The paper discusses the issues associated with the risks assessed between the organizations bidding for ownership of Lester Electronics. As described in the scenario
Running head: PROBLEM SOLUTION: LESTER ELECTRONICS
Problem Solution: Lester Electronics
Nicole Hamblin
University of Phoenix
Problem Solution: Lester Electronics
This paper shows problem solution for the organizations listed within the Lester Electronics scenario. It discusses the planning process used in determining the best avenue to take in deciding to sell or not sell the organization or to merge with another organization. It also discusses the decisions of a potential merger or buy-out of Lester Electronics, Shang-wa Electronics, Transnational Electronics Corporation, and Avral Electronics, S.A.
The paper discusses the issues associated with the risks assessed between the organizations bidding for ownership of Lester Electronics. As described in the scenario, Lester Electronics is an organization that entered into an exclusive contract in the United States with Shang-wa Electronics, a small Korean manufacturer of capacitors. Lester Electronics grew rapidly making inroads with two large domestic manufacturers that use capacitors in both consumer and industrial products. Since Lester Electronics is the master distributor of electronic parts it markets its products to small and medium sized original equipment manufacturers also known as OEMs, repair facilities, and small local distributors throughout the Americas and in Europe. Lester Electronics, because of the exclusive contract with Shang-wa Electronics, has not marketed domestic-made parts outside of the United States. By operating in this manner, Lester Electronics has revenues that total approximately $500 million dollars a year. Six years after the initiation of the contract with Lester Electronics and Shang-wa Electronics, Lester Bernard, the founder and CEO of Lester Electronics took his company public and it is now traded on the NASDAQ market and rated Baa (which is considered as medium-grade obligations, meaning they are neither highly protected nor poorly secured) by a nationally recognized rating agency.
John Lin who is the CEO of Shang-wa began the manufacturing of capacitors in 1969 by building a small well-respected business in Korea. Nine years later, in 1978, he entered into an exclusive supply agreement with Lester Bernard, CEO of Lester Electronics in the United States. Shang-wa granted Lester Electronics the exclusive right to sell Shang-wa capacitors in the United States for a timeframe of 65 years as long as the minimum annual wholesale purchase was at least one million dollars. Because of this exclusive contract, Shang-wa with Lester Electronics is the primary supplier of capacitors for the U. S. market. Other than the obvious financial benefits of this contract, Shang-wa Electronics cannot knowingly sell its capacitors to anyone intending to market to the United States buyers. The contract between Shang-wa and Lester Electronics has lasted for the last 35 years being renewed annually and has served the growth and finances of both organizations well. Because of this continual relationship between these two organizations, both CEOs have become friends as well as business partners. Five years ago, the CEO of Shang-wa Electronics was invited to be on the Board of Directors for Lester Electronics. He comes to the United States quarterly for Board Meetings. During his quarterly meetings, John (CEO of Shang-wa Electronics) continually suggested the fact that Shang-wa is open to growth opportunities that could positively position the company to meet the growing demand for the services they offer.
Transnational Electronics Corporation (TEC) is a large manufacturer and distributor of electronics components that is on the rise. Transnational Electronics Corporation has developed a greater amount of resources lately and has become able to expand globally because of recent mergers and acquisitions. Transnational Electronics Corporation CEO David Antone, since recognizing the growing domestic demand for the specialty capacitors that are manufactured by Shang-wa Electronics has been mentioning to Shang-wa Electronics CEO David Antone that Transnational Electronics is interested in acquiring the Shang-wa Electronics organization. The advantages of this acquisition would be financial stability and staying power for Shang-wa and John Lin, CEO would be able to spend less time and hours working and more time with family, as he desires. The disadvantage of this acquisition happening would be the longstanding exclusive distributorship contractual relationship between Lester Electronics and Shang-wa Electronics would not likely continue and would cease at the end of the current year. This would cause a substantial decrease in the yearly revenues earned by Lester Electronics over the next five years with a reduction of approximately 43 percent.
