Lester Gap Analysis

Gap Analysis: Lester Electronics

Lester Electronics Inc (LEI) is a public company that is traded on the NASDAQ market and distributes industrial electronics parts. The company currently makes $500 million yearly in revenues, markets its products to original small and medium-sized equipment manufacturers, retail facilities, and small local distributors in the Americas and Europe. The company?s largest market is in North America. Lester Electronics has an exclusive agreement with Shang-wa for capacitors.

Shang-wa Electronics is a Korean-based capacitor manufacture that supplies capacitors to LEI for the U.S. market based on the conditions stipulated under a 35 year annual agreement. Lester Electronics and Shang-wa have been having financial difficulties, and are facing hostile takeovers from Transnational Electronics Corporation (TEC) and Avral Electronics. These two companies that are bidding for the takeovers have been strong financially, and are seeking to establish their presence and explore external growth opportunities (University of Phoenix, 2007).

Lester Electronics and Shan-wa have begun to explore a merger between the two companies. The merger is an alternative to a take over from an outside electronics company. LEI and Shang-Wa have a good business relationship and value their respective companies and the employees that work for them. The two companies are going to analyze the results of a merger on shareholder wealth for each company and how to maximize shareholder wealth through a merger or acquisition.

Situation Analysis

Issue and Opportunity Identification

Lester Electronics Inc has several issues and opportunities associated with the merger with Shang-wa Electronics. Mergers pose some benefits and risks for shareholders and management. Lester Electronics will have to determine if the merger will maximize wealth for the shareholders of the company. The issues include determining if a merger is the best way to acquire Shang-wa Electronics, evaluating the tax implications of a merger, choosing an accounting method, finding sources of synergy from the merger, and taking advantage of the strategic benefits. (Ross, Westerfield, & Jaffe, 2005, ch. 29).

There are several opportunities and risks associated with mergers and acquisitions. Mergers are less expensive avoiding legal and accounting difficulties. A draw back to mergers is that it must be approved by the stockholders of each company. Dissenting shareholders can cause legal problems for firms considering a merger. Acquisitions don't require the confirmation of shareholders. This form of purchasing a company can bypass management. Generally, to gain complete control of a company eventually requires a merger. (Ross, Westerfield, & Jaffe, 2005, ch. 29).

The next issues are concerning the tax and accounting implications of a merger or acquisition. There are two types of tax forms. The forms are tax-free and taxable. The type of tax form is dependant on the value of the acquired firm?s assets. Revaluing the acquired firms assets to get equal value to the acquiring firm is favorable to avoid the capital gains tax. Tax reduction methods due to net operating loss and other tax benefits are also available as cost reductions. (Ross, Westerfield, & Jaffe, 2005, ch. 29).

Accounting methods can vary for acquisitions and mergers. A firm can report assets at the fair market value as opposed to the cost of the asset. This form of accounting is called the purchase method. Another method is the pooling of interest method. This method simply combines the balance sheets with out accounting for a premium paid for the acquired company. This allows a manager to purchase a company for large amounts without having to account for the price on the balance sheet. (www.aicpa.org)

Synergy is the combined value of two companies less the value of the two firms separately. Synergy comes from cost reduction, revenue enhancement, tax reduction and lower cost of capital. Revenue enhancement and cost reduction can both increase the profitability of a merger. A merger between Lester Electronics and Shang-wa has the ability to create synergy and make a stronger company from the two individual companies.

Stakeholder Perspectives/Ethical Dilemmas

The shareholders, employees, managers, and outside competition are all stakeholders in the merger between Lester and Shang-wa Electronics The primary stakeholders associated with the merger are owners of Lester Electronics and Shang-wa. The employees, management, and shareholders of Lester and Shang-wa all have the same goals to maximize wealth for the two companies. The companies have been codependent for a long time and have had the same objectives and goals. A merger between the two companies will ensure jobs for the current employees and management. The combining of the two companies will also create synergy which will ensure the longevity and future profitability of the company.

Outside competition has seen the profitability and success of both Lester and Shang-wa electronics. The success has encouraged outside firms to acquire either company to increase economies of scale and competitive advantage. The competition is juxtaposed to a merger between two companies that will take up more of a profitable market. The profitability of the companies may cause a competitor to give a tender offer to Shan-wa which is publicly owned. A shareholder may choose to sell stock to the competition if it appears to maximize wealth better than a merger between Lester and Shang-wa. The competition will have to take over Shang-wa in a hostile manner if management decides to merge with Lester Electronics. (University of Phoenix, 2007)

End-State Vision

Lester Electronics has a promising future through a merger with Shang-wa. The business relationship between the two companies has strengthened both companies and created success. Lester Electronics and Shang-wa will have to maximize shareholder wealth for the short and long term future of each company. The merger will produce synergy which will enhance revenue, reduce costs, and maximize tax benefits.

Gap Analysis

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