Problem Solution: Lester Electronics

Essay by actdjohngUniversity, Master's August 2007

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Lester Electronics is a consumer and electronics parts distributor, marketing its products to original equipment manufacturers (OEM). For many years, the Shang-wa company has been in an exclusive supply agreement with Lester electronics. Currently, the CEO of Shang-wa is exploring the possibility of retiring, to that end, there is no formal succession plan for the company should the CEO retire.. At the same time, Shang-wa is being pursued for a takeover by Transnational Electronics Corporation (TEC), another electronics company who would benefit from the merger with Shang-wa. Both Shang-wa and Lester companies are upset over the takeover possibility. Should the hostile takeover take place, Lester would lose 43% of their revenues and Shang-wa as a supplier. Lester Electronics is also being pursued for a possible takeover by Avral Electronics. After a consolidated 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).

Merging Lester and Shang-wa would be the best way to increase their shareholder's wealth. After such a merger, Lester would have a global presence and increase their market standing. There are, however, several issues that Lester will have to address as a result of the merger.

Issue and Opportunity IdentificationThe 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 capital 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...