Avral Electronics, another electronics equipment and components manufacturer which is headquartered in Paris and also has manufacturing facilities in Ireland, France, and three Asian nations. Avral is a lucrative organization that has shares traded through Paris Bourse, Frankfurt Stock Exchange, and New York Stock Exchange. Avral has a very wide shareholder base and in the past five years has tripled their annual revenues from $300 to $900 million. Because of this increased financial power, Avral executives have decided to explore the options of an electronics distributorship business in the United States.
Shang-wa Electronics has the tedious task of deciding if it is more beneficial to sell or not to sell and if so to which organization the merger with Lester Electronics, the acquisition by Avral Electronics, or the acquisition by Transnational Electronics Corporation.
Lester Electronics, Avral Electronics, and Transnational Electronics Corporation all use internal rate of return and net present value to determine whether acquiring Shang-wa Electronics would be a smart and feasible choice.
The internal rate of return is defined as the discount rate that gives a net present value (NPV) of zero. It is a commonly used measure of investment efficiency. The decision given from the internal rate of return is the same as the net present value (NPV). The net present value and the internal rate of return from these organizations use the incremental cash flows from each potential investment or project. The net present value should be estimated using a discounted cash flow valuation. Fisher's separation theorem asserts that the objective of a firm will be maximization of its present value regardless of the preferences expressed by its owners. The Fisher Separation Theorem states that the firm's investment decision is independent of the preferences of the owner and the financing decision. The theory also expresses that the value of a capital project (investment) is independent of the mix of methods-equity, debt, and/or cash-used to finance the project. (Wikipedia, 2007)
This scenario discusses the concept of capital budgeting and addresses it in the decision analysis for a couple of equal ranking organizations. This scenario also addresses the decision making process of Shang-wa Electronics choosing an organization to merge or form an acquisition with.
The organizations that are looking at acquisition of Shang-wa Electronics use the higher net present value, internal rate of return, and profitability index was based on the calculations that were analyzed and indicated from the past growth rates seen by Shang-wa Electronics. Because of the past success of Shang-wa Electronics, they have a ...
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This scenario discusses the concept of capital budgeting and addresses it in the decision analysis for a couple of equal ranking organizations. This scenario also addresses the decision making process of Shang-wa Electronics choosing an organization to merge or form an acquisition with.
The organizations that are looking at acquisition of Shang-wa Electronics use the higher net present value, internal rate of return, and profitability index was based on the calculations that were analyzed and indicated from the past growth rates seen by Shang-wa Electronics. Because of the past success of Shang-wa Electronics, they have a relatively high net present value, internal rate of return, and profitability index.
From the standpoint of Shang-wa Electronics, they are evaluating the two mutually exclusive capital investment proposals; different measures such as the net present value, internal rate return, and profitability index were used to evaluate the proposals. The reliability of these measures depends on the cash flow projections for the two organizations. Shang-wa Electronics CEO also looked at the positive potential outcome of a merger with Lester Electronics.
Situation Analysis
Issue and Opportunity Identification
The goal of Lester Electronics, Inc is to create a financially viable organization by merging with Shang-wa Electronics. The CEO of both organizations is convinced that by merging the two organizations, they have the opportunity to see their organization grow and compete in a larger market. The key to this is for the organization as a whole when merged to have a financial plan. The financial plan to be successful should include a sales forecast, pro forma statements, asset requirements, financial requirements, and the plug variable and economic assumptions. (Ross, 2005)
Avral Electronics would like to merge with Shang-wa Electronics - while at the same time Transnational Electronics Corporation would like to merge with Lester Electronics. If Shang-wa and Lester do not merge, they each independently face a take over. The problem being considered in this situation is how to financially merge these organizations while gathering investors to ensure success in competition against other already established large organizations. This is where it is important to have long-term investors or stockholders to ensure the success in this venture. (Ross, 2005) Attaining financial support could be a key concept in preventing the organization from having a take over. The key is finding adequate financial support to remain an independent entity and prevent the merger or take-over by a larger more powerful organization.
Once the merger happens between Shang-wa and Lester Electronics, they must compete in a larger format with other large companies. This is when it is even more important for the combined organization to be financially stable. Once the merger takes place the new Shang-wa/Lester Electronics organization must financially be prepared to compete with much larger and more established organizations such as Transnational Electronics Corporation and Avral Electronics. It is vital to have an impact in their respected markets and a new synergy will leverage the available intellectual capital, in-depth experience and expanded resources to provide a winning partnership. (business wire, 2005) It is key that the new Shang-wa/ Lester Electronics organization is financially viable in a large market to adequately be equipped to compete.
