Unlike Amazon.com, Lester is deciding to merge for the first time and Amazon.com has merged several times. The reason behind these mergers is important for leadership to make clear, if they will reduce costs or if they will expand internationally. Amazon.com has merged several times since its inception in 1994 and for several reasons. Management’s first strategy was to identify the impact of multiple mergers on its capital structure prior to another acquisition. They identified “three different measures of financial leverage namely the ratio of long term debt to total assets, the ratio of debt to equity and the ratio of interest expense to earnings before depreciation, interest and taxes are utilized.” (Sorensen, 2000). Upon doing so they found a low debt to equity ratio and a low interest to earnings ratio which confirmed their ability to acquire more debt and service more debt, thus in the future increasing their market power internationally.
Finally as a result of a thorough financial analysis including financial policy changes to reduce its operating cycle, Amazon .com in 2002 saw its first profit of $5 million. They remain a profit gaining company with the ability to grow significantly. Their shares remain at a seven year high and have reported a 115% profit surge on a 39% sales increase (Marketwatch. 2007).
IBM - Jasmine Lopez
IBM is the largest international computer technology and consulting corporation with a continuous history that dates back to the 19th century. IBM manufactures and sells computer software, hardware, hosting services, consulting services, and infrastructure services. They hold the most patents than any other US based technology company and are the largest employer with over 388,000 employees worldwide. Most notably they are the most profitable despite falling behind Hewlett Packard in total revenue since 2006.
Although IBM is known as the largest international computer technology company in the world they continuously “brainstorm” and research the next best move. Like Lester, IBM had to decide if an internal “organic” strategy was best to complete their portfolio or and external “acquisition” (Jensen, 1986). Acquisitions must create value; they must be positive net present value projects or investments (Sorenson, 2000). Similarly if managers are to create value then diversifying will increase cash flow (Jensen, 1986). Lester’s senior management must be clear about what move will create the most value, and a merger with a company like Avral who for the past five years has increased revenues and is in good financial health may be beneficial.
IBM acquired ISS a hardware/software infrastructure and services/security application company. Management’s reason for this acquisition was to continue to expand their information management services with ISS security and content from another recent acquisition with Filenet. IBM’s analysts like Lester’s CPA analyzed the stamen of earnings, financial position, and cash flows to determine the company’s profitability, liquidity, debt, inventory, and how effectively the company manages cash. Following this assessment they decided that this consolidation would be best for IBM’s goal of expansion.
Initially IBM reported increased revenues, but a fall in stock prices, as a result of their computer sales division. The decision later provided IBM with its largest source of revenue and although Lester may initially be hesitant they should know that it can help reduce debt and staying within the industry helps create greater value.
Rite-Aid – Kenneth Mabine
Rite-Aid has been steadily growing just like Transnational Electronics Corporation in the scenario. Rite-Aid demonstrates some of the positives of acquiring companies which pose’s the correct avenues for growth. Rite-Aid decided to expand by purchasing the Jean CoutuGroup. This acquisition made Rite-Aid the third largest drug store chain in the country, only behind Walgreens and CVS. Different media suggest that inventors for the company will not mind the large amount of debt acquired, because of the position the company will be in, will make them more competitive. With investments certain amounts of risk must be analyzed and in this case the investment would seemingly pay off in years to come. Rite-Aid’s 2005 letter to the stockholders reported that the year was profitable and the company will continue to grow.
“We took many positive steps during fiscal 2005 to take advantage of the growth opportunity we see ahead for pharmacy and for Rite Aid. Our balance sheet grew stronger as we reduced debt from $3.9 billion to $3.3 billion and extended maturities on the majority of our long term debt to 2009 and beyond. The re-pricing of a substantial portion of our debt lowered our interest expense, which will provide more capital to invest in our business.”(Letter to Stockholders, 2005, pg 3).
The merger gave Rite-Aid over 5,000 stores nationwide and since location is important in business ventures the eastern coast will be Rite-Aid’s new venture. The amount of stores and the ability to network them will make it easy to gain new customers and retain old customers from the acquired stores.
