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Over the course of many years, the business relationship between John Lin, owner of Shang-wa Electronics and Bernard Shaw, CEO of Lester Electronics, Inc., has grown financially and personally (University of Phoenix, 2005). Shang-wa produces specialized capacitors for which Lester Electronics has the exclusive market in the United States. With the impending takeover by two outside firms, Transnational Electronics Corporation (TEC), and Avral Electronics, S.A., John has proposed a merger of Shang-wa with Lester Electronics. Bernard brought the proposal before the board of directors, who agree that the amalgamation would bring further financial success and now need recommendations and analysis of alternatives for financing this merger. The executive leadership team is tasked with analyzing financial strategies to accomplish this goal with the globalization of Shang-wa and Lester Electronics. "There is no more dramatic or controversial activity in corporate finance than the acquisition of one firm by another or the merger of two firms" (Ross, Westerfield, and Jaffe, 2005, p. 796). Acquisition benefits are referred to as synergies. "The acquisition of one firm by another is, of course, an investment made under uncertainty" (Ross, 2005 p. 795). Being global companies, legalities, tax issues and accounting structures must be accommodated. "In mergers and tender offers, the acquiring firm buys the voting common stock of the acquired firm" (Ross, p. 798). All potential key metrics will be used to determine the best possible financing solutions while maximizing shareholders wealth on behalf of both Lester Electronics and Shang-wa.
Issue and Opportunity Identification
Transnational Electronics Corporation and Avral Electronics both see growth potential and increasing shareholder value in acquiring Lester Electronics and Shang-wa. As global corporations, TEC and Avral have definite advantages over the slightly smaller corporation. Lester Electronics will lose shareholder value if the exclusive distribution of the component supplied by Shang-wa were to be controlled by an outside company. Costs and potential outside influence would hedge Lester's financial gains. In order to defeat a takeover by either TEC or Avral, some type of synergy must be accomplished between Shag-wa and Lester Electronics. However, John Lin approached Bernard Lester with a partnership proposal. After due consideration, the Board of Directors for Lester Electronics has reviewed the financial metrics and concluded that a merger would be more financially suitable. Bernard and John Lin must come to some type of compromise and settle on a viable solution in order to avoid the potential risks of either Avral or Transnational gaining controlling interest in Shang-wa or Lester Electronics.
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Shang-wa and Lester Electronics need to evaluate their perspectives with financial planning and capital budgeting. The merger will strengthen both companies and increase shareholders wealth. Other opportunities include growing Lester into a global market, whereas they are mainly focused in the United States. While Lester is aware of monetary exchange rates with Shang-wa, other countries have additional cultural and monetary considerations. This will prove a difficult task to overcome. Benefits of globalization may allow Lester electronics to achieve lower labor costs and cheaper money.
Financing this merger will require both short term for immediate needs and long term financing. Lester Electronics must come up with a substantial amount to place as good faith. "Marketability refers to how easy it is to convert an asset to cash. Sometimes marketability is referred to as liquidity" (Ross, 2005, p. 771).
Stakeholder Perspectives/Ethical Dilemmas
Despite their friendship, Bernard Lester must continue to add value to Lester Electronics and take responsibility for the best potential opportunity for all concerned.
Lester Electronics will continue to grow and maximize shareholder wealth by successfully merging with Shang-wa.
Lester Electronics will maximize shareholders wealth by merging with Shang-wa.
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2005). Corporate finance (7th ed.). New York: McGraw-Hill Companies.
University of Phoenix. (2005). Capital Budgeting [Computer Software]. Retrieved October, 2007, from University of Phoenix, rEsource, Simulation, MBA540 Maximizing Shareholder Wealth, Apollo Group, Inc. Web site.
Issue Opportunity Reference to Specific
(Include citation) Concept
John Lin has no apparent heir, and wants to see that the business he developed will continue. John appears to have a sole proprietorship or at the minimum a major controlling interest. Any mergers will have to face close scrutiny. With a successful planning model, the financial arrangements will be successful. " the ultimate merger price make
application of the model quite difficult in reality" (Ross, 2005).
