Lester Electronics

Introduction

Lester Electronics (LEI) is a $500 million corporation that distributes electronic parts to original equipment manufacturers within the U.S. and Europe. LEI grew rapidly and added additional product lines that used capacitors in both consumer and industrial products. An exclusive distribution contract with a Korean capacitor manufacture, Shang-wa has been vital for its success. Through this strategic partnership, Lester Electronics holds a good portion of the market share in the United States. Recent events have pushed LEI to a pivotal point. Shang-wa has received a proposal to begin talking with Transnational Electronics Corporation (TEC) for a joint venture with the possibility of an acquisition. John Lin has hinted in the past about a partnership and now would like to make it a reality. Without a partnership to solidify both companies, they are both in a position to be acquisitioned into faster goring companies. LEI has also received notice that another company is interested in them, Avral Electronics (University of Phoenix, 2008).

The managers of LEI need to analyze their financial position and align their short-term goals with their long-term goals in order to create growth successfully for their company. Several options must be considered as this process evolves, LEI must define their intended growth strategies, evaluate the stakeholders, and look for opportunities to increase shareholders’ value in their company (Ross, Westerfield & Jaffe, 2005). Evaluating the merger with Shang-wa, Electronics (SE) must focus on due diligence and not only enable the merger to occur but to ensure the financial and corporate strength. A wrong decision can cripple both companies and decrease their competitive advantage. With the completion of this merger LEI would expand globally and increase their market strength in Europe and Asia. Jointly LEI and SE need to set new financial and corporate goals and strategies.

Lester Electronics’ next steps are to fully evaluate the financing of these capital expenditures through some combination of equity or debt in order to merge and strengthen the business. LEI and SE must plan and establish goals that will appropriately structure the financial backing that adds the greatest value and mitigates risk to the shareholders. The strategic merger plan 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 and economic survival. The results, interpretations and implications for LEI are discussed in the following pages.

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Situation Analysis

Issue and Opportunity Identification

One of the main issues that are presently influencing LEI’s future business includes the fact that Transnational Electronics Corporation (TEC) has approached Shang-wa for a partnership that could easily turn into a hostile takeover. If this transaction were to occur, LEI could lose 43% of its revenue over the next five years. Interestingly enough, Shang-wa’s owner John Lin has proposed that LEI and SE establish a joint manufacturing facility and mentioned his interest in retirement. This joint venture has the potential to lead to an easy merger or LEI could acquire Shang-wa outright at the present.

An alternate possibility has presented itself in the form of an acquisition of Lester Electronics by Avral Electronics. Through recent mergers and acquisitions, the company has finally developed enough resources to expand globally. A merger provides an opportunity to bring together and increase the value of the combined enterprise (Scenario, UOP). The firm must study the best options and make a decision timely in order to maximize shareholder wealth and save the interests of LEI and SE.

Lester Electronics decided its best alternative is to pursue a partnership arrangement with Shang-wa and John Lin. A merger involves the decision and agreement between the two companies and the ability according to the financial reports. LEI should use financial planning models to determine the best course of action for this merger. Financial planning comprised with the investment opportunities of the firm to take advantage, the debt amount the firm chooses to employ and the cash amount the firm thinks is necessary and appropriate to pay shareholders (Ross-Westerfield-Jaffe, 2004).

Many opportunities present themselves while considering the joint venture with SE. Lester Electronics has the opportunity to grow as a company, take on new actions and continue its relationship with John Lin. Mr. Lin has a good customer base and is well known throughout Asia. His contacts and reputation will help LEI during the project. LEI may also prepare themselves in how to best deal with operational exposures, such as exchange rate fluctuations. The opportunities offer diversification strategies increased profitability due to shared resources and synergies, reduce the company’s overall exposure to risk by balancing the business portfolio, or an opportunity to exploit underused resources (Yeldar, 2006).

Several factors need to be determined on the ability to merge these two companies. The Net present value along with the excess financial capacity and the excess debt capacity are three figures both organizations need to obtain. The present value of both organizations may show where the company’s currently stand. The excess financial capacity will show how much cash flow exists to the fund. The NPV and the excess debt capacity is the difference between an optimal debt level and the company's current level of debt (Carroll, 2001). These will give LEI a basic determination of the resources available to fund and borrow the necessary financing to merge the two organizations.

The alternative to be acquired by Avral does not seem to be the first for LEI nor does the proposal for SE to join with TEC. As managers, it would be wise to consider the possibility of these mergers for maximizing shareholders wealth if it would create a greater opportunity to combine efforts or if the value would decrease and give less ownership and control of the firm. Other opportunities arise from the proposal of Avral Electronics to acquire Lester. The acquisition by Avral Electronics would open the company to increased globalization. This chance would allow LEI to have a worldwide presence in its market, integrate it operations worldwide and standardize operations in one or more of the company’s current functional areas.

The third alternative is to try and stand