“The acquisition will give us the scale to compete more effectively with our major rivals because we can leverage our systems, programs and best practices over a larger store base to achieve substantial cost savings and grow sales. It will also strengthen our ability to take advantage of the considerable growth opportunities driven by an aging population, increasing use of drug therapy and the introduction of more affordable generic drugs. Having more than 5,000 stores also will enable us to better withstand both industry and competitive challenges.”(Letter to Stockholders, 2007, pg 3)
The annual revenues of the company have increased by 54% and Rite-Aid has gained stores in at least five more states. Rite-Aid has positioned itself in a terrific market and in good standings with its employees and consumers by not having serious layoffs, ease of transition, location and public relations.
Jean Coutu - Kenneth Mabine
Jean Coutu position is similar to Shang-wa in the sense of another company wishing to purchase the already well known firm. Shang-wa could possibly grow from the acquisition as Jean Coutu has with the Rite-Aid merger. Rite Aid bought Brooks-Eckerd from the Jean Coutu Group for approximately $3.4 billion. Jean Coutu Group will be the top shareholder in the company with 32% equity and will have a better appeal to investors since Rite Aid acquired $850 million of the Jean Coutu Group’s long-term debt. Senior executive members of the Coutu group will be place on the Rite Aid board so that the best interest of both parties will be at hand. With the stores in the United States now sold to Rite Aid the Coutu group intends to keep its main focus on the Canadian based companies. The company intends to start developments on new prototype stores and relocating of some of the existing stores, with the acquisition by Rite Aid analyst foresee the company being able to handle this new venture and lead into being able to acquire more companies of its own. The plan to revamp the older stores has been attempted in some areas so far and they have had sales increase by 25% in the first month. The Coutu group already has a name for itself as admirable and respectable so therefore, anywhere that is within certain proximity of its distribution center will prosper. Name recognition is very important in today’s society and in order to keep a company’s name in good standings the company has to show the consumers they care. Coutu has been in the top 150 most admired companies in Quebec for the past four years. It was brilliant for the Coutu group to manage a deal with Rite Aid that develops a win/win for everyone. The 2007 report to shareholders showed losses in certain areas but gains in the merger with Rite-Aid.
“On June 4, 2007, the Company completed the sale of its United States network and now holds a 32%common equity interest in Rite Aid. The gain on sale of US operations amounted to $139.3 million ($76.6 million after-tax), and the Company recorded restructuring charges of $54.3 million ($31.6 million after-tax). The loss on early debt retirement when debt was repaid using cash consideration from the Rite Aid transaction amounted to $168.3 million ($117.5 million after-tax).”Report to Shareholders, 2007, pg 3).
Home Depot - Kennith Bryant
The Home Depot is the world's largest home improvement retailer. By providing first class customer service they have become a world leader in the home improvement industry. Like any major corporation, the Home Depot has many financial aspects that they must keep in check, in order to maintain a high level of profitability.
As a retailer of goods ranging from a five cent washer, to a 15,000 dollar generator, the Home Depot must be able to mark up the right products for sale. This can serve as tricky, because the cost cannot be too high, and they must be able to purchase the goods to sell at a decent price.
One of the most important financial statements used in the Home Depot stores by management is called the Stats report. This report contains a bunch of information that is broken down into departments. Department managers can use this report in order for them to more effectively run their business.
The issue facing the Home Depot and the companies in the scenario is that of constantly trying to improve on their business savvy. Home Depot has competition, as do most other companies. By focusing on increasing profit, and reducing costs, Home Depot place more distance between them and the competition.
The Home Depot, like the companies in the scenario have addressed the issues and installed cost cutting and increasing productivity. So far, the outcomes to the response are very positive. Each year, the Home Depot records record growth and profit. The electronics companies will also follow suit, as they are becoming smarter in the business sense.
In dealing with cross border strategies Home depots are “big enough to be considered warehouses,” says Greg Doyle, regional transportation manager in Toronto, Home Depot’s Canadian headquarters. “Each one carries up to 45,000 items.” The strategy saves money by eliminating an expensive network of distribution centers. It also carries substantial risks in terms of customer service. A poorly managed supply chain can result in heavy stock shortages. To offset this problem Home Depot works with a company called Reimer and they deliver certain strategic loads to specific locations on certain days. This ultimately saves Home Depot millions and allows them to be leaders in their industry and a leader in customer service.
