Mba-540 Problem Solution: Lester Electronics

Problem Solution: Lester Electronics

Lester Electronics, Inc (LEI) is a public traded electronic parts distributor to the consumer and industrial small and medium sized original equipment manufacturers, repair facilities and small local distributors throughout Americas and Europe. LEI grew rapidly and added additional product line that use capacitors in both consumer and industrial products. Operating in this way, LEI expected to earn $500 million annually. LEI considers corporate growth that result from mergers to increase long-term profitability (Scenario, UOP). Acquisitions by merger and consolidation result in combinations of the assets and liabilities of LEI and Shang-Wa Electronics.

Situation Analysis

LEI is faced with the decision to align with Shang-Wa Electronics, its primary supplier of capacitors for the U.S market to establish a new business capacitor manufacturing facility that acquire Shang-Wa outright or sell the firm to Avral Electronics. Through recent mergers and acquisitions, the company has finally developed enough resources to expand globally. Merger provides an opportunity to bring together and increase the value of the combined enterprise (Scenario, UOP). In fact, the firm must study the best options and make a decision timely in order to maximize shareholder wealth.

Issues and Opportunities Identification

Shang-Wa CEO John Lin began manufacturing capacitors in 1969 and entered into an Exclusive Supply Agreement with Bernard Lester, LEI in 1978. Shang-Wa granted Lester the exclusive right to sell Shang-Wa capacitors in the United States for 65 years and they have very strong relationship over the years. Lester Electronics should consider a joint venture with Shang-Wa CEO, John Lin once he retires. LEI should use financial planning models to determine the best course of action for this merger. Financial planning comprised of the investment opportunities the firm to take advantage of, the amount of debt the firm chooses to employ, and the amount of cash the firm think is necessary and appropriate to pay shareholders. These are financial policies that LEI CFO must decide on for its acquisition of Shang-Wa and the new entity’s profitability (Ross-Westerfield-Jaffe, 2004). One biggest issue why LEI engage in joint venture with Shang-Wa is to establish joint manufacturing facility, seek to acquire Shang-Wa outright and maintain their revenues.

As with capital budgeting decisions, LEI seeks to create value with its financing decisions and

positive NPV financing arrangements. LEI must understand Net Present Value (NPV) method of

this process such as NPV uses cash flows, NPV uses all the cash flows of the project, NPV

Discounts the Cash Flows properly and working capital. As a result, mergers and acquisitions

shows higher returns and dominant market position in the global market. Working Capital is

forecasted to rise in the early years of the project but to fall to $0 by the project’s end. It is

important in such areas as capital budgeting, lease versus buy decisions, account receivable

analysis, financing arrangements, mergers and pension funding (Ross-Westerfield-Jaffe, 2004).

LEI CFO must analyze ways of raising financing that self funding from existing cash flows, debt

funding borrowed from others and equity funding raised by issuing stocks or bonds.

Stakeholder Perspectives/ Ethical Dilemmas

All stakeholders (shareholders, management, employees, customers, suppliers and

distributors) have the right to expect the benefits from this merger. Likewise, they may be

concerned about revenues through poor investment decisions and flawed costs of capital

budgeting. LEI and Shang-Wa have established strong relationship with customers over the

years, so that Bernard Lester and John Lin must take into consideration their customer needs.

CFO will determine lower costs of production and operation, as well as larger businesses may give rise to increasing capital investments which also contribute to greater productive capacity. A systematic process to identify concerns and expectations from the key stakeholders' perspectives can improve the outlook for market acceptance.

Suppliers and distributors will expect to benefit from the expected synergies of lowered operational costs. The customers will expect quality of products at fair market prices. Customers will also be interested in the new products that offered either after a joint venture or takeover and shareholders want is to be able to measure the time value of current income and the risk of those cash flows arriving. Higher discount rates result in a smaller stock price might otherwise be achieved with better transparency or the perception of less risk. By delivering cash flow with a minimal amount of risk, CFO can drive a higher market price for the company’s stock.

In addition, the primary stakeholder is Bernard Lester, CEO and founder of Lester Electronics. He has used his negotiation skills, extensive contacts and experience in the specialized sector of the electronic component parts industry to build LEI. Bernard entered into business with the small Shang-Wa Electronics, becoming the company’s exclusive distributor of capacitors in the United States. He has built a strong relationship with John Lin, which shows how the beneficial the merger of LEI with Shang-Wa. Though, the joint venture would enable both companies to meet growing demand for the niche product (Ross-Westerfield-Jaffe).

LEI also consider Avral Electronics, S.A and it has experienced to take over companies in the past. This is the opportunity to takeover before Avral has a chance to merge with Shang-Wa. In any case, a merge with another company is full of risks and many times investors are risk-averse. The CFO should take responsibility to choose a debt-equity mix that mitigates potential risks. He also assessed profits, sales, market share, stock price, borrowing ability, capital cost, finance cost, investment opportunities, competitive position, R&D, innovation and personnel development possibilities to implement the success. This includes reviewing exchange risk, asset/liability matching,