Lester

Lester Electronics Financing Alternative Benchmarking

The team researched six companies with similar issues facing Lester Electronics to determine some benchmarking references for Bernard Lester. The six companies researched were: Apollo Health Street/Zavata-Appendix A, AT&T/BellSouth-Appendix B, Safeway-Vons Merger-Appendix C, Oracle-PeopleSoft-Appendix D, Boeing / Mc Donnell Douglas-Appendix E, May Company / Federated-Appendix F. This paper will provide some key concepts that will be compared and contrasted to help Mr. Lester make a determination on how to handle his situation.

"One important reason for acquisitions is that a combined firm may generate greater revenues than two separate firms. Increased revenues may come from marketing gains, strategic benefits, and market power (Ross, 2004, p 802)".

Concepts/Compare and Contrast

In order for the team to make an educated recommendation to Bernard Lester and the LEI board of director researched needed to be accomplished. The team chose six corporations that have been through mergers and takeovers within the last 10 fiscal years. These companies varied in size and industries. The major requirement with the selection process was that one or both of the companies in the merger process was publicly held.

Some of the financial concepts discussed in this paper will be devices and jargon synergy, and patterns of financing. The attached table will illustrate how the companies compare and contrast.

Synergy

All of the companies in our research have financial synergy between each company. "The NPV of an acquisition candidate is the difference between the synergy from the merger and the premium to be paid. We consider the following types of synergy: (1) revenue enhancement, (2) cost reduction, (3) lower taxes, and (4) lower cost of capital. The premium paid

for an acquisition is the price paid minus the market value of the acquisition prior to the merger. The premium depends on whether cash or securities are used to finance the offer price (Ross, 2004, p 796)". "One important reason for acquisitions is that a combined firm may generate greater revenues than two separate firms. Increased revenues may come from marketing gains, strategic benefits, and market power (Ross, 2004, p 802)"

Devices and Jargon

. "The sought after firm may use defensive tactics, including lockup, olden parachutes, poison pills, greenmail, and white knights (Ross, 2004, p 796)".

Two of the companies Safeway and May Company were lockup: "A lockup is an option granted to a friendly suitor (perhaps a white knight) giving the right but not the obligation to purchase stock or a portion of the assets (perhaps the crown jewels) of the target firm at a fixed price in the event of an unfriendly takeover (Ross, 2004, p 818)."

The other four companies were Golden Parachutes: "Some target firms provide compensation to top-level management if a takeover occurs. For example, when the Scoville board endorsed a $523 million tender offer by First City Properties, it arranged for 13 top executives to receive termination payments of about $5 million. This can be viewed as a payment to management to make it less concerned for its own welfare and more interested in stockholders when considering a takeover bid. Alternatively, the payment can be seen as an attempt to enrich management at the stockholders' expense (Ross, 2004, p 818)".

Financing Options

"The financial plan provides the opportunity for the firm to work through various investment and financing options. The firm addresses questions of what financing arrangements

are optimal and evaluates options of closing plants or marketing new products (Ross, 2004, p 796)". The most prevalent financial strategy identified within the research was that four of the six companies chose common stock patterns.

Conclusion

There are many financing options available to LEI that both can and should be given serious consideration once the financial status of both LEI and Shang-wa have been presented to the committee. The foundational regions for the merger are sound; whichever direction the financial aspect of the merger takes there is a strong probability that the companies will include some variety of a lock-up strategy. The likelihood for this reasoning is based on the prior relationship between Shang-wa and LEI and that both companies are currently being pursued by other organizations as well.

Table 1

Compare and Contrast Concepts

Merger Devices and Jargon Patterns of financing Synergy

Safeway-Vons Lock-up Common stock trade Yes

Douglas-Boeing Golden parachutes Common stock trade Yes

May-Federated Lock-up Cash and common stock Yes

Apolla-Zavata Golden parachutes Long term bank notes Yes

ATT-Bell South Golden parachutes Common stock trade Yes

Oracle-PeopleSoft Golden parachutes

Poison Pill Tender offer Yes

Appendix A:

Safeway-Vons Acquisition

Introduction

In the late 1980's and early 1990's the retail food industry was faced with multiple changes into the consumer spending habits having a result of flat sales and small growth periods. These changes were driven both by the fast food crazy of this period, more disposable income was being spent on food out of the home. The introduction of the grocery warehouse approach to the bargain minded shopper as now the average person could buy in bulk and reduce the amount of time spent in the neighborhood market. With the changing coming forth, the traditional food retailers would need to make changes in order to counting to see their market share grow and stockholders confidence.

Safeway and Vons are both grocery stores giant in their individual target markets, with both companies have loyal brand following. Vons operating 325 stores under the names of Pavilions and Vons was the largest supermarket operations in Southern California. Safeway is one of the world's largest with 1,052 stores operating in the United States and Canada. Safeway already owns 34.5 percent of Vons, while both have representatives

...