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Lester Electronics

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Problem Solution: Lester Electronics Inc.

Marcella Starck

University of Phoenix

Problem Solution: Lester Electronics Inc.

Lester Electronics is a consumer and electronics parts master distributor that markets its products to original equipment manufacturers. For many years, Shang-wa company has been an exclusive supply agreement with Lester electronics. Now, the CEO of Shang-wa is wishing to retire and has no formal succession plans for the company's management. At the same time, Shang-wa is being pursued for a takeover by Transational Electronics Corporation (TEC). Both companies are upset over the take over possibility. Lester is set to lose 43% of their revenues if they lose Shang-wa as a supplier. Lester Electronics is also being pursued for a possible takeover by Avral Electronics. After much analysis, both Lester and Shang-wa agree that a merger between the two companies would be the best solution to maintain their relations and stave off takeover attempts by the two other companies (University of Phoenix, 2006).

Lester believes that a merger between the two companies would be the best way to increase their shareholder's wealth. By merging, Lester will now have a global presence and should increase their market standing. However, there are several issues that Lester will have to address as a result of the merger.

Describe the Situation

Issue and Opportunity Identification

The first issue that Lester will have to deal with is to determine if they have the financial capacity to complete the merger with Shang-wa. Lester's financial managers should evaluate their cash flows to see if they have the money to either buy Shang-wa using the equity that they already have or to finance the purchase with debt. During this evaluation, Lester should evaluate the timing of the cash flows. If Lester decides to purchase Shang-wa using any debt, the financial managers will have to ensure that the timing of the cash flows are such that Lester is able to make the principal and interest payments on the debt (Ross, Westerfield, & Jaffe, 2005). If this evaluation is completed successfully, then Lester should be able to increase in financial standing within the industry.

A second issue that Lester Electronics is facing will be to determine a financial structure and a financing plan to complete the merger with Shang-wa. "Managers should choose the capital structure that they believe will have the highest firm value, because this capital structure will be the most beneficial to the firm's stockholders" (Ross, Westerfield, & Jaffe, 2005, p. 404). If Lester can choose and implement a financial structure that will benefit their stockholders and add value to the firm, then they will have the opportunity to grow as a company, take on new endeavors, and continue their relationship with Shang-wa.

A third issue that Lester will be facing is to reduce the risk to the stockholders. A merge with another company is full of risks and many times investors are adverse to risk. By mitigating the risks associated with the merger, Lester Electronics has the opportunity to increase the shareholder's wealth and the firm's overall value (Ross, Westerfield, & Jaffe, 2005).

A fourth issue that Lester Electronics is facing combining their financial reports with Shang-wa and reducing their exposure risk. Economic exposure if the susceptibility of a company to currency exchange rates (Investopedia, 2006). There are three main types of exposure: economic exposure, transaction exposure, and translation exposure (Ross, Westerfield, & Jaffe, 2005). Economic exposure is "the extent to which the value of the firm would be affected by unanticipated changes in exchange rates" (Ross, Westerfield, & Jaffe, 2005, p. 284). Transaction exposure is "the sensitivity of the realized domestic currency values of the firms' contractual cash flows denominated in foreign currencies to unexpected exchange rate changes" (Ross, Westerfield, & Jaffe, 2005, p. 284). Lester Electronics will have to worry about exposure in acquiring Shang-wa because this now makes them a global company dealing with different currencies and exchange rates. The extent to which a company is susceptible to economic exposure depends on the characteristics of the company and its industry (Investopedia, 2006). To manage economic exposure, companies can incorporate strategies such as "choosing low-cost production sites, maintaining flexible sourcing policy, diversification of the market, product differentiation, and financial hedging using currency option and forward contracts" (Ross, Westerfield, & Jaffe, 2005, p. 299). If Lester is able to lower their risk of exposure, then the company has the opportunity to expand globally and increase its market position within the industry. The proposed merger is very important to both Lester Electronics and Shang-wa. The importance of the merger, however, is sure to bring about some ethical dilemmas from competing stakeholder values.

Stakeholder Perspectives/Ethical Dilemmas

Despite the fact that management of both Lester Electronics and Shang-wa are in agreement for the merger, there may be some differences in opinion in how to get the job done that will result in some ethical dilemmas. For example, the management of Lester will be concerned with getting the best deal for their stockholders to increase their wealth. Shang-wa's management may be concerned with the same principal for their stockholders. An ethical dilemma can arise here if both companies think singularly instead of in the best interest of the newly formed, merged company and its future stockholders.

The stockholders of both Lester and Shang-wa may operate the same way. Both sets of stockholders will want the best deal for themselves as a result of the merger. An ethical dilemma can arise here if they attempt to influence merger negotiations.

Another dilemma that could arise is with dealing with Avral and TEC which has interest in taking over Lester and Shang-wa respectively. Because of this interest, Avral and TEC may try to use a hostile takeover to prevent the merger. As a result of this action, the stockholders of Lester and Shang-wa may see benefit in being taken over by another company instead of a merger and push to have this done. Lester and Shang-wa's management may feel differently



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