John Deere and Company - Kennith Bryant
Like Lester Electronics, John Deere and Company identified an opportunity to increase its shareholders' wealth through synergies from acquisition. The organization saw an opportunity that would provide substantial benefits by acquiring Benye Tractor and Automobile Manufacture Co. Ltd. located in Ningbo, China in June 2007 (John Deere, 2007). This small tractor manufacturer builds tractors in the range of 20 to 50 horsepower to satisfy the demands of local farmers (Deere & Company, 2007). Deere already manufactures tractors in the 60 to 120 horsepower range at another joint venture factory in China, (Deere & Company, 2007). Consequently, acquiring Benye will allow the tractor manufacturer to provide products for a different segment of customers.
Chinese rice farmers are moving into mechanization and this should expose a growing demand for smaller tractors. "Deere anticipates that farmers with less powerful equipment will be upgrading to machines in the 20 to 50 horsepower range soon," (Deere & Company, 2007, para. 7). The merger will likely be a good move for Deere because it will allow the company to meet a growing but untapped market with an expanded product line in China. It will also increase the ability to market Chinese produced tractors to other parts of the globe. The sources of synergy for Deere will come mainly in the form of revenue enhancement. Further, the magnitude of this large merger will benefit Deere from reductions in the cost of capital; issuing larger amounts of securities will cost less, (Ross, et al., 2005).
Synergy from acquisition is a concept essentially pursued by firms when they acquire others. In other words, the sources of synergy lower tastes and costs of capital, cost reduction and revenue enhancement, represent the means through which companies expect to increase profits and maximize shareholders' wealth (Ross, et al., 2005). The more the sources of synergy a company is able to exploit the greater flexibility it will have to implement and explore ways to increase cash flows.
Time Warner Cable - Sylvia Rosario
Establishing a diversified portfolio affords firms the opportunity to maximize their investments in a way that best aligns their goal and mission. For the Time Warmer organization, the decision to split from its sister company, Time Warner Cable, was, as Time Warner President and CEO Jeff Bewkes, “the right step for Time Warner and Time Warner stockholders. Separating the two companies also will help their management teams focus on realizing the full potential of the respective businesses and will provide investors with greater choice in how they own this portfolio of assets” (Time Warner Cable, 2008). CEO Jeff Bewkes further states that “once the transaction is completed, Time Warner will have a streamlined portfolio of leading businesses focused on creating distributing our branded content across traditional and digital platforms worldwide” (Time Warner Cable, 2008). Hence, for the Time Warner organization the role of portfolio management in the allocation of resources was best serve in a spilt from the Time Warner Cable organization. Indeed, the expected return from the split of Time Warner from Time Warner Cable would not only streamline the role of portfolio management in the allocation of corporate resources at Time Warner, but also satisfies the ratio between the splits expected return and risk premium.
The proposed acquisition of the Shang-Wa organization by TEC has put a light on both the expected return and loss of a partnership between Shan-Wa and Lester Electronics. Similar to the Time Warner organization, Lester Electronics must ponder the role of the organizations current portfolio management in th allocation of its available corporate resources. The failure of Lester Electronics to merge with Shang-Wa could result in a 43% loss in revenue over 5 years. Time Warner not only considered how their split from Time Warner Cable could effectively allocate their resources within a more streamlined and directed portfolio, Time Warner ultimately reasoned the high expected return rate resulting from the split diminished any, if any, consequence of the split. For Bernard Lester merging with Shang-Wa may not only shield the firm from a loss of profits, but will further increase the array and portfolio management of their resources.
Sprint and Nextel - Sylvia Rosario
For telecommunications giants Sprint and Nextel communications, the pressure to upgrade their networks led to the merger of these two industry giants. In analyzing the business portfolio for both Sprint and Nextel, it was event that the marriage between these two organizations would be the most effective avenue to increase value and allocate corporate resources. As Steve Rosenbush highlights in an article in Businessweek (2004), “Sprint has done well in the wholesale wireless business. And by offering a unique walkie-talkie service, Nextel has carved out a profitable niche. And has maintained its edge, even as rivals have tried to copy the technology.” Rosenbush (2004) further highlights the efficacy of the merger between Sprint and Nextel when stating, “… that it is far cheaper for Nextel to merge with Sprint and adopt its partner’s CDMA wireless technology. That upgrade would cost only $2 billion to $3 billion.”
