Shang-Wa Electronics Option

Shang-Wa Electronics

Memo

Shang-Wa Electonics Option

To: Chairman of the Board, Shang-wa Electronics

From: Ann, Consultant

Cc:

Date: April 18, 2006

Subject: Shang-Wa Electronics Option

This memo to the Chairman of the Board is to provide an additional option for Shang-wa to consider in deciding which option is best to present to the board at the upcoming emergency board of directors meeting. The option put forth here in this document is a combination strategy option consisting of: implementing a couple of shark repellent strategic tactics; a strategic supplier alliance; and a different joint venture proposal with Lester Electronics than the one proposal already on the table for consideration. Addressed next is how such a combination is considered in the best interest of the shareholders. The memo then concludes with how such a combination package not only meets the S.M.A.R.T. goals management strategy but also complies with John Lin's retirement plans.

Shark Repellent Strategic Tactics

A couple of shark repellent strategic policies should be incorporated into the new company's policies when Shang-wa and Lester Electronics form their joint-venture. These defense policies protect the firm, the employees, the founders and owners, and above all the shareholders and their wealth by warding off any company takeover whether hostile or not.

Specifically, the following two are suggested as good defenses:

A policy allowing for the board of directors of the new formed company to authorize that in the event it is deemed that the firm is in danger of a takeover then as a defense the company will issue a massive amount of bonds with a condition that upon a company takeover the bonds would be due and payable immediately at a premium price. This defense is referred to as the Macaroni Defense because the premium redemption price payable immediately to all bondholders expands like macaroni in a pot! Usually if a company is thinking about acquiring a company and during due diligence gathering of info and terms sheets being exchanged and this policy is present then the company thinking about the takeover will back off. It makes the acquisition undesirable because of the mass amount of money that would become due and payable to the bondholders. The risk to the issuing company (target firm of the takeover danger) is that it must be strategically implemented meaning that the company does not overextend itself putting them in danger of defaulting on the interest payments on the bonds. This strategy works great to thwart a takeover but the company policy must set a limit on how many bonds may be issued. The firm only wants to defend itself and not pull itself under. This is why it is good to have good common sense managers drafting and implementing the company policies (Investopedia, 2005).

A clause added to the shareholder-rights plan allowing existing shareholders in the company, while excluding the bidding company's shareholders, the absolute right to buy more shares at a discount. This is one of the poison pill defense tactics available to a firm that wants to ward off takeover attempts of any kind. The goal of this defense is to protect the shareholder's wealth by diluting the shares of the company making a takeover bid very expensive and thus difficult for the acquiring company to benefit (Investopedia, 2005).

Strategic Supplier Alliance

It is always wise to seek out a strategic alliance with a main supplier of raw material to achieve the goal of success for both companies. A main supplier alliance is beneficial when either company faces difficulties. Each firm bands together to help overcome difficulties and enjoy successes. Another benefit is a larger customer base.

Alliance agreements commit each company's resources towards achieving common objectives beneficial to each. Alliances can be formed with government agencies, customers, universities (beneficial with Research and Development cost cutting), competitors, in this case to start off with either the raw material supplier or the R and D alliance would benefit Shang-wa and Lester if the joint venture with the option of Lester buying Shang-wa out in five years is chosen.

To minimize risks and cost waste at the beginning of the alliance definite parameters need to be set that are in no way ambiguous but clearly stated. These would include: clearly defined vision and strategy so both parties understand how the alliance lines up with common objectives of both companies; make sure an alliance is made with someone that is matched up in terms of synergy, ability and strengths of each firm. Another very important detail is to make sure that that agreement lays out a system to monitor performance and the policy to handle any disputes. Cost can be minimal in the short-term and can save costs in the long-term.