Lei Problem Solution Analysis

Running head: PROBLEM SOLUTION: LESTER ELECTRONICS

Problem Solution: Lester Electronics

University of Phoenix

Problem Solution: Lester Electronics

Shang-wa of Korea and Lester Electronics, Inc. (LEI) manufacture electronic parts for various industries. Upon news of Shang-wa CEO John Lin's retirement, competitors have determined that his company is a good buying opportunity. Mr. Lin would prefer to sell to his friend at LEI, CEO Bernard Lester, because Lin's belief is that Lester's company is fully capable of maintaining the daily operations of Shang-wa. After a thorough analysis from LEI analysts and a pro-forma financial sheet, the board of LEI recommended that the two companies combine into one entity. The following discussion analyzes the various means of financing the impending merger, reviewing various methods that will help LEI achieve the goal of the merger. An optimal solution is suggested including how the plan will be implemented. Finally, this paper will identify how the results will be evaluated.

Situation Analysis

Issue and Opportunity Identification

Shang-wa and LEI must first determine the value of the firm once the merger occurs. Often mergers are though of as a means to enhance shareholder wealth; in other words, making the rich, richer. However, that philosophy does not apply to the Shang-wa and LEI consolidation. John Lin, CEO of Shang-wa, is seeking an exit strategy that will enable him to retire within the next few years. That being realized, John will choose not only the company that will allow him to achieve his goal, but also one in which the company is still intact once he departs. Therefore, LEI and Shang-wa need to agree on a financing method that will maximize the mergers value. Maximizing value correlates with maximizing wealth where choosing to increase value will simultaneously increase shareholder wealth. This is in lieu of choosing a strategy that only maximizes shareholder interests. 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.

Once a value is determined, LEI will need to assess the NPV of the acquisition. Whether LEI should cover