Running head: PROBLEM SOLUTION: LESTER ELECTRONICS

Problem Solution: Lester Electronics
University of Phoenix Problem Solution: Lester Electronics
Lester Electronics is at a turning point in the business world. Bernard Lester has found that they cannot continue to manage the business as has previously been done in the past. The changes in the industry and the possible loss of their largest vendor, Shang-wa, are two of the main challenges facing Lester. One is growth, which represents an essential component of a successful, long-term business strategy. Various internal growth strategies exist; add new and improved products to the portfolio, target new markets, move into additional geographic areas, increase the number of stores. Second being, the number of external growth strategies can also be considered. The main ones is a merger or acquisition. This strategy should be employed when it would be more profitable and efficient for a company to obtain desired characteristics.
John Lin, founder and CEO of Shang-wa, is looking to spend less time with his business and more time with his family. John Lin has informally suggested to Bernard that they become partners that would enable both companies to meet the growing demands for their products.
Shang-Wa finds that they are on the verge of being taken over, this not what John wants for his company. Transnational Electronics Corporation is making a run to takeover John Lin’s company. John Lin is feeling pressured to sell. If Shang-wa does not sell or enter into a joint venture with Lester, Shang-wa will not continue to remain in business.
Lester also feels pressured by Avral Electronics, S.A. to sell the business. Lester must make the decision to partner with Shang-wa so that they are not forced out of business or to be acquired by Arval. Lester’s proposal to create a joint venture with Shang-wa may be the only option that would allow both companies to stay in business. John Lin and Bernard Lester can be each others White Knights which would prevent the takeover of each company.
The Board of Directors has approved the merger and Lester’s financial team needs to develop a plan for the venture to occur. The merger will create opportunities in the world market as Lester expands its boarders into other countries. The company will need to formulate a successful financial plan that optimizes the growth opportunities and maximizes the shareholder’s wealth.
Situation Analysis
Issue and Opportunity Identification

Some of the issues that involve the merger are that Lester will need to face is that Transnational Electronics Corporation has approached Shang-wa with a hostile takeover bid. If Transnational Electronics Corporation acquires Shang-Wa then Lester Electronics Inc. will lose a contract with his main supplier. This will cause Lester Electronics Inc. to lose 43% revenue over the next five years.
Lester has to determine if they have the financial capacity to complete a merger with

Shang-Wa. “Excess financial capacity is free cash flow plus excess debt capacity which defines

free cash flow as the cash flow in excess of that needed to fund all positive net present value

(NPV) projects. Excess debt capacity is defined as the difference between an optimal debt levels

and the company's current level of debt.” (Young, O’Byrne, 2008)

Lester will need to determine a capital structure and financing plan to use to go through

with the merger. Shang-wa has a considerable larger amount of debt than Lester Electronics Inc.

Lester will need to finance the merger through working capital and the acquisition of stocks. If

the merger is not successful then Lester faces the dilemma of decreasing shareholders wealth by

the Transnational Electronics Corporation acquisition of Shang-wa.

Lester Electronics needs to combine their financial reports with Shang-wa. This will

reduce the exposure risk due to the companies susceptibility from currency exchange rates.

Three main types of exposure:
1. economic exposure
2. transaction exposure
3. translation exposure

Economic exposure is “the extent to which the value of the firm would be affected by

unanticipated changes in exchange rates.” Transaction exposure is “the sensitivity of the realized

domestic currency values of the firms’ contractual cash flows denominated in foreign currencies

to unexpected exchange rate changes” (Marston, 1996)

Lester has the opportunity to enter into a joint venture with Shang-wa Electronics and

expand the company to protect its future. The advantage is that Lester Electronics Inc.

management understands the business process which will enable them to make correct business

decisions. “The process of partnering with technologically compatible companies will give them

the ability to accomplish the integration process rapidly.” (Ross, Westerfield, Jaffe, 2004)

Other opportunities arise from the proposal of Avral Electronics to acquire Lester. The

acquisition with Avral Electronics would open the company to increased globalization. This

opportunity would allow Lester Electronics Inc. to have a worldwide presence in its market,

integrate it operations worldwide, and standardize operations in one or more of the company’s

current functional areas.

