Lester Electronics Financing Alternative Benchmarking
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Issues Connected to Corporate Finance
The first concern that Lester should consider is checking whether or not they have enough financial capacity to carry out the merger with Shang-wa. The financial managers of Lester need to evaluate the companys cash flows to know if they have enough money to either buy Shang-wa with existing equity or to finance the purchase using debt. Through this evaluation process, Lester also needs to assess the timing of cash flows. If Lester decides to buy Shang-wa using any debt, the financial managers will have to make certain that the timing of the cash flows is such that Lester would be capable of making the principal and interest payments on the debt (Ross, Westerfield, & Jaffe, 2005). With the successful completion of this evaluation Lester should be able to increase its financial standing within the industry.
The second issue faced by Lester Electronics is establishing a financial structure and financing plan to complete its merger with Shang-wa. According to Ross, Westerfield, and Jaffe, “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 firms stockholders” (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 business relationship with Shang-wa.
A third issue confronting Lester Electronics is the reduction of risk to its stockholders. A merge with another company entails a substantial amount risks; frequently, investors avert such risks. The mitigation of risks associated with the merger would grant Lester Electronics the opportunity to increase its shareholders wealth and the entire firms overall value (Ross, Westerfield, & Jaffe, 2005).
A fourth issue that Lester Electronics needs to face is the adoption and combination of their financial reports with Shang-was, with the aim of minimizing exposure risk. Two main types of exposure are relevant to Lester Electronics: economic exposure and transaction exposure (Ross, Westerfield, & Jaffe, 2005). Economic exposure refers to “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 pertains to “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 should worry about exposure in acquiring Shang-wa because such merger would turn it into a global company dealing more with foreign exchange. To manage economic exposure, companies can take on 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 diminish their risk of exposure, it enhances its opportunity for global expansion thereby increasing its market position within the industry. The proposed merger is indeed very important to both Lester Electronics and Shang-wa.
Benchmarking with Other Companies
After identifying four issues relevant to corporate finance, several other companies that previously faced the abovementioned issues are discussed. The benchmarking of past practices from other companies is a useful technique of evaluating the alternatives that would be proposed to Lester Electronics in order to address the corporate-finance issues it faces while contemplating about its cross-border acquisition of Korean-based Shang-wa company.
Benchmarking # 1: Fidelity Bank
One good example of cross-border acquisition took place between Fidelity Bank of Nassau Bahamas and Royal Bank of Canada (RBC Financial Group, 2007). The acquisition has aggregated the Royal Banks institutional investor services, a move that involved 1.0 billion U.S. dollars worth of client assets, as well as 1,500 employees spanning a wide geographic area. According to Hoffman (2005), this cross-border transaction is a global venture, the first of its kind in the institutional investor services market in combining two enterprises having complementary global growth strategies and strong capitalization. The new joint venture, Royal Fidelity Merchant Bank & Trust Limited is a holding company that provides “corporate finance and advisory, investment management, stock brokerage, share registrar and transfer agency, pension and mutual fund administration services to existing and new clients throughout the Carribean” (RBC, 2007). The merger “establishes a one-stop solution for medium to large-sized corporate finance engagements” (RBC, 2007).
According to Fidelitys CEO and chairman Anwer Suderji, over 50 percent of Royal Fidelitys assets under custody are held for its cross-border clients.