An alternative medium-term financing method that could be used by LEI is to issue convertible bonds to its shareholders. “A convertible bond gives the holder the right to exchange it for a given number of shares of stock anytime up to and including the maturity date of the bond” (Ross, Westerfield & Jaffe, 2004, p. 682). Regardless of the profitability of the company, these types of bonds mean “bondholders receive only a fixed, limited income until conversion” (Cloutier, n.d.). This is an advantage for LEI because its operating income is available then to its common stockholders (Cloutier, n.d.). With LEI and Shang-wa’s future unpredictable, convertible bonds take a great deal of risk out of the issuance of bonds for the company. Another advantage is that “bond interest is a deductible expense for the issuing company” (Cloutier, n.d.). For a company trying to raise new capital, such as LEI and Shang-wa, these are advantages “over common and preferred stock” (Cloutier, n.d.).
The long-term success of the newly merged company is also an important factor in its financial decisions. Long-term financing instruments must be focused on in order to ensure the new company can handle any expansion LEI and Shang-wa may experience as a result of the acquisition. One major reason as to why many companies hit financial problems is because they do not have an adequate financial plan that is able to repay the long-term debt of the company (Growth Business, 2003). Both LEI and Shang-wa have debt, so there will be a larger total necessary to repay when the two are merged.
Long-term financing also is viewed as less risky to the firm because the borrower has a locked-in interest rate for the time of the loan (Gallagher & Andrew, n.d., p. 562). This means that while interest rates may fluctuate, the borrower does not need to worry about any increases. Unfortunately, while risk may decrease with long-term financing, returns are also decreased. LEI must analyze medium- and long-term financing alternatives to decide which it would rather adopt to ensure its maximum profit and growth. Sources of long-term financing could be debt, derivatives, or equity (Maps of World, 2008).
Debt instruments are typically fixed obligations to repay a given amount at a given time with interest. Equity instruments are typically used to “represent ownership interests entitled to dividend payments, when declared, but with no specific right to a return on capital” (Zero Million, n.d.). Examples of equity instruments include common stock and preferred bonds. Debt instruments include notes, bonds and debentures (Zero Million, n.d.).
Stakeholder Perspectives/Ethical Dilemmas
No more dramatic or controversial activity in corporate finance exists than mergers or acquisitions (Ross, et al., 2004, p. 796). This explains the reason for a variety of interests and rights of the stakeholders of LEI and Shang-wa. Employees focus on the success of the company to ensure they are able to remain in their position at the company. The more successful a company is, the more likely it is that employees will be given better benefits, a higher salary, and even opportunity for advancement. Employees also desire to receive intangible rewards such as respect, trust and fairness (Gardner, 2008). The Board and shareholders also focus on the success of the company, but for a different reason. They want the company to succeed in order to increase the profitability across the board, including the return they receive as investors. Lastly, but perhaps most importantly, is the consumers who turn to LEI and Shang-wa for their needs. Consumers have the right to get honest information and fair prices while receiving exceptional customer service. Consumers hope for the success of the company so they can remain doing business with a trusted source. If consumers are satisfied, the company will see it pay off.
End-State Vision
LEI and Shang-wa will complete its acquisition successfully by using financial planning and reviewing medium- and long-term financial alternatives.
Gap Analysis
The success of the merger between LEI and Shang-wa will require employees to work hard at overcoming barriers. A merger can make business decisions much more difficult because of two conflicting opinions from each company (William, 2008). Employees at each company also struggle with mergers because it typically requires duplicate positions to be eliminated and termination of a number of employees (William, 2008). The challenges that are presented with mergers can hinder the company’s success, but if the appropriate response is given, challenges can be overcome.
The main goal of the new merged company is to develop a financial planning method to increase net income, increase sales, and reduce debt while still retaining earnings. “Financial planning establishes guidelines for change in the firm. These guidelines should include (1) an identification of the firm’s financial goals, (2) an analysis of the differences between these goals and the current financial status of the firm, and (3) a statement of the actions needed for the firm to achieve its financial goals” (Ross, et al., 2004, p.44). To determine the opportunities LEI has available to it after the merger, strategic financial planning should be done. This will provide a guide to base its decisions on to ensure decisions made will positively impact the company’s future growth.
Medium-term financing alternatives, such as issuing convertible bonds, give the organization an opportunity to generate cash. If the company is successful, the convertible bonds can be converted. While the conversion can bring upon expensive dilution, the dilution only occurs when the company can afford it (Ross, et al., 2004, p. 689).
Long-term financing opportunities are also important to the successful merge of LEI and Shang-wa. These opportunities provide the new company to sustain future growth, which in turn will bring upon the company’s maximum value. Long-term debt will assist the company in financing certain necessities, such as “increasing facilities, expansion of companies, buying fixed assets, buying machinery, construction projects on a big scale, or provide capital for funding of the operations” (Maps of World, 2008). Any outstanding debt must be repaid in order to minimize the risk of negative implications.
Conclusion
This paper identified the issues and opportunities that LEI and Shang-wa are faced with as a result of a challenging acquisition. The differences in stakeholder perspectives were also explained, as well as the goal of each company, and a gap analysis that explained how LEI and Shang-wa can both benefit from the change. Careful financial planning and medium- and long-term financing alternatives were presented that would assist LEI and Shang-wa in the successful completion of the acquisition. With attentive leaders, the acquisition provides a bright future for the companies.
References
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