Lester Electronics has the opportunity of becoming partners with Shang-Wa. This would

give Lester Electronics the opportunity to grow as a company, and take them globally. Going

global gives Lester Electronics Inc. many opportunities to find the best deal with operational

exposures, such as exchange rate fluctuations.

These opportunities offer diversification strategies increased profitability due to shared

resources and synergies. Reducing the companies overall exposure to risk by balancing the

business portfolio, in return giving them the opportunity to exploit underused resources.
Stakeholder Perspectives/Ethical Dilemmas

One of the major problems that any company can face is joint ventures. The joint venture can affect the company as a whole. As a result, of this it can lead to less productivity and retention, leading to the problem that is currently faced by Lester Electronics Inc. now. Which now has to take careful measures to research and be framed appropriately, in order to allow their company to have the correct motivation, with internal security, benefits, that will allow them to be more flexible all while getting the work done.
The given scenario of major stakeholders such as CEO of Transnational Electronics Corporation and Director of Avral, each have one thing in mind, acquiring Lester Electronics Inc. and Shang-wa. Avral wants to acquire Lester Electronics Inc. and Transnational Electronics Corporation wants to acquire Shang-wa. By merging, Lester Electronics Inc. and Shang-wa they not only gain strong foot hold in the market but also has potential to beat its competitors.
In today’s world most investors and stockholders wants to see higher returns, which will be caused by higher market share and better marketing, and two major companies such as Lester Electronics Inc. and Shang-wa can open growth opportunities that could position the company to meet growing demand.
The management of Lester Electronics Inc. and Shang-wa wants higher returns, sales and profitability of the company. Through combining forces with each other rather than other companies, they can overcome the barriers faced in the company. Stockholders have one thing in mind; recover the money back with higher gains. Merging with Shang-wa this process seems not only saving Lester Electronics Inc. with the expanding and increasing stock values and prevent the company lose upwards of 45 % of our expected revenues over the next five years.

Problem Statement

Lester Electronics Inc. needs to find ways to help increase profitable market shares, both locally and globally, Lester Electronics Inc. growth potential will be heavily on dependent on how effectively the company manages its operational flexibility. Operational flexibility is provided by Lester Electronics Inc.’s options to defer, contract, expand and alter an investment program during its life cycle. Lester Electronics Inc. management should distinguish that a change in any one-investment program can influence a range of other programs, as well of those outside the firm, which in the long run would help increase customer loyalty, in return allow increase in market shares and marketability. Decisions regarding a joint venture with Shang-wa or an acquisition offer by Avral Electronics are interrelated, and deferring, accelerating, or otherwise changing any one-investment program is likely to produce positive returns. End-State Vision
Like any other company Lester Electronics Inc. would like to increase sales, profitability and capital structure, which can gain strong foot, hold in the industry with competitive markets. The best way to do this is to keep maintaining a relationship and renewing the contract with Shang-wa. Which will allow the company to measure low cost of equity to increase sales growth, combine assets to get more loans at a lower interest rate, and by merger the company would get equity loan that would be helpful because equity loans are tax deduct table.
Alternative Solutions

Before making any decisions, regarding selling off the company or acquiring Shang-wa Lester Electronics should analyze their current investment strategy and determine if there are any way to re-invest current assets to maximize shareholder wealth. If no opportunities for re-investment of Lester Electronics cash flow and assets, it can consider taking the risk of selling off assets to invest in the acquisition of Shang-wa. Before making this decision Lester Electronics should analyze Shang-Wa’s financial statements and determine if there are any opportunity to change the investment strategy within that organization should Lester Electronics decide to buy-out Shang-wa. Acquiring Shang-wa would be a risky option, but it would prevent the 45% loss in expected revenue and be an investment for Lester Electronics
Analysis of Alternative Solutions

If the company or organization is not using their resources it currently owns or is

Forgoing investment in capital or technology then it may be producing or performing at a level

below its potential. The goal of analysis is to identify the gap between the optimized allocation

and integration of the inputs and the current level of allocation. This helps provide the company

with insight into areas that have room for improvement, showing Lester Electronics Inc. that they

have more options than Shang-wa. Lester and Shang-wa have analysis of the decision to

purchase Shang-Wa Electronics started with the benchmarking of decisions that other

corporations in a similar situation have made.