Stakeholder Perspectives/Ethical Dilemmas
There were numerous ethical dilemmas addressed in this scenario. The ones addressed directly in this paper are those that relate to net present value (NPV) and internal rate of return, profitability index, capital project (investment), Fisher's Separation Theorem, and mergers and acquisitions. These dilemmas are addressed in the numerous issues that occur within the Shang-wa Electronics, Lester Electronics, Transnational Electronics Corporation, and Avral Electronics. The NPV and internal rate of return addressed relate to the ones expressed by the evaluations from all four organizations looking to making changes to potentially increase company revenue in response to projected plans. The dilemmas relating from the proposed mergers and acquisitions of the Lester Electronics - Avral Electronics merger versus the Shang-wa Electronics - Transnational Electronics Corporation merger versus the Shang-wa Electronics -Lester Electronics merger. Another issue to be addressed is the one regarding capital project (investment) as it relates to the merger of Lester Electronics and Shang-wa Electronics and how the capital would be addressed after the combination. The issues of mergers and acquisitions are addressed with all of the proposed mergers and acquisitions of all four organizations looking to acquire or be acquired.
Problem Statement
Lester Electronics after the merger with Shang-wa Electronics will transform itself into a lucrative electronics company that is number one in its industry and has a steady increase in the profit and growth margins of its stock.
End-State Vision
The merger of Lester Electronics and Shang-wa Electronics will be a successful, publicly traded company with rising stock indices on Wall Street. The new organization will become a publicly traded company that will realize its true growth targets, establish the company as a strong competitor, and show Wall Street that this new organization has the revenue and capital to succeed as a public entity.
Alternative Solutions
American Civil Constructors - Internal and External Growth Strategy
American Civil Constructors (ACC) is comprised of people who share a love for construction. More than 1500 employees make up ACC. Their success is built on their dedication and skills. ACC provides the opportunity for successful contractors to join a team of like-minded companies to become part of a profitable, geographically and service-diverse company that can provide more meaningful work and greater wealth creating opportunities that are possible in a single, smaller company. ACC demonstrates that a larger geographically diverse company, balancing work from the public and private sectors, as well as creating a more stable income and employment for its member companies therefore creating a substantial value for all its stakeholders.
ACCs internal growth strategy consists of investing in its existing operations. This is a positive point that can be used by Lester Electronics as it holds the benefits of investing in known entities. They know the people involved and can clearly measure the resources necessary to expand an existing operation. The cost of this organic growth can be significantly less than pursuing an external strategy.
ACCs external strategy is a carefully executed program that is an important complement to their internal or organic growth. They only consider growth as it contributes to the underlying business. This would be accomplished as the organizations in the Lester Electronics scenario are doing by the strategic acquisition of like-minded companies with well-defined attributes. This strategy is important to all stakeholders because if executed properly it is the fastest way to increase the value of the company and selected acquisitions will bring additional skills to the repertoire of the organization and enhance their service offerings.
ACC clearly shows what should be carefully considered by all organizations in the Lester Electronics scenario, a company should not acquire just for the sake of acquiring, they should only pursue companies, which have been strictly evaluated and can clearly add value to the organization.
Remedy Interactive - Return on Investment
As defined in Wikipedia, the phrase "return on investment (ROI), or sometimes referred to as just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment." (Wikipedia, 2007)
"Remedy Interactive is the leading provider of software that streamlines ergonomic programs in large organizations globally. The Company's flagship product is the Office Ergonomics Suite (OES) and it assesses risk, trains employees, optimizes work patterns, and collects data to enable organizations to focus their resources, automate their ergonomics programs, and ultimately reduce costs. The OES's management features are designed to allow companies to do more with less by harnessing the potential of automation." (RSI Guard, 2005).
