Lester Gap
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Gap Analysis: Lester Electronics
Lester Electronics is a distributor of electronics components in the United States. Shang-wa Electronics is a small Korean electronics manufacturer. For the past 35 years the two companies have been engaged in an exclusive supply agreement that has served both companies well. Recently there have been changes in the industry, the market, and in the personal lives of the CEOs of the two companies that have led Lester to the decision to merge with Shang-wa.
The problem facing the new company as it merges as one will be identified through a brief overview of the situation. The financial changes with the merger create issues and opportunities that will be examined. Those include deciding which acquisition procedure to use, the accounting method for the acquisition, the tax form for the acquisition and how the acquisition will be financed. Each of the stakeholders perspectives and interests will be considered in relation to the issues and opportunities. Clear financial goals will be established that define the end state and will enable Lester to measure the effectiveness of the problem solution in the future. Finally a gap analysis of the Lester/Shang-wa merger will be conducted to aid the company in developing a plan to reach its end-state goals.
Situation Analysis
Issue and Opportunity Identification
Lester Electronics Inc. is a consumer and industrial electronics parts master distributor that has been in business since the late 1970s. Shang-wa Electronics has been in business since 1969 and is a manufacturer of capacitors. In 1978 Shang-was CEO John Lin and Lesters CEO Bernard Lester entered into an exclusive supply agreement. Under the contract, Shang-wa granted Lester the exclusive right to sell Shang-wa capacitors in the United States for 65 years, as long
Lester also had several opportunities in this scenario. The following are opportunities that directly correspond to each of the issues listed above.
There are three basic legal procedures that one firm can use to acquire another firm: (1) merger or consolidation, (2) acquisition of stock, and (3) acquisition of assets.
Accounting for mergers and acquisitions involves a choice of the purchase method or the pooling-of-interests method.
Mergers and acquisitions can be taxable or tax-free transactions.
Lester can finance the merger through cash or stocks.
Managers should choose the capital structure that they believe will have the highest firm value, because this capital structure will be most beneficial to the firms stockholders.
As shown in Table 1 each of these issues and opportunities relate directly to concepts in financial planning and maximizing shareholders wealth. These concepts focus around the merger and the financing particularly techniques used to value external investments.
Stakeholder Perspectives/Ethical Dilemmas
In table 2 the stakeholders have been identified as Lester Electronics, Shang-wa Electronics, and the stockholders. The table identifies their perspectives including rights, values and expectations. Some of the stakeholder groups might have conflicting rights and values which present ethical dilemmas. There are many possible ethical dilemmas that the two companies will face during a merger including those related to operations, employees and customers. However, with the focus on the financial implications the shareholders might have the biggest ethical dilemma. Each set of stockholders at both companies will need to decide if they want to continue to invest in the new company and will have concerns about the new firms value and ability to maximize their wealth. Lester Electronics must consider all the stakeholder perspectives when considering solutions to merger issues.
Table 2
Stakeholder Perspectives
Stakeholder Perspectives
Stakeholder Groups
The Interests, Rights, and
Values of Each Group
Lester Electronics (Senior Leadership)
Lesters interests are to be accountable to the stockholders, successfully develop the company, and to maintain a strong and well trained workforce. Senior leadership values are integrity of the company, respect for the employees and increased profitability.
Shang-Wa (Senior Leadership)
Shang-was interests and values are similar to Lesters. Additionally John Lin has an interest in finding a way to keep the firm successfully running when he retires.
Set of stockholders for each company,
The shareholders have a vested interest in how the company is performing, namely what is the price of the stock. In addition to the right to vote the shareholders have the following rights:
1. The right to share proportionally in dividends paid.
2. The right to share proportionally in assets remaining after liabilities have been paid in a liquidation.
3. The right to vote on matters of great importance to stockholders, such as a merger, usually decided at the annual meeting or a special meeting.
4. The right to share proportionally in any new stock sold (Ross et al, 2005, p. 388)
End-State Vision
The opportunity statement which defines Lester Electronics end-state vision is that Lester will become a premier manufacturer and distributor of electronic components by determining financing instruments that will positioning the organization to finance this investment as well as future opportunities successfully. If Lester is going to achieve this vision the organization will need to achieve the goals listed in Table 3.
Table 3
End State Goals
End-State Goals
Increase return on assets.
Reduce Debt to equity ratio to 25% or below
Increased return on equity
Determine successful financial instruments for future investments.
Improvement in working capital and cash flows
These goals and the organizations vision will only be reached if the issues that have been identified