Lester Electronics, Inc. and Shang-Wa must make a rapid decision regarding their partnership and what the future holds for them. Each company must also consider how their organization could benefit from an outside organization and keeps the friendship out of the decision making process. These problems are worth solving as these men have both worked very hard to achieve success with their organizations. The opportunities are available to expand the businesses and even reach out to new markets. The catch is making the decision that has the greatest benefit to each organization.
Stakeholder Perspectives/Ethical Dilemmas
The key stakeholders of both companies include; the board members, CEOs, the employees, the customers, the potential new employees, the stockholders and Avral Electronics, S.A. and Transnational Electronics Corporation. The board and CEOs have the right to make decisions that are believed to be in the best interest of the corporation, even decisions some people might find ethically challenging. Closing the business or accepting a takeover offer impacts the business and the employees, especially Lester Electronics, Inc. as an American company with American jobs, values and ethics.
The ethical dilemma with this situation is that the CEO of Shang-Wa sits on Lester Electronics, Inc. board and has become friends with Bernard Lester. If this merger does not go well or Lester Electronics, Inc. decides to take a different path than originally discussed, Lester Electronics, Inc. board could be affected and the overall decisions could be tainted. This needs to be monitored closely by an independent third party. Obviously, this is a very tough situation for all parties and the problem definition must acknowledge all parties and what could be gained or lost.
Frame the “Right” Problem
Lester Electronics, Inc. and Shang-Wa Electronics will become an industry leader by merging companies, expanding its products, increasing market share, cutting costs, committing timely and effective communication, and maintaining organizational commitment of all employees. This problem statement is short and can easily be understood, allowing for many solutions. It can help all that read it realize Lester Electronics, Inc. and Shang-Wa Electronics opportunities.
Describe the “End-State” Vision
The ideal end-state for these companies is to expand into the international market. This must be achieved by merging the organizations into the most lucrative company possible. For example, it may benefit Lester Electronics, Inc. to allow the takeover by Transnational Electronics Corporation and partner with them. However, the financial assistance that Lester Electronics, Inc. would receive from Avral would be an advantageous plus; Avral could provide the international market that Lester Electronics, Inc. has not tapped into.
In order to achieve these end-states, several goals must be met. Lester Electronics, Inc. and Shang-Wa must evaluate all financial statements and determine what is best for the organizations. This would include setting aside the friendship and looking at the overall business picture. Each organization must create communication plans for their employees to keep everyone abreast of changes and prepare them for possible mergers or new ventures. Identifying best practices in mergers, acquisitions and takeovers may assist Lester Electronics, Inc. in determining the best course of action. Reviewing the venture capital budget shows that it would cost $6,000,000 to open the Asian facility, which would produce in excess of 1 million capacitors over what is already made. Another goal is to establish a team that can analyze these figures and determine if that increased production is worth the cost.
Risk Assessment and Mitigation Plan
The acquisition between LEI and Shang-wa was based on a decision which both companies seeks economies of scale, efficiencies and enhanced market visibility. Both parties should feel satisfied with the decision. LEI has the opportunity to purchase Shang-wa with cash, stock or a combination of the two. As in the acquisition between General Mill and Pillsbury segment of Diageo, LEI will purchase Shang-wa with its stocks and assume any debt that Shang-wa has. LEI can also incorporate the “claw back” or contingent value rights option to ease stakeholders worry on the acquisition. Regardless, the two organizations have one common goal and that is to create synergy that makes the value of the combined organizations greater than the sum of the two parts. Lester knows in theory that this acquisition will create synergy and economies of scale, expanding operations and cutting costs. As in the Microsoft and quantative acquisition, this synergy will allow the new organization to compete globally and puts them in a better position in the industry.
Analyzing Risks
Today’s business world involves risks for example, change, new competitors, acquisition, merging factors outside the business control est. Risk analysis and risk management can help businesses to minimize disruptions in their plans. Risks analysis will also help to decide the strategies to be use. The Executive option and valuing a start up risk will be analyzed.
Executive Stock Options: Options are involved in decisions whether to build, expand to buy productive assets, to drill for oil or mine for gold, sometimes options are involve in decision-making. The main purpose of stock options is to align the interest of management with those of the shareholders of the firm. The stock options make the Chief Executive Officers fortune rise and fall with those of the company. This is why the company requires the executive to hold the options at least for a freeze out period rather than letting executive sell them to realize value.