Remedy Interactive suggests that the benefit of investing in their products within their organization is because they feel that there is a great opportunity for a return on investment. This can be looked at by all organizations listed in the Lester Electronics Scenario. The two organizations that are looked at to be purchased by other organizations can look at what their current return on investment will likely be decided based looking at this number as well as the company's that are looking to expand by buying the other two organizations. All can decide if the purchase or acquiring of another company will be beneficial for all parties. Another example of return on investment is when an organization puts a substantial amount of finances into an individual or a product. The investment into that individual or product will be proven to have a positive or negative benefit on the organization directly related to the individual or products that were invested in. This can be greatly used as a benchmarking example to assist the Lester Electronics scenario examples.
Kimberly-Clark acquires TECHNOL Medical products, Ballard Medical Products, and Safeskin Corporation
The use of mergers and acquisitions is widely used by organizations to better strengthen their organizations with the combination of two somewhat lucrative organizations or by a larger more powerful organization acquiring an organization that is less likely to become a strong independent organization. The concept of mergers and acquisitions allows for the organization to combine assets and capital and become a more financially strong organization as well as becoming a more technologically strong organization by combining two organizations of similar services within an industry. The concept of mergers and acquisitions used in this light allows for the creation of many mega-companies by use of this concept. Like Lester Electronics, other organizations also use the concept of mergers and acquisitions to create a more solid organization. One such company is Kimberly-Clark. In the 1990's Kimberly-Clark a company already growing and striving for over 125 years acquired not just one organization but two companies, TECHNOL Medical Products and Ballard Medical Products. They later in 2000 acquired Safeskin Corporation who was a leading maker of high quality disposable gloves for health care, high-technology, and the scientific industry. This not only increased the asset and capital contained within the organization as the disposable glove industry at this time was a $3 billion industry but because Safeskin was in the number one position in the U.S with exam gloves this allowed them the accolade of acquiring a top company within and area that was not already touched by the Kimberly-Clark's previous products which allowed the organization to be considered a top company in more than one arena. By acquiring these companies Kimberly-Clark went from a strong organization the previously primarily made paper products such as tissues, paper towels, and diapers to an organization that pushed into a new realm of service. (Kimberly-Clark, 2007)
The success of Kimberly-Clark in its mergers and acquisitions has shown greatly over the past decade and they continue to grow and strive in the new areas that have been opened up due to their mergers with the several companies they acquired. Lester Electronics can use the example of Kimberly-Clark to grow into areas that were previously untapped by their organization after the merger is complete. They have the ability to become an even stronger mega-company and can become the monopoly for their products and services by branching into the right areas. (Kimberly-Clark, 2007)
Coca-Cola Integration of companies through Mergers and Acquisitions
Coca Cola, the world's largest soft drink company decided to combine three of its North American units: Coca-Cola, Fountain, and the Minute Maid Company. The integration of these three companies not only strengthened the capital of the organization overall but combining with other successful or potentially successful organizations but it also lead to the increase in revenue by being able to exercise the Fisher Separation Theorem. The Fisher's Separation Theorem asserts that the objective of an organization is the maximization of its present value regardless of the preferences expressed by its owners. This theorem states that the organization's investment decisions are independent of the preferences of the owners of the organization and the financing decisions. The theory expresses that the value of a capital project or an investment is independent of the mix of methods-equity, debt, and /or cash used to finance the project. (Wikipedia, 2007)
After the integration of these companies, layoffs were eminent. Coca Cola similar to Lester Electronics will possibly consider some layoffs across the board after they are totally acquired by another organization. Downsizing and layoffs not only affects employees but it creates change in the organizations culture. Coke experienced employees voicing concerns within the organization because of the future change in staffing and a resulting decrease in morale. This decrease in morale if experienced by Lester Electronics will possibly result in decrease in production. This can have a potential negative effect on the capital within the organization.
The Coca Cola Corporation addressed these concerns by stated that due to net loss of Coke, changes were needed. Aware of the employees' concerns; top management executives added that changes in management will create good consequences for employee well-being, motivation, and productivity. They also provided psychological help for the employees to help them adjust to the impending change. The Coca Cola Corporation indicated that this change is needed and will save the corporation about $300 million a year.
