Lester Electronic: Investment Alternative Benchmarking

Running head: INVESTMENT ALTERNATIVE BENCHMARKING

Investment Alternative Benchmarking

University of Phoenix

MBA 540

November 26, 2007

Introduction

In this paper will compare and contrast issues that various companies had experienced in simulation to the issues presented in the Lester Electronic Scenario. The companies chosen are Intel Capital, Kodak, Alcoa, Toronto-Dominion Bank, Delphi, General Motors, Southwest Airlines, and SunTrust Bank. One of the issues presented in the scenario is that LEI was preparing to conduct a joint venture with Shang-wa when Transnational Electronics made an offer to acquire Shang-wa. The main issue is that if Shang-wa is acquired by TEC, the joint venture between Shang-wa and LEI will not be possible. LEI intends to remain as the company of choice but this might not be possible if TEC acquires Shang-wa or if LEI acquires Shang-wa. Some of the concepts that Team A will evaluate considering the LEI scenario issues are: capital management strategies to maximize shareholder wealth, economic exposure, the challenges of cross-border growth strategies, working capital management, and internal and external growth strategies.

Working Capital Management Strategies to Maximize Shareholder Wealth

CFOs are constantly faced with new challenges in managing their working capital. Companies are taking twice as long to convert their working capital into cash. What is more, instead of relying on cash from efficient working capital, companies are turning to banks to ask for immediate credit lines instead of planning to improve cash flow (JP Morgan Chase). Working capital management is an important yardstick to measure a company operational and financial efficiency. This aspect must form part of the company’s strategic and operational thinking. Efforts should constantly be made to improve the working capital position. This will yield greater efficiencies and improve customer satisfaction (Gordon, 2006). The essence of effective working capital management is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles, loss of a prime customer and actions by competitors. The effect of unforeseen demands of working capital should be factored in (Gordon, 2006). One of the primary reasons SunTrust is conservative when it comes to mergers and acquisitions is due to their 1986 purchase of Nashville-based Third National Corp. SunTrust paid 1.8 times book value and was subsequently responsible for $225 million in chargeoffs, depressing SunTrust’s stock price for several years. It is imperative that LEI take into consideration any possible unforeseen demands that can decrease its working capital. LEI is in the process of reviewing financial statements of companies it is interested in possibly merging with, however, sometimes financial statements would not show possible unforeseen events.

Addressing the issue of working capital on a corporate-wide basis has certain advantages. Cash generated at one location can well be used at another. For this to happen, information access, efficient banking channels, good linkages between production and billing, internal systems to move cash and good treasury practices should be in place (Gordon, 2006). Southwest Airlines states that it plans to generate cash from other sources other than airline tickets. For example, allowing customers to book hotel reservations directly from Southwest’s website. This not only impacts customer service, but will maximize long-term wealth as well. Customers demand services that add convenience for him or her. LEI needs to take an approach similar to Southwest’s to cross-sell or offer internal growth strategies such in addition to its current offerings that will increase working capital. For example, changing its organizational culture or changing product awareness.

Internal and External Growth Strategies

Many companies today are looking for opportunities to strategize on how to grow internally and externally. Kodak is one company that has realized being in a competitive industry requires a world-class diverse supply chain (Kodak, 2007). Like Kodak, LEI should realize its growth potential and opportunity and act accordingly. Kodak has looked externally, and partnered with efficient, fast, and flexible suppliers to obtain the best possible value for all materials, goods, and services