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Lester Electronics Problem Solution Essay

4317 words - 17 pages

Problem Solution: Lester ElectronicsLester Electronice, Inc. (LEI) is a consumer and industrial electronics parts master distributor, marketing its products to small and medium-sized equipment manufacturers, repair facilities and small local distributors throughout the Americas and Europe with revenues approximating at $500 million a year. Shang-wa CEO, John Lin began manufacturing capacitors in 1969, building a small business in Korea. In 1978, Shang-wa entered into an exclusive United States distribution contract with LEI. Under the contract, Shang-wa granted LEI the exclusive right to sell Shang-wa capacitors in the United States for 65 years, as long as LEI maintained a minimum annual purchase of $1 million wholesale; as a result, Shang-wa is LEI’s primary supplier of capacitors for the U.S. market. In exchange, Shang-wa cannot knowingly sell its capacitors to anyone intending to market to U.S. buyers.The contract between LEI and Shang-wa must be renewed annually and the relationship between both the companies has served them well, and John and Bernard (CEO’s of Shang-wa and LEI respectively) now consider themselves friends and as well as business partners. In fact, five years ago, Bernard invited John to sit on the LEI Board of Directors. During his past two visits to the United States for Lester’s quarterly Board meetings, John has informally suggested that Shang-wa is open to growth opportunities that could position the company to meet growing demand. In 1984, LEI went public, and it is now traded on the NASDAQ market and rated Baa by a nationally recognized rating agency.Situation AnalysisIssue and Opportunity IdentificationConsolidated financial statements for LEI and Shang-wa show positive growth for the firms. LEI and Shang-wa Electronics have been in business together for 40 years, and the 1 million dollar exclusive minimum wholesale agreement has developed into a lucrative relationship. The companies have become targets for hostile takeover and losing Shang-wa would prove to be disastrous to LEI’s revenue which will go down by 43% in the next five years, and the drop in sales would lead to decreased market value which would impact the shareholders’ wealth negatively. Shang-wa has shown interest to merge with LEI as Shang-wa’s CEO was planning to retire. To stop the hostile takeovers in their racks, both the companies have decided to merge. The vertical consolidation as a manufacturer and distributor has shown a good growth potential. Transitioning together will require optimal capital budgeting techniques and expert financial planning to enhance the current capital structure.The first issue that LEI faces is to determine a financial structure and a financing plan to for 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 &...

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