Lester Electronics Inc

Problem Solution: Lester Electronics Inc.

Lester Electronics, Inc. (LEI) was founded in 1978, and it is a small electronics company that distributes electronic parts to repair facilities, small local distributors, and two large domestic manufacturers that use capacitors in both consumer and industrial products. The company entered into an exclusive agreement to distribute Shang-wa Electronics (SE), a capacitor manufacturer, in 1978. The contract has to be renewed annually by both parties with a minimum order of one million dollars per year. This paper discusses some of the issues, opportunities, goals, and vision of LEI that will help the company to maintain and increase its revenues.

Describe the Situation

Issue and Opportunity Identification

Lester Electronics, Inc. (LEI), a small Korean manufacturer of capacitors, is faced with several challenges and opportunities that will make or break the company's future. The researcher will focus on the most important issues and the opportunities that will bring LEI to achieve its financial prosperity in the capacitors market.

The primary issue facing LEI is to merge with SE or to be acquired by Avral Electronics (AE). Currently LEI and SE have a partnership. According to Westfield, and Jaffe (2005), a partnership is "Any two or more persons can get together and form a partnership. Partnerships fall into two categories: (1) general partnerships and (2) limited partnerships" (p. 16). SE is Lester Electronics' largest supplier, accounting for the manufacturing of 43% of their products (Lester Information Sheet). The partnership keeps the company's revenue increasing, allowing LEI to become the only distributor of SE capacitors in the USA.

By LEI acquiring SE, the company needs to keep in mind that the total operating expenses will increase. The merger of SE will enable the companies to increase the company's production capacities of aluminum electrolytic and film/plastic. In addition, the financial projection benefits LEI to acquire SE, because the earnings before interest tax increases from 16, 319.25 to 72,274.85 within the first year.

Shang-wa Electronics' income statement provides valuable information that will help LEI determine what will be the best choice for the company and its stakeholders. An article by Bellovary, Giacomino, and Akers (2005) presents the importance of taking time to evaluate a company's finance. The authors' state:

Earning's quality is an important aspect of evaluating an entity's financial health, yet investors, creditors, and other financial statement users often overlook it. Earnings quality refers to the ability of reported earnings to reflect the company's true earnings as well as the usefulness of reported earnings to predict future earnings. (p. 1)

Analysis of the income statement will provide the true score potential of SE, will increase LEI revenues, and will enable the company to expand in other markets.

Lester as CEO of LEI needs to take the best course of action that will add value to the corporation and its stockholders, because the "goal of the corporation is to add value for the stockholders" (Ross, Westerfield, and Jaffe, 2005, p. 24).

Another issue LEI needs to consider is how the merger will affect their economic exposure. Economic exposure is "changes in exchange rates can have a profound effect on the firm's competitive position in the world market and thus on its cash flows and market value" (Eun and Resnick, 2004, p. 8). Transaction exposure is known as a short-term economic exposure and arises from fixed-price contracting in a world where exchange rates are changing randomly (Eun and Resnick, 2004, p. 8). LEI needs to face the risk of been involved in international trade, where the currency exchange rates will change before entering a financial obligation. Exposure to fluctuating exchange rates can lead to major economic losses for LEI. When a company encounters these dilemmas, they implement hedging strategies where the companies will use "forward rates to lock in an exchange rate and thus eliminate the exposure to the risk" (Investopedia Inc., 2006).

LEI encounters the issue of only distributing capacitors from SE. LEI has the opportunity to develop strategies to focus on developing and distributing its domestic-made parts outside the USA. These strategies are growth opportunities, "opportunities to invest in profitable projects" (Ross, Westerfield, and Jaffe, 2005, p. 110). The growth opportunities will increase LEI's profits if the project has a positive net present value, where the stock value is a net present value (per share) of the growth opportunity (NPVGO) (Ross, Westerfield, and Jaffe, 2005, p. 115).

In the competitive market of capacitors, LEI leadership team needs to evaluate the increasing competition from Transnational Electronic Corporation (TEC) and Avral Electronics. Because, "As the economy becomes increasingly globalized, more firms are subject to international competition" (Eun and Resnick, 2004, p. 50). In addition, "fluctuating exchange rates can seriously alter the relative competitive positions of such firms in domestic and foreign markets, affecting their operating cash flows" (Eun and Resnick, 2004, p. 55). The fluctuation of exchange rates needs to be controlled by LEI, knowing that operating exposure depends on the structure of the market where the company sells its products and collects its inputs (Karikari and Collins, 1989, p. 55). An article by Karikari and Collins (1989) states that:

If the local currency appreciates, the change in cash flows is zero if there is free trade in the output and input markets, or if the foreign affiliate is an exporter, operates in a segmented market, and operates in a free trade market. The changes in cash flows are negative if free trade in products exists but the input market is protected. The effect is ambiguous if the foreign affiliate provides import-competing products in

segmented product and input markets. (p. 57)

To become familiar of the market and operating exposure, will help LEI to determine how to deal with its competitors, increase market share, and grow its product distribution.

John Lin, CEO of Shan-wa, is experiencing the issue of lack of succession planning. This situation is important to resolve, because as stated in Succession Planning and Transitional Responsibilities:

Ideally, you succession plan over time, but sometimes it is done in reaction to emergencies and surprises. To reduce the surprises, begin by asking key firm figures or partners to share on an annual basis their planned retirement