In large measure, portfolio management is concerned with the relationship between risk and expected return, a relationship which often dictates how corporate resources are allocated. Making sensible and low risk decisions is desirable for investors opting for well diversified portfolios because they are risk averse and risk adverse people avoid unnecessary risk (Jaffe, 2004). The Sprint and Nextel merger did not flare the fear of the risk adverse investor, instead proved to be the best solution for the need to upgrade in the most cost efficient and competitive way. Lester Electronics is seeking to find the best solution to tackle a possible 43% loss in revenue over the next 5 years that would result from the takeover of Shang-Wa electronics by Transnational Electronics Company. Similar to the Sprint and Nextel organizations, Lester Electronics must assess not only their need to offset possible revenue loss, but also the route that offers the most sensible risk and expected return ratio. Consequently, the Sprint and Nextel merger demonstrates the need for Lester Electronics to consider the most competitive alternative for the organization that will lead to a greater availability and flexibility of corporate resources.
Key Concept Compare and Contrast
Internal and External Growth Strategies
Lester Electronics (LEI) and Shang-wa are facing situations involving a larger company s looking to acquire each company to match growth strategies. In the case of LEI, if Shang-wa indeed is acquired by another company LEI stand to lose upwards of 45% of expected revenues over the following 5 years.
LEI can look to Yahoo and Google as benchmarks in their situation. Microsoft’s proposal for a hostile acquisition of Yahoo was met with the threat of shifting some key elements to outsourcing which would make Yahoo less desirable for acquisition. Reflective in such a move allows Yahoo to hold a position of strength in maintaining control is the situation, therefore, keeping the price high for the benefit of Yahoo shareholders. LEI can look to Yahoo and maintain strength by not allowing acquisition by another company along with keeping the price high as to benefit LEI shareholders.
The second benchmark LEI should consider is to follow Google’s lead. Knowing that their growth strategy involves acquiring other companies, Google looks for other companies to meet their needs and fill gaps in their business plan. Such should be the case for LEI. In order for the company to grow and achieve a strong position for maximizing both company and shareholder wealth involves an external growth strategy. The opportunity is for LEI to acquire Shang-wa. The move would protect LEI from losing their primary producer, fill gaps in their plan, and LEI would then grow outside of domestic boarders. John Lin, CEO of Shang-wa and would welcome the move and shareholders form both companies would benefit by the value of the growth strategies.
Capital Management Strategies to Maximize Shareholder Wealth
Amazon.com and IBM are very largely respected companies that like Lester had to perform a thorough review of their financial statements to understand their financial picture and decide what strategic move would create value for shareholders.
Both Amazon and IBM’s financial management teams were determined to use their financial capabilities to reach larger amounts of customers through joint efforts. Lester would benefit from analyzing how Amazon and IBM bolstered their presence in different aspects of technology. Amazon and IBM have set an example; they have increased cash flow by improving the cash operating cycle. They have also managed their cash outflow of capital expenditure by ensuring that the fixed assets are absolutely necessary before incurring it (Jensen, 1986). By strategic improvement in cash flow Lester can make the most beneficial organizational strategic decision to increase ultimately their market power and create value for all shareholders.
Finally, Lester can be confident that after planning by covering financial policy making, mergers and acquisitions, capital structure, and risk management, their decision is the one that will assist them in reaching their strategic goals.
Challenges of Cross-Border Growth Strategy
Lester Electronics (LEI) and Shang-wa are facing situations where they are looking to improve its cross-border growth strategies for the overall expansion of their respective companies. By comparing its strategies with John Deere and Harley-Davidson LEI will have an idea of what it takes to overcome the challenges of cross-border hindrances.
LEI can examine the practices of John Deere and how it used its cross-border strategy to enter into the growing small Chinese farmer marketplace to become a key tractor manufacturer in that country. Just as LEI desires to grow and prosper in the electronics industry, John Deere also wanted to pursue growth opportunities to become a profitable entity in the tractor manufacturing industry. The manufacturer chose to grow by acquiring a cross-border, smaller horsepower tractor producer. These techniques helped the organization become more profitable by tapping into a growing market.
Harley-Davidson is also known around the world for its motorcycles and clothing line. The challenges of cross-border growth were not easily overcome as the company carved a name for itself in joint venture with Shang-wa who already enjoys of worldwide distribution of its transistors.the worldwide marketplace manufacturing one custom bike at the time. Although the company did this solely on its own, LEI can make the transition outside of the US marketplace even quicker by entering into a joint venture with Shang-wa who already enjoys of worldwide distribution of its transistors.
