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Lester Electronics: Benchmarking

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Lester Electronics Benchmarking

University of Phoenix

MBA 540: Maximizing Shareholder Wealth

Lester Electronics, Inc. (LEI) Benchmarking

Lester Electronics, Inc. (LEI) faces a situation where the company must decide to whether partner with Shang-wa to establish a new capacitor manufacturing facility in a neighboring Asian country, acquire Shang-wa, or sell the firm to Aral Electronics, Inc., (University of Phoenix, 2004). 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 in a timely manner in order to maximize profits.

Company Synopses

Rio Tinto Company

Synergy from Acquisitions

Situation Facing the Company

Comalco, now officially known as Rio Tinto Aluminum, also faced a situation similar to that of LEI - the opportunity to maximize shareholder's wealth as a result of a hostile bid to acquire a key company (Stevens, 2007). Rio is a leading international mining firm with headquarter offices in Melbourne, Australia and London, England and operations on all continents except Antarctica (Kennedy, 2001). The business' major products include aluminum, copper, diamonds, energy products, gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore (Rio Tinto, 2007).

The United States aluminum producer Alcoa Inc. submitted a bid for $33 billion to acquire Alcan Inc., a Canadian firm in the innovative aluminum and packaging solutions business (Stevens, 2007). Alcoa is obviously one of Rio's competitors. Alcan owns valuable asset that translate to benefits or synergies to companies in the mining and metal production industry.

Response to the Issue

After the rejection of the hostile bid in May 2007, Tom Albanese, CEO of Rio Tinto, realized that Alcan would provide value to Rio's shareholders. Thus, he submitted a $38 billion bid and acquired the Canadian business (Rio Tinto bid US$38.1 billion to acquire Canadian aluminum manufacturer, 2007). Although Rio would not incur losses if it did not acquire Alcan, unlike LEI not acquiring Shang-wa in the scenario, executives knew Alcan was a key project that would generate cash and provide multiple benefits such as lowering costs and others (Kohler, 2007).

Outcome of Response

Although the transaction is too recent to identify any tangible outcomes, preliminary research conducted by the soon to be called Rio Tinto Alcan indicates that the company would benefit from Alcan's low-cost hydro power generation capability, especially in the future when energy becomes more expensive (Kohler, 2007). Additionally, the acquisition will enable Rio Tinto's shareholders to profit from the value of Alcan's organization and asset portfolio, the favorable demand fundamentals of the aluminum sector, particularly from nations that continue to grow rapidly like China and India, and the synergies and improved development opportunities which the combination of the merger will deliver (Kohler, 2007). The acquisition will be valuable to shareholders since is expected to generate earnings and cash flow per share to Rio Tinto in the first full year (Rio Tinto bid US$38.1 billion to acquire Canadian aluminum manufacturer, 2007). The sources of synergy for Rio Tinto come primarily from revenue enhancement and cost reduction.

Deere & Company

Synergy from Acquisitions

Situation Facing the Company

Deere & Company, the world's leading manufacturer of agricultural and forestry equipment, a leading supplier of equipment used in lawn, grounds and turf care, and manufacturer of engines used in heavy equipment, also identified an opportunity to increase its shareholders' wealth through synergies from acquisition (John Deere, 2007). Unlike Rio Tinto or Lester Electronics, Deere did not act in respond to a hostile action by another company. The firm simply saw an opportunity that would provide substantial benefits and made the move.

Response to the Issue

Robert W. Lane, CEO, announced Deere's plans to expand by acquiring Ningbo Benye Tractor & Automobile Manufacture Co. Ltd. business, located in Ningbo in southern China, in June 2007 (John Deere, 2007). The transaction was finalized in August 2007 (John Deere, 2007). The small tractor manufacturing builds tractors in the 20 to 50 horsepower range to satisfy the demands of Chinese farmers (Deere & Company to Acquire Chinese Tractor Company; Expand Product Line, 2007). Since Deere currently builds tractors in the 60 to 120 horsepower range at its current China joint venture tractor factory, the merger will facilitate service to those who work the land (Deere & Company to Acquire Chinese Tractor Company; Expand Product Line, 2007). Consequently, acquiring Benye provides an excellent opportunity to align with a manufacturer of tractors that provides products for a different segment of customers.

Outcome of Response

Since there is a growing demand for smaller tractors in China because rice farmers are moving into mechanization, Deere anticipates that farmers with less powerful equipment will be upgrading to machines in the 20 to 50 horsepower range soon (Deere & Company to Acquire Chinese Tractor Company; Expand Product Line, 2007). Evidently, the merger will allow Deere to better serve customers in China with a more complete product line, as well as to provide tractors from China to other locations in the world. The sources of synergy for Deere come mainly from revenue enhancement. Finally, although



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