Gap Analysis: Lester Electronics

Gap Analysis: Lester Electronics

Lester Electronics, Inc, a consumer and industrial electronics parts master distributor with distributors throughout America and Europe. The company entered into an exclusive agreement with Shang-wa Electronics, a small Korean manufacturer of capacitors, to give Lester the exclusive right to sell Shang-wa capacitors in the United States as long as the company maintained a minimum purchase of $1 million wholesale annually. Transnational Electronics Corporation (TEC) is a large manufacturer of electronics components and has expressed an interest in acquiring Shang-wa. Avral Electronics, an electronic equipment and component parts manufacturer, has expressed an interest in acquiring Lester Electronics.

Bernard Lester, CEO and founder of Lester Electronics and John Lin, CEO and founder of Shang-wa Electronics have built an amicable working relationship and have discussed the option of establishing a new capacitor manufacturing facility. Bernard’s interests lie in the fact that the loss of Shang-wa as a manufacturer would result in a 43% loss in revenue over five years. John Lin is interested in planning for retirement yet has not groomed a successor and realizes that a joint venture would “enable both companies to meet growing demand for the niche product Shang-wa offers,” (Scenario: Lester Electronics, 2). In addition, it would provide Shang-wa with the management talent and John Lin the long-term opportunity to potentially exit the business.

As the two companies prepare to merge, there must be careful consideration of the various issues and opportunities, along with the interests of the stakeholders and the ultimate end state goals. This paper will further explore these considerations.

Situation Analysis

Issue and Opportunity Identification

Lester Electronics has decided to merge with Shang-Wa. A merger is advantageous over an acquisition because “a merger is legally straightforward and does not cost as much as other forms of acquisition,” (Ross, Westerfield, Jaffe, 2005). In addition, a merger does not require a transfer of title of each individual asset of the acquired firm to the acquiring firm. However with this venture will come issues related to mergers including determining the NPV. In addition a merger must be approved by a vote of the stockholders of each firm, which usually requires two-thirds of the shares are required for approval. An additional consideration is that shareholders of the acquired firm have appraisal rights or the ability to “demand that their shares be purchased at a fair value by the acquiring firm,” (2005). Often the acquiring firm and the dissenting shareholders of the acquired firm cannot agree on a fair value, which results in expensive legal issues. Lastly a merger is the complete absorption of one firm by another therefore Lester Electronics retains its name and identity, yet will acquire all the assets and liabilities of the acquired firm and once the process is complete, Shang-wa will cease to exist as a separate business entity.

Lester Electronics must determine how this merger is going to bring financial value to the company. The company can create value from capital budgeting decisions by: locating an unsatisfied demand for a particular product or service; create a barrier to make it more difficult for other firms to compete; produce products or services at lower cost than the competition; be the first to develop a new product (Ross, Westerfield, Jaffe, 2005). It is possible that Lester Electronics will capitalize its market share and become an industry leader if the terms of the merger are acceptable to all parties and all potential risks and pitfalls are calculated and mitigated.

Lester Electronics must