenues approximate $500 million a year despite that Lester has never marketed domestic-made parts outside of the United States. Furthermore, Lester markets its products to small and medium-size original equipment manufactures, repair facilities and small local distributors throughout the Americas and Europe. On the other hand, there is Shang-wa Electronics, a capacitor manufacture founded by John Lin back in 1969. In business agreement in 1978 Shag-wa granted, exclusive right to Lester to sell its capacitors for 65 years as long as the there is a minimum annual purchase of $1 million wholesale (Shang-wa is the primary source of supplier for Lester). For the past 35 years such agreement which must be signed annual has serve both companies well. Therefore, John and Bernard consider themselves friends as well as business partners. In fact, John has had the opportunity to seat with the LEI Board of Directors and had informally suggested that Shang-wa is open to growth opportunities that could position the company to meet growing demands (University of Phoenix, 2007).

Economy continues to grow and companies seek for global opportunities, Shang-wa CEO John Lin is approached during an International Electronic Show by David Anton CEO of Transactional Electronics. David expressed how Shang-wa strength and quality will benefit TEC. TEC is large manufacture and distributor of electronics components, which throughout mergers and acquisitions has finally developed enough resources to expand globally. Recently they have acquired another company and have enough resources to ask or to take rather quickly over Shang-wa; Therefore, if TEC were to acquire Shang-wa that would mean a loss of 43% percent of Lester's revenues over the next 5 years. On the other hand, Bernard Lester CEO of Lester Electronics was approached by Peter Zack from Silver Socks on behalf of one of his clients who has expressed interest in acquiring Lester (Avral Electronics, S,A). Avral is an electronic equipment and component manufacture company who owns facilities in Ireland, France and three Asian nations. In the past five years Avral has increase their annual revenues from $300 to $900 million, as result of such a good financial heath the company has enough reason to explore an electronics distributorship business in the United States (University of Phoenix, 2007).

As demand increases most companies are acting fast by increasing market share within their territory or expanding globally; that is the case with some of the companies, such as TEC and Avral. For others is a matter of joining venture or survival. In the case of Lester electronics and Shang-wa is now a matter of joining venture or merge in order to avoid being taken over by either of the companies mentioned.

Problem Statement

As a result of economy growth and being at the verge of being taken over, Lester and Shang-wa had decided to merge. In order to succeed many financial alternatives were evaluated. Base on the company's best interest, a mix of financials instruments such as issues of stocks and bonds was selected to finance the merger. However, Lester and Shang-wa needs to carefully re-evaluated the selected financial plan and mitigate any risk associated with it.

End-state goals

Lester and Shang-wa end-stated goal is to have a re-evaluated financial plan were the merger would be a success and allows the company to continue its developing and growth for future to come; A plan that balance the best interest of all stockholders as well as all the company internal employees. (Management in particular)

Financial Plan

Corporations usually plan to expand without having the funds to do so. Therefore, the need to raise capital is a requirement. As a method, corporations' issues securities, where some can be call long-term debts in order to raise the necessary cash for merger. Lester has decided to use a combination of common stocks and bonds to financing the project due to the high cost associated with just selecting a single financial instrument. Lester will issue around 24.8 billion dollars worth of stocks plus 225 million dollars worth of bonds which will provide the funds to pay an equal amount of 10% premium to all Shang-wa stockholders. A CRV that protects both companies will be in place along with a dividend policy that will continue to maximize wealth. Furthermore, a reasonable amount of stocks will be authorize and hold in order to balance company's control within internal existing management.

Financial Plan Alternatives

The following financing alternatives were carefully analyzed in order to insure that no other possible option was ignored. Cost and company control was the major factor for the decision presented above.

Alternative 1

Issues of common stocks enough to finance the whole merger follow by a reasonable percentage of authorize shares; which will be approve and reserve by the organization in order to keep a higher organizational control in house. There is no limit to the numbers of share that can be authorize (Ross, Westerfield, & Jordan, 2007, p. 385)

Alternative 2

Lester may Issue long term corporate debenture from a set of multiple major banks such as JP Morgan and Merry Lynch. Such debt will be issue at the lowest possible interest follow by the advantage of deducting some of the interest with the tax credit. Such debenture would be unsecured (Ross, Westerfield, & Jordan, 2007, p. 385)

Alternative 3

Lester may issue secured bonds of 1000.00 dollars with a par of 6% and obtained the tax advantage from the IRS. Such bonds will have the option to be purchase