Lester's Electronics situation is similar to that of the Coca Cola Corporation because of being acquired by Shang-wa Electronics and the extra staff that came along with Lester's Electronics there will possibly be s serious need for cutbacks in certain departments, particularly those that are duplications of the same areas of the acquiring organization. (Beverage World, 2000)
Analysis of Alternative Solutions
The items that I ranked as the highest in the list of alternative solutions are the development of molding an executive board for needed guidelines and the needed funds for the expansion after the merger. The need for the executive board development I ranked higher because that development would assist in molding the overall structure and guidelines of the new blended organization. This is needed to set up guidelines that will benefit the merger of a new organization versus the benefit of two distinct individual organizations. The need for the funds to expand products and branch into new areas that are currently unscathed by the either of the individual organizations is ranked as the second highest of the alternative solutions. Therefore the greatest two needed solutions is the creation of new advances in products and services for the expansion of the organization and gathering the needed resources to place the company in a place where they need to be in order to successfully expand the organization. The second alternative is to have a strong board available to offer guidance and direction to assist the organization in achieving the set goals.
Risk Assessment and Mitigation Techniques
The potential negative outcomes or risks associated with the alternative solutions chosen are very minimal. The risk of the combination of development of new products and the funds needed for the expansion of the newly merged organization consist of the products not being created in a timely enough fashion for the organization to meet the set timelines. This would cause either a delay in the expansion of capital for the organization or the total demise of the combined organization all together. The development of the new products also has a very strong impact on the gaining of the needed revenue to continually expand the organization. If the needed funds are not gathered in time and a sound board is not developed this could also cause a delay in progression or demise in the recommended strategies for the organization.
Optimal Solution
The optimal solution that will best meet the end state goals of Lester Electronics/Shang-wa Electronics will be combinations of several alternatives. Those alternatives are to continue the plan to develop new board of directors and aggressively work on the development of new breakthrough technologies that will allow the organization to develop the notoriety and financial structure and stability needed to move forward and progress with the planned strategy.
By this combination of resources from other a know leader in this industry, it will allow for the needed technological advances that will assist in the end state goal of Lester Electronics/Shang-wa Electronics expanding financially with rising stock within the next three years.
Implementation Plan
The planned merger should be implemented by first identifying all of the variables and notifying the staff of the expected changes and company goals. The staff should although being made aware of all the changes that will be taking place within the organization should be reassured that although there will be many impending changes the livelihood of the staff is also a priority of the company.
The plan should be modeled after the successes of different companies that have also been successful in developing a new company merger. American Civil Constructors, Remedy Interactive, Kimberly-Clark, and Coca Cola were all successful at creating a merger or organizations. They were successful in this venture and therefore the strategy used by them as generic benchmarking can be used by Lester Electronics/Shang-wa Electronics as an example to assist in accomplishing the same goals for a successful implementation of their merger. Lester Electronics/Shang-wa Electronics can use these examples for their benefit in following the lead of a company that has already been successful with accomplishing the same tasks.
Evaluation of Results
For Lester Electronics/Shang-wa Electronics to evaluate if the implemented solutions are successful, they must evaluate the difference in profit increase made after the merger has been implemented. If the projections are correct there should be a steady increase in overall profits over the next four quarters slowly rising and with a more noticeable increase over the next three years in quarterly increments. The company will notice an increase in sales due to new expansion in their customers attained from new products that were developed and the increase in global expansion.
Conclusion
Lester Electronics/Shang-wa Electronics needs to create the needed products and finances to complete the strategy developed by the newly developed board. The assistance of the organization's alliances with other successful electronics' organizations within this area developing new products will assist Lester Electronics/Shang-wa Electronics in becoming the industry leader. By developing these alliances with other electronics organizations coupled with Lester Electronics/Shang-wa Electronics will ultimately increase their amount of financial stability for this organization and place it in a better financial position to expand its revenue and products. By accomplishing this it places the company in a better position globally. This summarizes the overall short-term goal of the organization which is development of new revenue and products to expand the overall capital and revenue of the organization.
References
http://www.acconstructors.com/growth/growth.html
Beverage World. (2000) " World in which we operate" spurs Coke to cut 6000 job.
