Problem Solution: Lester Electronics

Problem Solution: Lester Electronics

Lester Electronics (LEI) is a consumer and electronics parts master distributor that markets its products to original eqhttp://www.oppapers.com/media/images/btn_join.gifuipment manufacturers. Recently, the CEO of Shang-wa is wishing to retire and has no formal progression plans for the company's management. Simultaneously, Shang-wa is being pursued for a takeover by Transnational Electronics Corporation (TEC). Lester Electronics and Shang-wa Electronics are both upset over the take over possibility. Lester is set to lose 43% of their revenues if they lose Shang-wa as a supplier. Both Lester and Shang-wa agree that a merger between the two companies would be the best solution to maintain their relations and hold off takeover attempts by the two other companies Lester believes that a merger between the two companies would be the best way to increase their shareholder's wealth. (University of Phoenix, 2007).

Situation Analysis

Issue and Opportunity Identification

The first issue, Lester's financial managers should evaluate their cash flows to see if they have the money to either buy Shang-wa using the equity that they already have or to finance the purchase with debt. During this evaluation, Lester should evaluate the timing of the cash flows. If Lester decides to purchase Shang-wa using any debt, the financial managers will have to ensure that the timing of the cash flow is such that Lester is able to make the principal and interest payments on the debt (Ross, 2005). If this evaluation is completed successfully, then Lester should be able to increase in financial standing within the industry.

Second, LEI is facing will be to determine a financial structure and a financing plan to complete the merger with Shang-wa. "Managers should choose the capital structure that they believe will have the highest firm value, because this capital structure will be the most beneficial to the firm's stockholders" (Ross, 2005). If Lester can choose and implement a financial structure that will benefit their stockholders and add value to the firm, then they will have the opportunity to grow as a company, take on new endeavors, and continue their relationship with Shang-wa.

Third issue that Lester will be facing is to reduce the risk to the stockholders. A merge with another company is full of risks and many times investors are adverse to risk. By mitigating the risks associated with the merger, LEI has the opportunity to increase the shareholder's wealth and the company's overall value (Ross, 2005).

Stakeholder Perspectives/Ethical Dilemmas

Within the Scenario, there are 3 major stakeholders; each company's shareholders, the employees and customers, and both Mr. Lin and Mr. Lester. All shareholders have the right to expect returns on their investments. LEI are publicly traded and must report all earnings and investment activities to the SEC in order publicly publish the information. As with any investment, the earnings per share ratio are the most watched ratio of all.

Next stakeholder group would be the company's employees and customers. This group is the largest of all stakeholder groups. The employees of both companies' have the right to expect equitable treatment throughout the merger process. Both Lester and Shang-Wa must ensure that all employees are either guaranteed positions at the new firm, or at minimum given a fair severance package.

The last group, Mr. Lin and Mr. Lester each have ethical responsibilities to each stakeholder group as well as to themselves and to one another. Each owner should be able to expect fair treatment and full disclosure to one another throughout the merger process and in all future transactions and business matters. The two owners must be able to continue their relationship, both personal and professional, throughout the merger process as well as in their future business relationship as well.

Problem Statement

Forming a problem statement for Lester Electronics will be critical portion of Lester's problem-solving method. The problem statement should be short, concise, and lend itself many solutions (University of Phoenix, 2007). The problem that Lester is facing is definitely worth solving as the company has much to gain from a successful merger with Shang-wa. For Lester Electronics, an appropriate problem statement would be: Lester Electronics can increase the value of their company and merge with Shang-wa by choosing an appropriate capital structure. Now that the problem statement has been formed, Lester's end-state goals can be outlined.

End-State Vision

The large end-state goal that Lester would have is to form a successful financing plan to take over Shang-wa. The measure of success of this end state goal can be through several other, smaller end state goals. For example, as an end state goal, Lester should maintain a debt to equity ratio of less than two. The ideal debt to equity ratio can be dependent on the industry and many capital-intensive industries tend to have a debt to equity ration around two (Investopedia, 2007). Lester would also like to have a quick ratio or 1:1 or higher. Having a ratio at this level means that the company could pay off its liabilities, even in the worst situation.

Identifying the Alternatives

After identifying the issues and opportunities for Lester, the alternative were to arrange a partnership with Shang-wa instead of a full merger, use existing cash to purchase Shang-wa, issue stock to raise money to use to merge with Shang-wa, and use debt to finance the purchase of Shang-wa.

Alternative Solutions

Although it appears from the combined statements of cash flow that a merger would increase the company's overall cash flow. In planning for the suture of the merged company Lester must have a plan as to how their financial goals are to be met. In order to do so they must do some serious financial planning. "Financial planning formulates the method by which financial goals are to be achieved. It has two dimensions: a time frame, a level of aggregation." (Ross, 2005) Lester must conduct a capital-budgeting analysis of the project as a whole. Assumptions will need to be made as to the economic future as a whole, for example, taking the company's most recent sales figures and assume that there will be a 10% increase over the next year. $481,714.72 * 1.1 = $529,886.19. Then, the costs associated with sales will remain the same, $440,276.48 and when subtracted from the net sales amount, leaves