Once the projects have been trimmed down to a reasonable list, with the financial

concepts of internal rate of return (IRR) and net present value (NPV) to make the dollar values

comparable. Based on this analysis the purchase of Shang-Wa provided an IRR of 11.92% and

NPV of $31,882.48 million. The positive values indicated the favorability of the purchase. “Through analysis this process of which involves determining, documenting and approving the variance between business requirements and current capabilities. An analysis naturally flows from benchmarking and other assessments.” (Honeywell, 1999) Given the challenges such as, Lester Electronics Inc. has no knowledge of manufacturing; Shang-wa has more long-term liabilities than Lester Electronics Inc.
Lester Electronics Inc. has more assets than Shang-wa thus deciding how merging and working together is the question, and most important question is who will finance their long-term debts when the merger takes place? In the given situation, opportunities presented above are the only way to survive. The decision to purchase the company is to be made with how to pay for the company whether with cash if not with shares.
Both Lester Electronics Inc. and Shang-wa cannot make it on their own, and in order to survive they must merge as stated by the board of directors of Lester Electronics Inc. As merger takes place, they not only have more power as combine together but also now are on the same level as Avral and Transnational Electronics Corporation. This situation will help protect Lester Electronics Inc and Shang-wa from hostile takeover. Once the general expectation of performance in the industry is understood, there are possible to compare that expectation with the level of performance at which the company currently functions.
Risk Assessment and Mitigation Techniques
The potential merger between Transnational Electronics Corporation affects Lester

Electronics and Shang-wa. If Shang-wa chooses to merge with Transnational, Lester will lose

business. The loss of business affects the price of the merchandise. The company will not be able

to compete with the businesses within their market. The operation exposure is high with this

merger.

This pricing battle affects the bottom line of the companies. Lester Electronics operate

within the principles of agency relationships and associated agency costs. Lester shareholders

serve as the principals within this relationship, delegating decision making responsibilities to

their agent, the Lester management team. Lester Electronics is faced with making a decision on

the future of the company and is entertaining a few business options. One, Shang-wa, a key

manufacturer to Lester Electronics, is considering a take-over by Transnational Electronics

Corporation. If this acquisition occurs, Lester Electronics will lose around 45 of expected

revenue over the next five years. This will have a negative impact on shareholder wealth. Lester

Electronics has the option to allow the take-over by Transnational Electronics to take place,

place its own bid to acquire Shang-wa, or determine how to invest current assets to recover from

the expected loss in revenue. Conflicts of interest between these parties, principals and agents,

can involve agency costs, which can result in a reduction in the value of the company if

managers act in their own best interest. One strategy that could reduce agency costs and

maximize wealth involves making productive use of free cash flows.