Vol. 119 Issue 1687 p. 12. Retrieved June 17, 2007 from UOP ReEsource , EBSCHOST Database
Capital budgeting- Wikipedia, the free encyclopedia. Retrieved on June 17, 2007 from http://en.wikipedia.org/wiki/Capital_budgeting
Kimberly-Clark (2007) http://www.kimberly-clark.com/. Retrieved June 16, 2007
RSIGuard Software: User Perception and the Return on Investment, Remedy Interactive Propriety, June, 2005. Retrieved on May 25, 2007 from http://www.rsiguard.com/documents/help/ROIAndUserPerception.pdf
Table 1
Issue and Opportunity Identification
Issue
Opportunity
Reference to Specific
Course Concept
(Include citation)
Concept
Create a financially viable organization by merging Shang-wa electronics with Lester Electronics.
By merging these two organizations, Shang-wa/Lester has the opportunity to see their organization grow and compete in a larger market.
It is important for an organization undergoing such changes to have a financial plan. The plan must include Sales forecast, pro forma statements, Asset requirements, financial requirements, and the plug variable and economic assumptions. (Ross, 2005)
Financial Planning
Avral Electronics would like to merge with Shang-wa Electronics - while at the same time Transnational Electronics Corporation would like to merge with Lester Electronics.
If Shang-wa and Lester do not merge they each independently face a take over, the issue is how to financially merge while gathering investors to ensure success in competition against established large organizations.
Long term investors or stock holders are needed to ensure success in this venture. (Ross, 2005)
Attaining Financial support.
Once Shang-wa/ Lester Electronics merge they must compete in a larger format with other large companies.
Once the merger takes place Shang-wa/Lester must financially be prepared to compete with a much larger established organizations such as Transnational and Avril.
It is vital to have an impact in their respected markets and a new synergy will leverage the available intellectual capital, in-depth experience and expanded resources to provide a winning partnership. (business wire, 2005)
Financially viable in a large market
Table 2
Stakeholder Perspectives
Stakeholder Perspectives
Stakeholder Groups
The Interests, Rights, and
Values of Each Group
Shang-wa and its employees
It is the best interest of Shang-wa to form a partner ship with Lester Electronics if Shang-wa is to continue to be a valued member of the industry.
Lester and It's employees
It is the best interest of Lester to form a partner ship with Shang-wa Electronics if Lester is to continue to be a valued member of the industry.
Avril and International
Avril and International must thwart the merger between Lester and Shang-wa to gain control of them respectively.
Analysis of Alternative Solutions
Table 4
Risk Assessment and Mitigation Techniques
Risk Assessment and Mitigation Techniques
Alternative Solution
Risks and Probability
Consequence and Severity
Mitigation Techniques
The alternative solution would be to have Avral and International take over Lester, and Shang-wa respectively
* The risk is the destruction of the organizations as they are now.
* The probability of the products being produced, reflecting the Lester / Shang-wa standards may not be there.
* The current owners of Shang-wa and Lester will no longer have any authority in the decisions.
* To avoid this Lester and Shang-wa need to work together to overcome this obstacle.
Lester and Shang-wa can continue to run business as usual and, try independently to thwart the competition posed by Avral and International.
* The risk with this alternative solution is to risk loosing it all.
* The probability of surviving as independent organizations is very slim.
* The Consequence of going with this solution is the risk of loosing it all.
* The best answer to this problem is address in the paper.
Table 5
Optimal Solution Implementation Plan
Deliverable
Timeline
Who is Responsible
Lester / Shang-wa will be fully integrated as one.
6 months
CEO's of each organization
Lester-Shang-wa will be a viable organization within the Electronic industry in competition with Avral and International.
9 months
Board of directors of Lester-Shang-wa
Lester-Shang-wa will be operational, selling in a world market.
year
Board of directors of Lester-Shang-wa
Table 6
Evaluation of Results
End-State Goals
Metrics
Target
Lester-Shang-Wa will be operational in a multinational industry.
3 review
Reviews will be performed quarterly.
Lester- Shang-Wa will produce a new product once a year.
Yearly
Product on the market by September of each year.
Problem Solution: Lester Electronics 1
