Gap Analysis: Lester Electronics

Gap Analysis: Lester Electronics

Lester Electronics, Incorporated is a distributor of electronic parts to small and medium sized electronic manufacturers within the U.S. and Europe. Lester generates approximately $500 million in revenue per year. Lester Electronics has an exclusive distribution contract with a Korean capacitor manufacture, Shang-wa (University of Phoenix, 2008). This strategic partnership has allowed Lester Electronics to be a dominant market player in the United States. However, Lester has a very minor portion of the market in Europe and Asia. In order grow the business and secure the capacitor supply chain, Lester must evolve from the status quo business plan. Of the several strategic growth opportunities, such as buy Shang-wa Electronics, form a joint manufacturing venture with Shang-wa Electronics, or sell Lester Electronics to Avral Electronics, the Lester Board of Directors has chosen to merge Shang-wa Electronics. The merger will secure Shang-wa as a supplier which accounts for 43% of Lester's revenue and provide a market opportunity in Southeast Asia.

Lester now needs to evaluate fully the financing of these capital expenditures through some combination equity or debt in order to merge and grow the business. This business plan requires planning in order appropriately structure the financial backing that adds the greatest value and mitigates risk to the shareholders. Within the strategic merger plan, Lester needs to assess financing needs for wealth maximization, identify medium-term financing alternatives, and analyze long-term financing instruments in order for the merger to meet the end state goals.

Situation Analysis

Issue and Opportunity Identification

The capacitor market has been volatile over the last several years due to unprecedented technology advancements in the technology arena. In order to combat overseas competition and to maintain a competitive position in the United States marketplace, the Lester Board of Directors has approved a plan to merge with Shang-wa Electronics. This plan is intended to forge alliances with new customers, gain the loyalty of the current customers, and retain the alliance and supply from the current suppliers. Now, the Lester management team must come up with a financial implementation plan that maximizes shareholder wealth, identifies the most optimal medium-term financing alternatives, and analyzes long-term financing instruments in order for the merger to meet the end state goals.

Lester Electronics Board of Directors has recommended a strategic merger with Shang-wa Electronics. The Lester senior management team needs to find the best combination of financing options in order to align the firm's growth with maximizing shareholder value. Lester Electronics has the opportunity to merge with Shang-wa Electronics in order to secure market share, profitability, and product pipeline. Lester will need to choose an appropriate capital-structure decision in order to maximize the value of the firm and provide the most benefit to the stockholders. The managers will need to choose a capital structure that they believe will have the highest firm value and therefore, should be most beneficial to the firm's stockholders, (Ross, Westerfield & Jaffe, 2005).

Lester Electronics needs to develop a strategy based on how they want to leverage the company in the form of a loan or other debt. The management team needs to evaluate the combined assets and liabilities of the merged company in terms of the percentage change in earnings, earnings per share, which will occur as a result of a percentage change in earnings before interest and taxes. Lester has the opportunity to finance to define the optimal capital structure for the combined Lester/Shang-wa Electronics Company. Lester needs to discover what the right mix of the equity/debt ratio, risk, and leverage makes the most sense in order to maximize the value of the firm and provides the most benefit to the stockholders.

Lester Electronics also needs to develop a capital structure for the combined business that involves a trade-off between the tax benefits of debt and the costs of financial distress and bankruptcy. Lester Electronics has the opportunity to model both corporate and personal tax implications, asset cost, and operating income in order to formulate the best debt-equity ratio in order to grow the business profitably. Typically, 100 percent debt financing is suboptimal whether growth opportunities and/or inflation is present. High-growth firms will have lower debt ratios than low-growth firms (Ross, Westerfield & Jaffe, 2005).

Shang-wa and Lester corporations need to determine their combined degree of operating exposure with a manufacturing plant in Asia. The cost of goods and taxation rates should be evaluated in the context of fluctuation in the currency rate in order to see the effect on profitability. Lester needs to identify medium term financing options through the Net Present Value (NPV) analysis to determine whether or not they would like to lease or purchase the capital equipment for this new manufacturing plant. The optimal debt level is also determined by discounting all flows at the after-tax interest rate. Thus, a negative NPV number would indicate that the purchase alternative should be taken over the lease (Ross, Westerfield & Jaffe, 2005).

Lester and Shang-wa Electronics have common stock issued. Under the new merged company, Lester electronics needs to decide the mix of long-term debt, preferred stock, and common stock to fund the upcoming capital expenditures of the combined company. Lester Electronics has the opportunity to analyze long-term financing instruments including long-term debt, preferred stock, and common stock for upcoming capital expenditures and net working capital in order to generate positive NPV numbers. Typically company with a positive NPV use internally generated cash flow for projects: net income plus depreciation minus dividends and debt is used (Ross, Westerfield & Jaffe, 2005).

Stakeholder Perspectives/Ethical Dilemmas

Four sets of stakeholders are responsible for the successful implementation of the strategic plan. The different groups are the customers, employees, management team, and shareholders. Each group has different interests and ethical dilemmas associated with implementation of the strategic plan.

International customers want to be able to purchase Lester capacitors without any distribution issues due to the new merger. The products need to be of good quality and sold at a reasonable price. All employees at Lester Electronics are accountable to this customer group. The employees want a corporate culture where the leadership team is recognizing their talents through