Optimal Solution

Investing in a company can be a very risky move because the result could be a negative return and affect shareholder wealth. Lester Electronics is entertaining the decision to partner with Shang-wa. This option could be a huge success for both Lester Electronics and Shang-wa, or it could be a detriment to Lester Electronics future. Although, Lester Electronics is not at this point there is a possibility that the company may experience this type of loss by taking the risk of investing in Shang-wa or any other company. Any investment, which can have negatively impacting shareholder wealth, should be looked as a form of benchmarking.
Lester Electronics executive leadership and financial analysts can learn from this kind and proves that even though an investment may seem profitable in the beginning it could easily switch gears and affect the return to the company as well as its shareholders. Although, Shang-Wa’s financial performance proves positive return over the past three years there are still risks that the company may not perform as well after a partnership, therefore, there is the opportunity of worth in the value to oversee, review and analyze all aspects of the joint venture.
Lester and Shang-Wa will merge using Lester’s finances to payoff Shang-Wa’s debt. After the companies have merged the combined company will take their company from public to private to prevent any thoughts from Transnational and Avral of a hostile take-over. After the merger, the companies will re-evaluate their finances after the company has familiarized itself with each other. That way the company can see how the assets can be rearranged, plants consolidated and the combing of jobs / responsibilities.
Implementation Plan
Lester Electronics can leverage a variety of strategies to maximize shareholder wealth such as; working capital management, portfolio management, internal and external growth strategies, cross-border growth strategies, and organization performance. Prior to making any decisions regarding selling off the company or acquiring Shang-Wa Lester Electronics should analyze their current investment strategy and determine if there is any reason to re-invest in the current assets to maximize shareholder wealth. If there are no opportunities given for re-investment of Lester Electronics cash flow and assets, it can consider taking the risk of selling off assets to invest in the acquisition of Shang-Wa.
Before making any decision Lester Electronics should analyze Shang-wa’s financial statements and determine that if there is any opportunities to change the investment strategy within that organization should Lester Electronics decide to buy-out Shang-wa. Acquiring Shang-Wa would be a risky option, but it would prevent the 45% loss in expected revenue and be an investment for Lester Electronics. Although, Shang-Wa’s financial performance proves positive returns over the past three years still a risk that the company may not perform as well after a partnership. Whether Transactional Electronics Corporation acquires Shang-Wa or Lester Electronics entertains a partnership.
Furthermore, operating exposure can affect either the loss of business or gain in revenue. Lester can also have the opportunity to leverage on return any excess capital to the shareholders, to be used to determine whether the returns available from either option of Shang-Wa will produce a corresponding positive change in other, mutually reinforcing sets of investments. Evaluation of Results
Lester Electronics can leverage a variety of strategies to maximize shareholder wealth such as, working capital management, portfolio management, internal and external growth strategies, cross-border growth strategies, and organization performance. The company needs to prove that employing regional teams of product development engineers and taking advantage of new technologies a company can increase its profits and shares of the company. Lester Electronics can learn from mistakes of lack of communication and develop a clear and thorough communication plan and process of change to shareholders. Whether Transnational Electronics Corporation acquires Shang-Wa or Lester Electronics entertains a partnership, Lester Electronics can use its leverage and the company must adjust the exchange rate of the company that is being acquired to avoid profound effects on the competitive position on the industry.
Furthermore, the can prove how operating exposure can affect either the loss of business or gain in revenue. Lester can also leverage the return any excess capital to the shareholders, which can be used to determine whether the returns available from either option of Shang-Wa will produce a corresponding, positive, change in other, mutually reinforcing sets of investments. Lester Electronics can change the investment strategy to maximize return on investment and shareholder wealth, allowing to the company to gain and have a win-win solution.
Conclusion
With the industry changing, the competition continues to increase at alarming rates. The emphasis on the importance to stay ahead of the game Lester must embrace change. “Dealing with change and growth are concepts that corporate leaders face in a daily effort to create value for investors and stockholders, lasting jobs for company workers and a diverse product line for consumers.” (Honeywell, 1999) “Corporations have faced many of these solutions which have been already addressed by leading corporations, strategies, and actions that will form a reference point for decision-making and problem solving in this business scenario.” (The Associated Press, 1988) Corporations find many ways to address these issues and find good solutions but in the end, the goal is to find good win-win options for all participants of this organization.
In conclusion, Lester Electronics can leverage a variety of strategies to maximize shareholder wealth such as; working capital management, portfolio management, internal and external growth strategies, cross-border growth strategies, and organization performance. Prior to making any decisions regarding selling off the company or acquiring Shang-Wa. Lester Electronics should analyze their current investment strategy and determine that there are ways to re-invest current assets to maximize shareholder wealth. Although, opportunities are there for re-investment of Lester Electronics cash flow and assets, it can consider taking the risk of selling off assets to invest in the acquisition of Shang-Wa.
Before making this decision Lester Electronics should analyze Shang-Wa’s financial statements and determine that there are opportunities to change the investment strategy within that organization should Lester Electronics decide to buy-out Shang-Wa. Acquiring Shang-wa would be a risky option, but it would prevent the 45% loss in expected revenue and be an investment for Lester Electronics. Although Shang-Wa’s financial performance proves positive return over the past three years, a risk that the company may not perform as well after a partnership. Whether Transnational Electronics Corporation acquires Shang-Wa or Lester Electronics entertains a partnership.
The operating exposure can affect either the loss of business or gain in revenue. Lester can also have the opportunity to leverage on return any excess capital to the shareholders, to be used to determine whether the returns available from either option of Shang-wa will produce a corresponding, positive, change in other, mutually reinforcing sets of investments.