The stock options allows the company to lower the executive’s base pay, this removes pressures on morale caused by large disparities between the salaries of executives and those of other employees. The stock option also serves as cash inflow to the organization. Options are tax-efficient way to pay employees; the options are taxed only when and if the options are eventually exercised. Lester Incorporation can use the stock options as financing. This is because it will make the executives of Lester Incorporation to share the same interests as the stockholders. Lester Electronics can benchmark Wal-Mart and Best Buy has stock options as employees’ benefits and executive’s compensations. Offering stock options reduced owner’s risks because it is not their direct cash that is involve in the company.
Valuing a start up is very important in every organization. Decision makers must analyze the risks and options in starting up a new business or organization. There are many risks and decisions to put in place while valuing a start up for example, the positioning of the firm, how the firm will take advantage of competition. There are two possible outcomes for virtually every business idea. The business may fail and it may be shut down, on the other hand, the business may prosper in which it may be expanded. Ignoring these options is likely to lead to undervaluation. The risks associated with valuing set up for the merger of Lester Electronics and Shang-wa are operating exposures, language barriers, organizational culture and structure, job insecurity and economic exposure. Another opportunity Lester could explore is finding a company other than Shang-wa with which to initiate a merger. In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. Horizontal integration is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets. To get this market coverage, several small subsidiary companies are created. Each markets the product to a different market segment or to a different geographical area. This is sometimes referred to as the horizontal integration of marketing. The horizontal integration of production exists when a firm has plants in several locations producing similar products (Horizontal Integration, 2006). By merging with another electronics firm that distributes outside of the United States, Lester may be able to increase their profitability by double.
While acquisitions can often help one organization grow by dominating another, there are certain risks involved that should be analyzed before acquiring another firm. Generally there is a reduction in competition and choice for consumers in oligopoly markets, a likelihood of price increases and job cuts, cultural integration and conflict with new management and hidden liabilities of target entity (Brendenberg, 2006).
Growing through mergers has both pros and cons. On one hand it gives access to a larger customer base, induces economies of scale and scope. On the other hand it induces complexity, duplication of people, processes and technology. There are various aspects which if not managed carefully during a merger can become major pitfalls, such as issues of managing Intellectual Property, human resources encompassing cultural diversity and perspectives, technology platforms, supply chain management and product and service delivery channels. A common practice to control this is Integrated Complexity Reduction, which is very relevant to a newly merged company.
Mergers can create a tremendous amount of internal complexity because the small companies that have been integrated continue to operate as before, and therefore, the umbrella company is merely managing many stand-alone companies (Brendenberg, 2006). Lester can investigate the golden parachute clause in an attempt to retain key staff. A golden parachute is a clause in an executive's employment contract specifying that employees will receive certain large benefits if their employment is terminated. Sometimes it is enacted only when a company is acquired and the executive's employment is terminated as a result, but this is not always the case. These benefits can be severance pay, cash bonuses, stock options or a combination of the items. The benefits are designed to reduce perverse incentives.
Conclusion
Lester Electronics, Inc. and Shang-Wa Electronics can take the present situation and grow from it by understanding the financial history of the corporations and the present situation, recognizing potential takeover threats and opportunities and stating the problem definition. End state goals will help them realize success for all parties involved.
References
Brendenberg, A. (2006). Pros and Cons of Growing Through Mergers. Retrieved June 17, 2007
from
Horizontal Integration. Retrieved June 16, 2007 from:
http://www.worldlygoods.com/Horizontal_integration/encyclopedia.htm
Ross, S.A., Westerfield, R.W., & Jaffe, J. (2005). Corporate Finance 7e. New York: McGraw-
Hill.
University of Phoenix. (2004). Scenario: Lester Electronics. Retrieved June 16, 2007 from
University of Phoenix, Week One, rEsource. MBA540 – Maximizing Shareholder
Wealth
University of Phoenix. (2004). Defining the Problem: The Critical Step to Realizing
Opportunities. Retrieved June 15, 2007, from University of Phoenix, Week Four,
rEsource. MBA500 – Foundations of Problem Based Learning.