Organizational Performance Using Financial Statement and Ratio Analysis
Organizational performance focuses on how actual results compare to the desired results of an organization. For example, Rite-Aid decided to acquire the Eckerd (Jean Coutu) locations in the U.S. in an attempt to increase market share and improve location. Which would lead to more customers, higher sales and a more competitive front? The acquisition did exactly what was expected, making Rite-Aid third in the industry and creating a larger consumer base for the firm. The company experienced increases in revenue immediately, mostly because of the smooth transition created by keeping key employees from the acquired stores and never having to close stores to make the transition. Jean Coutu also experienced success in the merger because the company eliminated millions in debt, allowing for the opportunity to focus more on Canadian ventures which were proving more profitable to the Coutu group. Both Rite-Aid and Jean Coutu showed high levels of organizational performance by creating a win/win for both companies which was shown in the financial changes to the companies by the merger. Ratio analysis helps with the consideration or risk in this merger Jean Coutu seemed to have less of a risk since the company received a percentage of the profits from the acquired stores and Rite-Aid purchased the debt already involved with the stores. Rite-Aid and its stockholders agreed the acquisition would start negative but help to accomplish long-term goals, proving to be a profitable investment.
Portfolio Management in the Allocation of Corporate Resources
Lester Electronics can benefit from the example of how the Time Warner and Sprint- Nextel organizations approached the role of portfolio management in the allocation of their corporate resources. Although the Time Warner organization decided to break away from Time Warner Cable, Bernard Lester can glean from this action the need to partner with a company that not only may increase his organizations profits, but that will also allow for the organization to streamline their portfolio, expanding into areas that will best serve the overall goal and mission of Lester Electronics. In dissolving its relationship with the Time Warner Cable firm, Time Warner provides a benchmark for Lester Electronics in how to confront the challenge of providing greater choice in how portfolio assets are managed and resources allocated in a way that best maximizes expected returns, while decreasing the risk premium.
The Sprint Nextel organizations provide a benchmark of the efficacy of portfolio management in allocating resources via the marriage of two organizations. Both the Sprint and Nextel organizations brought a unique expertise and experience that allowed for the expansion of their portfolio, along with greater flexibility with respect to the allocation of their corporate resources. Additionally, the partnering of these two firms did not cause anxiety and fear among risk adverse investors. In this sense, the Sprint Nextel organization provides a benchmark for Lester Electronics to follow in terms of not only resource allocation, but also risk aversion and high expected returns and low risk premium.
Conclusion
In today’s marketplace understanding investment alternatives is vital for maximization of wealth and survival for companies. As discussed, the benchmarked companies illuminated key course concepts for LEI to use as examples to handle their current situation.
For LEI, a clear evaluation of internal and external growth strategies will illuminate opportunities for growth along with allowing LEI to expand in a positive manner for shareholders. In addition, a clear understanding of capital management strategies involving cash flows and the cash operating cycle is vital for LEI to create value for all shareholders. The understanding of challenges facing cross-border growth strategies entails an understanding involving market growth and identifying risks associated with such growth strategies. Assessing organizational performance using financial statement and ratio analysis is associated with a performance focuses on how actual results compare to the desired results for an organization such as LEI. Finally, in identifying the role of portfolio management in allocation of corporate resources, LEI can realize greater choice in how portfolio assets are managed in conjunction to resources allocation, LEI can increase returns while decreasing the risk premium. Armed with such information, LEI can maximize the wealth and growth of the company.
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References
Corporate IT Update (Sept 5, 2007): NA. General One File. University of Phoenix. August 21, 2007. Homedepot.com Retrieved from internet August 20, 2008).
Coutu, J. (2007). Report to Shareholders. Retrieved on August 23, 2008, from www.jeancoutu.com
Google.Com (2008). Corporate website. Retrieved August 20, 2008, from http://www.google.com/corporate/
Jaffe, Jeffrey, Ross, Stephen A., Westerfield, Randolph W. (2004). Corporate Finance (7th edition). New York: The McGraw-Hill Companies.
Jensen, M. (1986). Agency Costs of Free Cash Flows, Corporate Finance and Takeovers. American Economic Reviews. 76(3) p323-329.
Microsoft.Com (2008). Microsoft withdraws proposal to acquire yahoo. Retrieved August 21, 2008, from http://www.microsoft.com/presspass/press/2008/may08/05-03letter.mspx
Miller, R. G. & Sammons, M. (2005). Letter to Stockholders