References

Fatemi, Tavakkol, Dukas, (1996). Foreign Exchange Exposure and the Pricing of exchange ate Risk. Global Finance Journal. 7 Issue 2.
Honeywell, (1999). Mergers and Acquisitions. http://myhoneywell.com
Jarrell, Gregg Takeovers and Leveraged Buyouts. In The Concise Encyclopedia of Economics
[Web]. The Library of Economics and Liberty. Retrieved 02/05/2008, from http://www.libraryofeconomicsand liberty.com
Kennon, Joshua (2008). Poison Pill. Retrieved February 6, 2008, from Poison Pill Web site: http://www.beginnersinvest.about.com/library/glossary/bldef-poisonpill.htm Marston, Richard (1996). The Effects of Industry Structure on Economic Exposure.
Ross-Westerfield-Jaff, (2004). Corporate Finance. The McGraw-Hill Companies.
The Associated Press, (1988). Problem Solving Techniques. http://www.theassociatedpress.com
Young, O'Byrne, (2008). EVA and Value-Based Management: A Practical Guide to
Implementation of the Net Present Value Method. http://www.valuebasedmanagement.net/methods

Table 1
Issue and Opportunity Identification
Issue Opportunity Reference to Specific
Course Concept
(Include citation) Concept
John Lin, CEO of Shang-wa Electronics, wants to form a partnership with Lester Electronics and establish a new manufacturing facility in a neighboring Asian country.
During the informal discussion, Transitional Electronics Corporation (TEC) offers a bid for Shang-wa. Bernard Lester would like to avoid a hostile takeover by TEC and partner with Shang-wa Electronics. Lester Electronics can take this opportunity to merge with Shang-wa and benefit both companies. Lester would maintain the supply of capacitors and Shang-wa would gain financial and management support. “Target-firm managers frequently resist takeover attempts. Resistance usually starts with press releases and mailings to shareholders that present management's viewpoint.” (Ross Westerfield, Jaffe, 2004)

