Lester Electronics has an exclusive deal with the Korean manufacturer of capacitors to be the sole distributor of the capacitors within the United States. Lester Electronics uses the capacitors in its small and medium sized equipment. Lester Electronics in partnership with Shang Wa have made inroads in both the consumer and industrial areas of the market. This has helped both organizations grow and has led to the opportunity of a merger between both organizations. Lester Electronics, however, faces a hostile takeover from another company within the market who would like to grow using the takeover. This hostile takeover, if completed would end the exclusivity of the contract between Lester Electronics and Shang Wa. This has made a merger between the two organizations even more important to Lester Electronics and must be accomplished as quickly as possible.
Situation Analysis
Issue and Opportunity Identification
Lester Electronics has an exclusive contract with Shang Wa to distribute Shang Wa’s products within the United States. Lester Electronics has maintained a $500 million level of revenue even selling just within the United States. The contract between Lester Electronics and Shang Wa is renewed each year and will continue for 65 years as long as Lester Electronics continues to purchase at least $1 million worth at a wholesale rate. Mr. Lin whom owns Shang Wa recognizes the fact that he is growing older and would like to see his company continue to grow within the industry. Mr. Lin agrees that the way to do this is for Lester Electronics and Shang Wa to merge into one organization which will greatly benefit both organizations. One issue to this merger is to insure that it increases the value to the shareholders of both organizations. Another item pressing the merger is that the merger must be completing prior to the hostile takeover attempt. This would allow Lester Electronics to avoid such an effort.
Transnational is considering a hostile takeover attempt on Lester Electronics. This is one of the reasons why Lester Electronics is very interested in acquiring Shang Wa. There are several reasons for hostile takeovers in the business world. Transnational may believe that Lester Electronics will help the company grow its revenue larger than the cost of the takeover. The takeover may also help the company increase its name recognition, technology base or distribution channels. A hostile takeover is accomplished when a company obtains another company that did not want to be bought. The target company may believe that the acquisition would lower the value of the original company or it could be as simple as executives trying to protect their jobs. Two of the most used methods of a hostile takeover are a tender offer and a proxy fight. The tender offer is a public bid for a large amount of the target companies stock at a fixed rate. When this type of takeover is one the company must provide the documents to the SEC and they must include the plans for the target company. The proxy fight occurs when the group whom is attempting to takeover the company tries to convince the shareholders to vote in new management that will agree with the takeover.
Lester Electronics will also need to determine how to create the merger between Lester Electronics and Shang Wa. When two companies merge that are the same size it is called a merger of equals and they agree to go forward as one new company and new stock is issued for the new company. However, in this case Lester Electronics and Shang Wa will merge through the purchase of Shang Wa by Lester Electronics. Lester Electronics will have to raise the money for this merger through some form of debt instrument. Lester Electronics will have to fund the merger by selling bonds or bills to individuals or institutions. In return for buying these from Lester Electronics they promise to pay both interest and principle in a certain amount of time. Another way that Lester Electronics can raise the necessary funds is to issue shares of stock. This type of financing is called equity financing.
Stakeholder Perspectives/Ethical Dilemmas
There are always people and organizations that are affected in any change that happens within the organization. The employees of the organization expect management to treat them fairly and to help protect the jobs of the employees while increasing revenue. The management expects the CEO to develop a plan for the organization and to set the goals of the organization.
Lester Electronics has a large stake in the merger with Shang Wa for two reasons. The first is that Lester Electronics would like to continue to grow into the worldwide market and continue to increase revenue for the company. The second reason is that Lester Electronics would like to avoid the hostile takeover attempt that Transnational is trying to achieve. If Transnational is allowed to complete the hostile takeover Lester Electronics would lose 43% of the revenues that Lester Electronics currently enjoys. Shang Wa would no longer be able to provide the services to Lester Electronics at such a discount to Lester Electronics. Shang Wa also has a large stake in the merger of the two organizations. Mr. Lin would like to do his best to guarantee the success of his organization and to insure the future growth of the organization. Mr. Lin is contemplating retiring and would not like his company to die after he retires. The shareholders of both organizations have the right to increased value of the stock that they own through the organization increasing the profits and revenue of the organization. This merger will help the shareholders of both organizations realize an increase of shareholder wealth as the companies combine.
