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Introduction

Why has the pace of consolidations increased so dramatically in the last few years? Are mergers today different in character from those of a decade ago? It is believed that the current merger wave is significantly different from the "junk bond"-fueled mergers of the 1980's. (Pitofsky, R. 1998) Some of those mergers involved the acquisition of unrelated businesses that were targeted for their break-up value or designed to generate cash for corporate raiders. Today's mergers are more likely to be motivated by fundamental developments in the rapidly changing economy and reflect more traditional corporate goals of efficiency and competitiveness.

Corporate Finance is the specific area of finance dealing with the financial decisions corporations make and the tools and analysis used to make those decisions. The decision discipline as a whole may be divided between long-term capital investment decisions, and

short- term working capital management. The two are related in that firm value is enhanced when return on capital (a function of working capital management), exceeds cost of capital, which results from the long-term capital decisions by upper management.

In order to for organizations like Lester Electronics to expand is necessary for business owners to tap financial resources. Business owners can use a variety of financing resources, initially broken into two categories, debt and equity. "Debt" involves borrowing money to be repaid, plus interest. "Equity" involves raising money by selling interests in the

company. (www.investordictionary.)

For Lester Electronics the merger with Shang-wa may be financed by; cash, securities, or a combination of cash and securities.

Issue and Opportunity Identification

It is important for upper management to take a close look at the strategic implications of vertical mergers in new market environment similar to Lester Electronics and Shang-wa. While many, if not most, vertical mergers are likely to be efficiency-enhancing, such as by joining complementary assets, some vertical mergers can be anticompetitive. For example, by acquiring their supplier of a critical input like Shang-wa for which there are few or no capacitor alternatives, Lester Electronics may be able to raise the input costs of its rivals or foreclose entry.

A recent merger example serves to illustrate this point between Time Warner and Turner Broadcasting. Both companies were major producers of video programming for distribution on cable television. In addition, Time Warner was a major operator of cable television systems, as was TCI, which held a significant interest in Turner Broadcasting. At the time, deregulation of the telecommunications industry promised to interject new competition for cable television, as telephone companies and others sought to use new technology to deliver video programming through alternative channels. The merger, however, threatened to give the combined entity control over competition and entry conditions in both the video programming and cable distribution markets.

As I understand from Chapter 15, capital structure is important to any organization large or small. Lester Management should be focused on Maximizing Firm Value in regard to the merger with Shang-wa. This will be established by choosing the right capital structure for Lester Electronics that will increase the value of the firm and thus benefit all shareholders.

The situation for Lester Electronics is to ensure they structure the merger with Shang-wa Corporation suitably which is going to leverage Lester Electronics to increase shareholder value by maximizing an increase in the value of the new partnership firm. If Lester is looking at either stock or a cash transaction, there is no easy answer of which one is better.

* Stock transactions typically result in fewer tax liabilities for the acquired firm. In addition, a cash-based acquisition may force the acquiring company to incur debt, which increases the risk associated with the merger.

* However, in order for Lester and Shang-wa companies to reach an agreement on a securities-based merger, they have to first reach an agreement regarding the value assigned to the securities involved which is often problematic.

Stakeholder Perspectives / Ethical Dilemmas

In this scenario the merger between Lester Electronics and Shang-wa involves the two owners and founders Bernard Lester and John Lin. In the scenario there does not appear to be a board of directors within Shang-wa, only that of Lester Electronics. The stakeholders will include the founders, board of directors for Lester Electronics, employees of both companies who have a vested interest in the outcome of the merger and shareholders.

The owners will definitely have strong feelings on how the merger should be handled and what costs are involved since they are the founders as well. John Lin would like to step down and take advantage of the market leverage that Lester Electronics has developed as a master distributor of electronics well as the strong management culture. This merger would allow John Lin to retire and Lester to gain market share and grow the business in new global market segments as discussed in the scenario.

The board of directors will ensure that Lester Electronics Corporate Mission is upheld as they expand into new frontiers with the expansion and gain a foothold into new areas of business. The board will vote after they determine the scope of the merger and approve the business deal. The board's interest will be to guarantee shareholders this merger supports the corporate values and brings about shareholder value by maximizing the value in the new company after the merger is complete.

The employees who are employed with each company will want to be well informed of the merger and all pertinent changes to the structure of the company who have been loyal to company management. Employees will want to know how the merger affects their job security in regard to pay and benefits as well as future career opportunities within the new company. Management should reinforce job security to employees to reduce undue stress, turnover and anxiety about the up-coming merger.

The shareholders will want to be assured that their investment in Lester Electronics is going to grow substantially over time and is safe. Without this reassurance, some investors might jump ship if the stock price drops abruptly due to analyst's opinions of the merger. The company should make public their intentions through press releases to educate investors on the benefits.