Defensive tactics

The merger has been approved by the Board of Directors. Lester Electronics needs to get the stockholders of each firm, Lester Electronics and Shang-Wa, to vote for the approval of the merger. Lester Electronics has the opportunity to use their financial projections and research to inform the stockholders of each company the benefits that can be gained from the merger. “Mergers must be approved by a vote of the stockholders of each firm. Typically, votes of the owners of two-thirds of the shares are required for approval. In addition, shareholders of the acquired firm have appraisal rights.”
(Ross, Westerfield, Jaffe, 2004)
This means that they can demand that their shares can be purchased at a fair value by the acquiring firm. In which is called the poison pill strategy. “The flip-in and flip-out allows existing shareholders to buy more shares and also allows stockholders to acquire share at a discounted price.” (Kennon, 2008) Acquisition Merger
The merger of Lester Electronics and Shang-wa will form an internationally based company. It will need to ensure that exposures, such as fluctuations in the exchange rates, will not negatively affect the organization. Lester Electronics will have the opportunity to take advantage of international growth by merging with Shang-Wa. The formation of a facility in a neighboring country will also need to be observed. Identifying operating exposure is the most important and difficult to manage There are three components of foreign exchange exposure: direct operating exposure, the market demand effect, and the competitive effect. “The size and relative importance of these components depends critically upon international market structure and firm strategies.” (Fatemi, Tavakkol, Dukas, 1996) Operating Exposure
The merger will need to be financed. Shang-wa has a high debt ratio of over 60%. Lester may use some of their working capital to finance the venture but additional finacing will be needed. Although Lester will need to finance the merger additionally through acquisition of stocks. Lester has the opportunity to finance the venture by using working capital and also through the acquisition of stock. “Purchasing the firm’s voting stock in exchange for cash, shares of stock, or other securities. This can start as a private offer from the management of one firm to another. At some point the offer is taken directly to the selling firm’s stockholders.” (Ross, Westerfield, Jaffe, 2004) Financing an Acquisition / merger
Transnational and Avral Electronics are both on the rise. Transnational has acquired several companies through the use of mergers and acquisitions and are looking to expand globally.
Avral has old money backing the company. Robert Paget is called the “Rainmaker” of deals. Transnational and Avral Electronics both see the opportunity to take their companies globally. Both are aggressive and up and coming companies. Both companies see the opportunity to Takeover Shang-Wa and Lester Electronics. “A hostile takeover is when one company attempts to acquire another company against the wishes of the management, shareholders, and board of directors of the target company.” (Jarrell, 1993) Hostile Takeovers

Table 2
Stakeholder Perspectives
Stakeholder Perspectives

Stakeholder Groups
The Interests, Rights, and
Values of Each Group
Lester Electronics, Inc. Board of Directors.

. Interests include the successful merger of the two companies to secure future growth, profits, performance and the goals will be met by the company. The Board of Directors rights are Shareholders Interests include the maximizing of the shareholders wealth form the merger. They have the right to accurate information in making their decisions.

Bernard Lester John Lin Interests include profit, longevity of the company, performance and targets. Bernard has the right to expect accurate information from Shang-Wa to be evaluated for merger. John’s interests include the successful merger of Shang-wa, turning the company over to capable management as he retires; profits and performance are expected form the venture.

Employees of both organizations. Interests of the employees include continued rates of pay, job security, and working conditions. Have the right to expect fairness and respect from the new management.

Table 3
Analysis of Alternative Solutions

Table 4
Risk Assessment and Mitigation Techniques
Risk Assessment and Mitigation Techniques
Alternative Solution Risks and Probability Consequence and Severity Mitigation Techniques
Lester chooses not to merge with Shang-wa • unsatisfied customers
• • • Loss of business
• Hostile takeover
• Loss of shares • Benchmarking
• The goal of ERM is to manage any facet of risk that threatens a company’s ability to achieve its strategic objectives.
•
Lester and Shang-Wa merge • continuous satisfaction of customers and shareholders
• Taking the merged company from public to private
• • Financial pitfalls
• Selling off assets to finance
• • Benchmarking
• NPV•
Transnational and Avral take-over Lester and Shang-wa • If the merger does not happen between Lester and Shang-wa it is a good chance that these companies will step in take them over.
• • Becoming rivals
• Stocks may drop
• Loss of employees • The offer of benefits out going employees (layoff’s)
• •

Table 5
Optimal Solution Implementation Plan
Deliverable Timeline Who is Responsible
Lester and Shang-Wa merge 3 to 6 months Bernard and John
Combined finances 3 to 8 months Bernard and John
After merger go from public to private 1 to 2 months Shareholders/Stockholders
Bernard and John, Board of Directors
Assessment of all assets combined 3 to 8 months Bernard and John

Table 6
Evaluation of Results
End-State Goals Metrics Target
Lester and Shang-Wa merger A fortune 500 company
NASDAQ Leading company in their business
Increased sales Profitable, a strong capital structure Going global
Gaining a strong hold in the market Increased Sales A company to be reckoned with in the industry
Happy shareholders/stockholders Increased shares profitability Large returns in dividends