Gap Analysis: Lester Electronics

Gap Analysis: Lester Electronics

Lester Electronics Inc. (LEI) is a consumer and industrial electronics parts distributing company that markets its products to small local distributors throughout North, South, and Central America and Europe. The company also markets to small to medium-sized original equipment manufacturers and repair facilities. In 1978 LEI entered into an exclusive distribution contract with Shang-wa Electronics. Lester Electronics (LEI) and Shang-wa have been close partners for nearly 35 years. LEI is faced with the decision to align with Shang-wa Electronics to establish a new capacitor manufacturing facility in a neighboring Asian country, acquire Shang-wa outright, or sell the firm to Avral Electronics, Inc., (University of Phoenix, 2007). “The issue translates into an opportunity to increase revenues through sources of synergy – revenue enhancement, cost reduction, lower taxes, and lower cost of capital,” (Ross, Westerfield, & Jaffe, 2005). Clearly, the firm must study the options carefully and make a decision timely in order to maximize wealth for its shareholders. The owners of these two companies are also close friends. As business owners they have worked hard to increase market share, maximize profits, and ultimately share their success. Difficult decisions will have to be made especially now that the boards of directors at Lester have given the green light to merge with Shang-wa. A hostile takeover looms in the horizon and LEI cannot afford to stand on the sidelines and sit idle since 40% of their revenues and products come from Shang-wa. The board has asked the leadership team to move forward with a financing recommendation

Situation Analysis

Issue and Opportunity Identification

The major issue confronting Lester is to repel the hostile takeover that Transnational Electronics Corporation (TEC) is proposing with Shang-wa. If TEC takes Shang-wa over then Lester loses its key supplier and ultimately be detrimental. Shang-wa also realizes that if it does not cooperate with TEC the situation could turn hostile. After Shang-wa was approached by TEC John Lin went direct to Bernard Lester to propose a partnership or joint venture agreement. John Lin ultimately wants to retire and since he does not have a successor wants the company to be in good hands and for Lester they continue to have their key supplier. Lester will have to do their research and perhaps convince Linn that merging is the best alternative to a partnership. The executive team will have to examine operational exposure and exchange rate currency fluctuations. Lester will also have to determine if they have the financial capacity to complete the merger. According to (Ross, 2005), “there are three basic legal procedures that one firm can acquire another: (1) merger or consolidation, (2) acquisition of stock, (3) acquisition of assets”. Lester will have to decide which option is best for them as they pursue Shang-wa. Lester also must determine the synergy of the acquisition. The executive team must ask and calculate if the acquisition will create (Ross, Westerfield, & Jaffe, 2005):

a. revenue enhancement

b. marketing gains-strategic benefits-market or monopoly power

c. strategic benefits-cost reduction-economies of scale-vertical integration-inefficient management-complementary resources

d. tax gains-net operating loses-unused debt capacity-surplus funds

e. cost of capital

On the surface synergies already exists between these two firms. Lester must convince their shareholders to accept the board’s proposal. A merger 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. Once the stockholder’s approve the deal then financing can be arranged. Financial planning establishes guidelines for change in the firm. These guidelines should include (1) an identification of the firm's financial goals, (2) an analysis of the differences between these goals and the current financial status of the firm, and (3) a statement of the actions needed for the firm to achieve its financial goals (Ross, Westerfield, & Jaffe, 2005). According to Ross, Westerfield, & Jaffe (2005), “Managers should choose the capital structure that they believe will have the highest value, because this capital structure will be most beneficial to the stockholders” (p. 404). An adequate mixture of stocks and bonds will essentially yield a higher overall value. LEI will face a critical issue of avoiding errors by obtaining the wrong type of financing or by overestimating