Lester Electronics

Running head: PROBLEM SOLUTION: LESTER ELECTRONICS

Problem Solution: Lester Electronics

Problem Solution: Lester Electronics

"Change is inevitable. Change is constant," (QuoteDB, 2007). This quote from Benjamin Disraeli, although stated in the mid-1800's should be the mantra for today's business environment. Modern business operates at the speed of the electron - over the Internet and on a 24-hour basis. Companies which wish to survive and expand beyond extremely local environments must realize that change will be constant and learn to adapt.

Lester Electronics, Inc. (LEI) is a firm in danger. LEI is facing two threats which could have an effect upon its viability. One of them, absorption by the larger, global firm Avral Electronics, S.A., would end its existence, while the other - the absorption of one of LEI's major suppliers (Shang-wa Electronics) by another manufacturer and distributor - Transnational Electronics Corporation (TEC) - would remove an extremely profitable sole-source distribution deal and result in an estimated loss of 48% of the firm's business. Obviously, the board of directors of LEI had to take action.

In addition to the above, LEI is determined to expand to a global market. To change from a regional to a global firm, the firm realizes that it needs outside knowledge, which is available from Shang-wa Electronics. Knowing this, the board was faced with making one of two decisions - either allow absorption by the Avral Electronics corporate enterprise or merge with Shang-wa Electronics - forming a larger, global firm whose synergy would ensure survival. The decision of the board was - not surprisingly - to merge with Shang-wa Electronics.

Situation Analysis

Issue and Opportunity Identification

LEI is facing a bi-polar issue - either acquire Shang-wa Electronics or be acquired by Avral Electronics, S.A. Having decided to acquire Shang-wa, the next question is how to finance the acquisition. Since the balance sheets for the two firms show that LEI will be unable to finance this merger through existing equity, the option then becomes long-term financing. Opportunities for long-term financing are:

* Debentures

* Secured and unsecured notes

* Convertible notes

* Fixed deposit loans

* Mortgages

* Eurobonds

* Interest rates swaps

* Forward rate agreements (FRA's)

* Interest only futures

* Option on future contracts.

* Convertible notes

* Subordiniated debt

* Preference shares. (UniXL, 2007)

These options must be evaluated to determine which one will be the best for the firm. The board and the executive staff must look at the costs of debt and the synergies which will result from the merger of the two firms. The goal of the merger, increasing corporate wealth, should be a prime consideration in all calculations.

Stakeholder Perspectives/Ethical Dilemmas

Three primary stakeholders need to be considered. They and their interests are:

1. The employees - The backbone of the company. They are interested in keeping their jobs and income and are concerned about receiving timely, accurate information concerning the health of the firm.

2. John Lin and Bernard Lester - Each of these men founded his firm. As such, their interest in the companies will be paternal. They do not want to see their corporate entities cease to exist.

At the same time, both men are rapidly approaching retirement age and wish to spend less time as executives and more as retirees.

3. The stockholders - These individuals are interested in maximizing their personal wealth. This interest may be in conflict with the interests of the employees and management because acquisition by another firm - although detrimental to the other two groups - might be beneficial to them.

Problem Statement

LEI has a very simple problem which is multiple levels deep - how to remain in existence. If the firm is acquired by Avral Electronics, it will cease to exist. Therefore, the resolution of that problem is that the firm acquires its major supplier, Shang-wa Electronics.

The next level of the problem is how to do this. A number of issues which must be resolved, including:

1. How to handle the logistics of the merger,

2. How to finance the merger,

3. How to maximize the synergies obtained through the merger, and

4. The merger schedule.

Once these issues are resolved, the merger itself should be relatively smooth as the two firms are already familiar with each other because of the long-standing relationship between them.

End-State Vision

The Board of Directors of LEI has a goal. That goal is to acquire Shang-wa Electronics and to expand the combined firm into a global presence by taking advantage of the synergy of the combined organization. The board has set a goal of one year to complete acquisition of the other firm. Although this might be considered a short period to complete this transaction, the shared knowledge that each entity has of the other one will greatly reduce the merger complexity and time.

The next step for the board is to become a global presence. They envision this happening through a two-pronged approach. The first is to take advantage of the sales and marketing capabilities of John Lester and his team, and second is to build a capacitor plant in Asia which would ensure availability of the products which they sell.

The final vision affects two people - Bernard Lester and John Lin. Lester came out of retirement and created LEI. Lin, who is older than Lester, is seeking to retire and spend time with his family. The resolution for Lin is to sell-out to Lester and semi-retire while still maintaining a seat on the board of the merged firm so that he can retain influence.

Lester and Lin will not