Financial Planning Model
Since Shang-wa and Lester are merging, loans may be assumed and the strength of the company needs to reflect a valuable corporation in order for them to gain the best rates at the lowest costs. Shang-wa and Lester financials will reflect a very viable company in order to achieve the best rates. "If the goal of the management of the firm is to make the
firm as valuable as possible, then the firm should pick the debt-equity ratio that makes the
piethe total valueas big as possible" (Ross, 2005, p. 402). Growth and the debt-equity ratio
The merger between Shang-wa and Lester Electronics must maximize shareholder wealth on both sides. By merging, the costs of the merger are lowered thereby keeping retained earnings and tax credits. "A merger is legally straightforward and does not cost as much as other forms of acquisition.
It avoids the necessity of transferring title of each individual asset of the acquired
firm to the acquiring firm" (Ross, 2005, p. 796.
Costs of Capital
Even with the competition of Avril and Transnational, Shang-wa and Lester Electronics need credit based upon the current needs. Avril and Transnational will not be a deciding factor in the credit necessary for the merger. "Alternative amounts of credit for a firm should not affect the value of the firm.
Long Term Financing
The shareholders for both companies need to be aware of the pending situation in order to maintain control and not be swayed by outside influences. Communication with appropriate financial key metrics will enable both companies to ratify the merger easily in concise and knowledgeable decisions. "Target-firm managers frequently resist takeover attempts. Resistance usually starts with
press releases and mailings to shareholders that present management's viewpoint" (Ross, 2005, p. 814).
Maximizing firm value versus maximizing stockholder interests
The Interests, Rights, and
Values of Each Group
John Lin to Shang-wa employees John Line needs to assure that his company will continue to grow and prosper offering good jobs to employees
Bernard Lester to Lester Electronics Bernard needs to make certain that all parties, Stakeholders of Lester Electronics gets a fair deal of the merger
Transnational and Avril versus the current merger between Lester and Shang-wa Lester and Shang-wa must stave off the takeover and discount any future financial issues in order to maintain their company and the proposed merger
John Lin and Bernard Lester John and Bernard have become friends, and a trust has built between them. Although John proposed a partnership, Lester Electronics is seeking a merger, as a more viable option.
A) Allow TEC or Avral to synthesize with either TEI or Shang-wa
B) Find anpother company to supply the special components
C) Lester Electronics and Shang-wa will sucessfully merge
Lester Electronics and Shang-wa will sucessfully merge
The merged company will be strong enough to stay additional takeovers
Lester Electronics will continue its success as a distributor.
Allow TEC or Avral to gain controlling interest in either Shang-wa or LEI Risk is high, if both Shang-wa and Lester do not move quickly.
Too much unknown about either TEC or Avral to risk the chances of losing control.
Successful merge between Shang-wa and LEI
Find another company to supply the special components. The costs will be too high
Profit margins low
Not very likely in time to save the business. Medium
Successfully merge with Shang-wa
Optimal Solution Implementation Plan
Deliverable Timeline Who is Responsible
Viable financing options One Week Lester Electronics financial managers
Review and decision 3 days from receipt of options LEI Board of Directors
Communication of intention to Lester stockholders Two weeks LEI corporate communications and shareholders
Proposal, negotiations, and expected acceptance by Shang-wa. One week from Lester Board of Directors decision. John Lin and Shang-wa
Shareholders Vote One Day Lester Shareholders (and potentially John Lin as sole proprietor)
Financial Credit extended by banking institution. One week from approval vote Financial Institution of choice.
Legalities and global stock exchanges and any government regulations that must be met. One month Global regulatory commissions, etc.
John Lin and Bernard Shaw celebration dinner Three months from initial Board approval. John Lin and Bernard Lester.
Evaluation of Results
End-State Goals Metrics Target
Business will continue at both Shang-wa and Lester Electronics. Employees will remain at the respective companies and work together to achieve manufacturing and distribution.