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Lester Electronics Financing Alternatives

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Lester Electronics Financing Alternatives


University of Phoenix


Maximizing Shareholder Wealth


June 21, 2007

Lester Electronics Financing Alternatives

Bernard Lester of Lester Electronics (LEI) is not convinced that a merger with Shang-wan is in the best interest of the company. Lester has requested the assistance of a professional consulting group to assess all alternatives including financing alternatives for Lester Electronics. The final report is in and the results to be discussed are as follows:

1) End State Goals defined;

2) Financing alternatives identified;

3) Evaluation: Advantages and disadvantages identified;

4) Risk analysis data compiled;

5) Alternative Matrix developed;

6) Risk Assessment and Mitigation chart developed; and

7) Financing solution proposed.

Detailed information can be found below on the above mentioned subject matter. LEI plans to utilize the consulting data to determine the direction and future of their corporation.

End State Goals Defined

Although Bernard Lester is leery of the board's request to pursue Shang-wa as an acquisition, he has defined the end state goals of LEI-Shang-wa as the following:

* Become an international seller of electronic parts increasing sales by 50% in year 1

* Increase ROE to 30% over the next 2 years. (Debt to equity)

* Long term debt reduction plan

* Maximize shareholder wealth via increased stock prices and market share

In order to achieve these end state goals LEI considered many financing alternatives and narrowed their decision down to four main topics to present to the Board of Directors along with evaluations of each. Summary details can be found below.

Alternative 1 Identified - Management Buyout

LEI will consider a management buy-out option and bringing Shang-wa on as a subsidiary partner providing them with financial backing, leadership, and direction for their company. LEI have considered hiring an outside consulting company to help facilitate the management buy-out process. The consulting company will revamp the entire management structure of Shang-wa and act as a liaison between LEI and Shang-wa manufacturing. Bernard Lester and John Lin of Shang-wa, both find this alternative plan very attractive because of all the options involved and accomplishing the needs of both companies to achieve their end-state goal. LEI understands in order to achieve the goal of a management buyout, they will first have to go through the process of a leveraged buyout. A leveraged buyout, or LBO, involves the use of borrowed money, in conjunction with equity capital, to finance a change in a company's ownership. A management buyout is a type of LBO in which the acquiring group is led by the target company's existing management. Through these transactions, operating management can acquire an ownership in the business stake it runs. (LanternCapitalAdvisors, 2007).

Alternative 1 - Evaluation

By considering the option of management buyout and keeping Shang-wa on a subsidiary partner, John Lin is relinquished of the day-to-day operational duties. Bernard Lester benefits because he still maintains his relationship with the existing partnership that he has had with Shang-wa. From an accounting perspective, bringing Shang-wa on as a subsidiary makes sense because it will allow Shang-wa to enjoy a tax benefit and creditor protections. In addition, forming a subsidiary with Shang-wa will also provide a substantial tax benefit at a state level. LEI has endorsed this alternative business plan because if Shang-wa were to incur any financial problems, the parent company being LEI, assets and its credit rating are still protected. Hence, LEI finds no potential risk in making Shang-wa a subsidiary partner. (Myers, R, 2002).

Bernard Lester will retain Shang-wa as his primary source for manufacturing capacitors, while accomplishing the goal of becoming an international seller of electronic parts increasing sales by 50% in the first year, or possibly more. The only change will be in management, which will be controlled by LEI. However, LEI guarantees to leverage new economies of scale, innovative and up-to-date technology, and enter into new markets. The capital structure to increase the ROE to over 30% in the next two years is realistic because LEI plans to turn senior secured debt to equity. (LanternCapitalAdvisors, 2007).

Alternative 1 - Risk Analysis

Bernard Lester, John Lin, and LEI are all in favor of the management buyout option and bringing Shang-wa on as subsidiary partner rather than merging Shang-wa into LEI. This solution would incur minimal risk due to parent company protection if the subsidiary incurs financial problems. The solution also has a high probability of success because the new management buy-out plan was structured by consultants that will assist with revamping the new management staff under LEI's corporate business plan. This alternative plan ranks very high for all three companies while attempting to achieve the end state goals.

Alternative 2 Identified - Seller Financing

As LEI considers financing alternatives, Bernard Lester will find seller financing a very attractive proposition. "Buying a business without seller financing is like buying a home without a home owner's warranty. The seller note is a bond for performance" (Cooper, 2002). Shang-wa could make the LEI-Shang-wa merger proposition more attractive by offering seller financing. LEI knows firsthand that Shang-wa manufacturers a quality and popular capacitator; However, LEI would not only be purchasing Shang-wa's capacitator business but also Shang-wa's large debt load. By offering seller financing, Shang-wa, the seller, shows that it has faith in the future of business despite the debt load (Cooper, 2002). Shang-wa also positions itself to get the highest purchase price possible by funding 30-50% of the acquisition (Parker, 2006). Shang-wa may become creative and offer consulting agreements,



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