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Lei Problem Solution Analysis

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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 the acquisition in cash or a stock purchase depends on the NPV of the projects. The purchase of Shang-wa could be possible due to LEI's availability of cash. Pending any unforeseen circumstances, John Lin might prefer this financing method because a lump sum of cash could allow him to retire much sooner. If he chooses the cash-deal then he could collect his money up front rather than receiving stock, which unless he sells, holds him liable for any future occurrences. Conversely, "If cash is used to finance an acquisition, the selling firm's shareholders receive a fixed price. In the event of a hugely successful merger, they will not participate in any additional gains" (Ross, Westerfield, Jaffe, 2005, p. 815).

The alternative means of financing for LEI is to offer common stock to Shang-wa's shareholders. This means configuring a value that would yield a fair exchange ratio for shareholders. There a many benefits to purchasing a company with stock versus cash, one of which is the tax advantages. Exchanging stock is a tax-free transaction that benefits shareholders of both companies. John and the stockholders could benefit because they will gain more shares that could potentially be sold for a higher return. LEI will benefit with a stock purchase because "If in the opinion of management the acquiring firm's stock is overvalued, using shares of stock can be less costly than using cash" (Ross, Westerfield, and Jaffe, 2005, p. 815).

Before the merger takes place, analysts need to configure the value of the firm after an acquisition. Combined, LEI and Shang-wa should generate higher cash flow than if they continued to operate as separate companies. According to Ross, Westerfield and Jaffe (2005), "Ð' analyst must estimateÐ' flows and determine the proper discount rate" (p. 807). Therefore, the authors identify four general rules: "Do not ignore market values; estimate only incremental cash flows; use the correct discount rate; there will be transaction costs" (p. 808). Stakeholder Perspectives/Ethical Dilemmas

Several stakeholders are prevalent throughout this merger process. His or her interests, rights and values could conflict with one another. Therefore, identifying stakeholders is important and the affect the merger will have on their perspectives and ethical dilemmas. The first group of stakeholders is the board of directors of Shang-wa. They have an interest in receiving a fair offer that could enable John to retire while simultaneously holding value for the company. As previously mentioned, company value and shareholder wealth have a direct relationship with one another. John's friendship with Bernard Lester should have no bearing on the board's decision to accept the offer from LEI. The board has the right to review all offers and make a sound decision that will yield the highest value. This might conflict with John's intentions, but John could accept the deal if he is convinced that another tender offer (i.e. TEC) would be in the best interest of the firm. The board values honesty, decisiveness, candor and fairness.

The second group of stakeholders is the board of directors of LEI. He or she has an interest in combining two entities that will yield the highest value while minimizing costs. John's impending retirement might persuade Bernard to make an offer that assists John in achieving his personal goal of retirement. However, the board should agree to an offer that meets LEI's financial goals, not necessarily the goals of someone else. If Bernard is not careful, his personal relationship with John could cause conflict with the board and any dissenting shareholders. The LEI board of director's value profit, market dominance, increased revenue, fairness.

The third group of stakeholders is the shareholders of Shang-wa and LEI, which have an interest in receiving an offer that yields the highest return on investment. The stockholders have the right to vote on the offer once it has been agreed upon by the board of directors of both companies. A fair return means that the stockholders are gaining in both value and equity once the



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