Problem Solution

Problem Solution: Lester Electronics

Lester Electronics, Inc. (LEI) and Shang-wa Electronics (SWE) joined together as business partners in 1978 (UoP, 2007). The business relationship has been successful during this time and each company has experienced significant growth. Recently both companies were approached by other organizations that displayed interest in merging, acquiring, or taking over the companies. Bernard Lester (Lester) and John Lin (Lin) have entertained the interest of the other companies and the LEI Board of Directors has made the decision to pursue a merger with SWE. This document addresses the scenario, risks LEI faces and an end-state vision that will find the organization learning from the pending merger, implementing a more effective financial strategy and positioned to continue as a leader in the electronics market. The immediate and long-term future is at stake for both LEI and SWE, not only for the companies and their employees but the principles as well.

Situation Analysis

Issue and Opportunity Identification

The situation presented in scenario one and two cause LEI and SWE to make strategic decisions that will affect the future effectiveness and success of the organizations (UoP, 2007). With each issue presented opportunities are considered that can lead the companies to more profitable futures. The synergy of the organizations has led to the impending merger of the organizations and projected success for the surviving business. The merger of LEI and SWE will require the merging of the two cultures while addressing several financial issues. The issues that present concern and interest for LEI revolve around financial distress created by the immediacy of reviewing and implementing the merger, capitalizing on cash and international conversion rates, and improving the leverage position of the companies in order to form defensive tactics to delay the aggressive bids from Transnational Electronics Corporation (TEC) and Avral Electronics (AE) (see Table 1).

With the growing demand for SWE and LEI products, expansion and growth are high on the list of priorities of the two management teams. Future success is based on LEI’s ability to continue to sell exclusively the SWE products in America and Europe. The risk presented by the possibility of losing 45% of LEI’s projected sales could mean the success or failure of the organization. A consolidation or merger seems to be the avenue most palatable for the success of both organizations and will afford both protection of the important business partnership as well as ensure the future success of the combined organizations. “A merger refers to the absorption of one firm by another” (Ross, Westerfield, & Jaffe, 2005, p. 797). In a merger the acquiring firm will retain the name and acquires the assets and liabilities of the acquired organization, a consolidation is substantially different. “A consolidation is the same as a merger except that an entirely new firm is created. In a consolidation, both the acquiring firm and the acquired firm terminate their previous legal existence and become part of the new firm” (Ross, Westerfield, & Jaffe, 2005, p. 797).

Timing is a concern for LEI and SWE, without making an attempt to deter or push off the aggressive acquisition bids from TEC and AE, LEI and SWE may lose the ability to continue with the merger or consolidation plans. With exclusionary self-tender the companies may give themselves enough time to finish their consolidation or merger. The self-tender operation entails, “…the firm making a tender offer for a given amount of its own stock while excluding targeted stockholders” (Ross, Westerfield, & Jaffe, 2005, p. 817). This will transform the wealth of the stockholders and make it more difficult for the company’s to be purchased by a hostile force.

The concerns of a hostile takeover of LEI or SWE, the merger of LEI and SWE, or the noted 45% loss in projected sales can develop into financial distress (FD) and collapse of the LEI organization. FD centers on the failure or decline of an organization’s financial status and the filing of bankruptcy or some other form of impairment in business function (Ross, Westerfield, and Jaffe, 2004, p. 433). FD most often develops when a company has a higher debt-equity ratio and assumes an increased amount of debt. The probability that a firm will avoid financial distress can be linked to the firm’s liquidity function (Ross, Westerfield, and Jaffe, 2004, p. 23). When a company has sufficient cash flow liquidity the chance that a company will default on debt and experience FD is reduced (Ross, Westerfield, and Jaffe, 2004, Appendix 2A, p. 35).

FD impacts an organization in several ways including direct,