End-State Vision
Lester Electronics has the opportunity to merge with Shang Wa into a major player in the world markets. The merger would allow Lester Electronics increase the organizations innovative edge when dealing with others within the global electronics markets. With the merger between Lester Electronics and Shang Wa they will be able to branch into new markets while gaining new customers in the manufacturing area and to individual customers. The expansion of Lester Electronics into the global market will help to increase the market share of the new organization by at least 12% which will push Lester Electronics into the global leader in the market. The merger and the growth into the global markets will also increase shareholder wealth by 16% and increase the customer base of the organization by 20%. Lester Electronics should now invest in analyzing the efficiencies of the organization in order to further reduce the cost of the organization. This will also help to increase revenue and decrease waste.
Gap Analysis
When dealing with new visions for the organization it is very important not to forget your old and loyal customer base. Many times organizations try to expand into new markets to grow the customer base of the organization they will forget about the loyal customers who have helped to grow the company from the beginning. The old customers are forgotten and taken for granted. When this happens the old customers look for another company and it becomes a race against time to find new customers to replace the old customers that the organization lost. It is also vastly more expensive to find new customers than to retain old, loyal customers. In order for Lester Electronics and Shang Wa to have a successful merger, not lose old customers while increasing customer base and expand into new markets they must find creative ways to create financing. The CFO must analyze the cost of the merger and how the debt is to be financed. The companies must also decide how to combine the stocks of the two organizations and how the growth of the companies will affect the shareholders in order to gain shareholder approval for the merger.
Conclusion
There are many struggles for Lester Electronics and Shang Wa through this time of transition. Transition and change brings with it many anxieties for everyone involved. It is important for the organizations to understand this and provide the information to the employees and to the shareholders of all that is going to happen. It is also very important to maximize the use of debt for the organization. This can be done through using financial planning and organizing the debt of the organization to utilize tax deductions. It will also be necessary for Lester Electronics to analyze the global markets to determine the best long range goals of the organization after the merger is complete to guarantee the best way to maximize shareholder wealth.
References
Ross-Westerfield-Jaffe. (2004). Corporate Finance. Retrieved October 20, 2008, from University of Phoenix, Week Three, rEsource. MBA 540 Maximizing Shareholder Wealth.
University of Phoenix. (2007). Scenario: Maximizing Shareholder Wealth. Retrieved October 19, 2008, from University of Phoenix, Week Three, rEsource. MBA 540 Scenario 2 website.
Gabriele Carbonara, Rosa Caiazza. (2009). Mergers and Acquisitions: Causes and
Effects. Journal of American Academy of Business, Cambridge, 14(2), 188-194.
Retrieved February 16, 2009.
Focer, Ada. (1988, March). The Coming Wave of Hostile Takeovers. Bankers
Monthly, 105(3), 73. Retrieved February 16, 2009.
Scott Schofield. (2007, January). HOW TO MAKE THE MOST OF YOUR PROPOSAL
BUDGET. Contract Management, 47(1), 46-50. Retrieved February 16, 2009.
Table 1
Issue and Opportunity Identification
Issue Opportunity Reference to Specific
Course Concept
(Include citation) Concept
Lester Electronics has an exclusive contract with Shang Wa to use the capacitors that Shang Wa produces within the US This agreement has allowed Lester the opportunity the exclusive rights to obtain the capacitors at a lower rate and lower cost. It has also provided the opportunity for Lester Electronics to be in a position to buy Shang Wa. Acquiring another firm by buying all if the assets of the organization (Ross-Westerfield-Jaffe, 2004, p. 798). Establishing Capital Structure
Lester and Shang Wa have decided to pursue the option of merging. Shang Wa has been in the process of growing while in a relationship with Lester Electronics. The merger will help both companies continue to grow. A merger refers to the action of one firm being absorbed by another (Ross-Westerfield-Jaffe, 2004, p. 797). Mergers
Lester Electronics is concerned because Transnational Electronics is considering a hostile takeover attempt. This would end the relationship between Shang-Wa and Lester Electronics and cause Lester Electronics cost to increase dramatically. The hostile takeover would allow TEC to expand into the global market. An organization must take advantage of the competitive market when the opportunity and situation arises (Ross-Westerfield-Jaffe, 2004, p. 803). Market Gains
Table 2
Stakeholder Perspectives
Stakeholder Perspectives
Stakeholder Groups
The Interests, Rights, and
Values of Each Group
Lester Electronics
Shareholders
Shang Wa
Table 3
End State Goals
End-State Goals
Lester Electronics should analyze all avenues to increase and maximize shareholder wealth.
To acquire Shang-Wa to increase profit margins for the company.
To identify areas to increase distribution and lower cost.