Problem Solution: Lester Electronics

8/14/2019 Problem Solution: Lester Electronics

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Problem Solution: Lester Electronics 1

Running head: PROBLEM SOLUTION: LESTER ELECTRONICS

Problem Solution: Lester Electronics

Albee Horne

University of Phoenix


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Problem Solution: Lester Electronics

According to the Scenario University of Phoenix (2009), Lesterelectronics, owned by

Bernard Lester, was a consumer industrial electronics parts master distributor who contracted

with John Lin, owner of Shang-Wa a capacitor manufacturer. The following analysis will

explore the merger between Shang-Wa and Lester Electronics and other elements which fit into

the equation for solidifying maximization of shareholders wealth.

In an attempt to generalize the best solution to aide in the merger between Shang Wa

and Lester electronics, an attempt will be made to appraise Corporate Performance using

Financial Statements and Ratio Analysis. In addition there will be scrutiny of Corporate

Performance using Discounted Cash Flow Techniques, scrutiny of Corporate Performance using

Asset Valuation Models and a Problem-Solving Approach will be initiated in order to

Demonstrate Critical Thought in Analyzing the given Information.

Critical thought will be given to focusing on identifying key issues, opportunities, end

state goals, bridging the gaps and recognizing the needs of shareholders. It is critical for any

organization to be ethical, in every decision they make towards reaching end goals that will

deliver the greatest financial maximization.


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Situation Analysis

Issue and Opportunity Identification

Issues

There were several proposals for combination mergers and acquisitions.

TEC (Transitional Electronics Corporation) wanted to acquire Shang-Wa; which would have

caused a 45% decrease in revenues over the course of five years for Lester Electronics, and

which already had an agreement with Shang-Wa in the terms of distributor vs. manufacturer

(University of Phoenix, 2009).

Another proposal was suggested from Avral to acquire Lesterelectronics. Shang-Wa's

owner gave Lester the exclusive right to sell capacitors in the US for 65 years; it has only been

35 years though since that agreement. In actuality this would affect shareholders wealth due to

the timing of this merge if it had progressed further before the last quarter of sales. (University of

Phoenix, 2009).

Merging or acquire? There are 3 forms of acquisitions merger of consolidation,

acquisition of stock, acquisition of assets, choosing the right business structure will also affect

shareholders wealth in different ways.

According to Ross (2004) a merger is defined as absorption of one firm by another, with

the acquiring firm retaining its name, entities, plus additional assets, liabilities of the firm being

acquired. The acquired firm no longer exists after this acquisition (Ross, p797).

A consolidation is the same as a merger except a new firm is created and the same rules

apply as for a merger. If a merger of consolidation is used, then the stockholders must vote to

approve vs. disapprove the merge (Ross, p 797).


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Acquisition of stock occurs when voting stocks are purchased in exchange for cash,

shares of stock, or other securities. This can be done privately by the management of another

firm or if done publicly or by one firm to the shareholders of another firm, this is considered a

tender offer (Ross, p 797).

Acquisition of assets occurs when one firm acquires the assets of another firm, but again

the shareholders of the selling firm would have to vote on this type of acquisition (Ross, p 798).

Transcend Services; an Atlanta based company which offers medical transcription

services announced a merge with Medical Dictation Services (MDI), based out of Gaithersburg

Maryland. MDI has revenues in the in the 14.3 million range. The main issue was selecting the

right financial mix for the merger. This brings us back to the question of whether to finance

through debt or capital.

The deal was financed with 10.2 million in cash (this excludes any outstanding debts,

working capital and tax-related adjustments) (Deals Round Up, 2009). To break this down

further according to Device Medical Daily quote;

$2 million in cash payable after receipt of interim financial

statements and audited financial statements for the last two fiscal

years, a $2 million note payable to the selling shareholder due one

year after closing, and $2 million of Transcend common stock

(119,940 shares). The initial cash portion of the purchase price is

expected to be funded using a combination of cash on hand and up

to $7 million in bank term debt (Deals Round up 2009 p3).


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The outcome caused an integration of operations and expanded the company nationally

through the merge. According to Device Medically Daily, revenue is not expected to change

much during the 3rd quarter of year 2009; however, they are expecting an increase in revenue

during the 4th quarter of monitored sales. (Cite)

According to Neely (n.d.), there seems to be a significant correlation regarding stock

returns of the acquirer during the announcement week. The article states that when a merger is

announced that the acquirer experiences slightly negative returns, but two weeks after the

announcements, returns turn slightly positive. When it comes to the acquired company for non

financial acquisitions (banks), they experience abnormal returns with the first week displaying a

very large abnormality followed by 10 weeks of cumulative abnormalities. None of these

abnormalities affect the abnormal returns of targets (Deals Round up 2009).

This may be a reality of what Shang-LEI may experience since according to the Scenario

(University Of Phoenix, 2009) Lester Electronics was registered and traded on the NASDAQ

(National Association of Security Dealers Automated Quotations) Market.

Merger-Shang-Wa and Lester Electronics

After referring to Scenario two (University of Phoenix, 2009), it is apparent that both

members of the board of directors, have decided that the ideal method of shareholders

wealth/maximization is through the merge with Shang-Wa and Lester Electronics, see appendix

3.

Opportunities

Once the merger is completed, the opportunity exists for the Shang-LEI (Shang and

Lester Electronics) to learn from others who have been through similar instances. For example


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finances will be the primary concern, because the company will have to determine the right

capital structure for this new merger project. According to Ross (2004), deciding to finance

through debt or equity defines the companys capital structure or the value of the firm (Ross, pg

402). The equation representing the value of the firm is V=B+S (Ross, pg.402).

In its Deals Round Up section (2009), Medical Device Daily announces that SonoSite

based out of Bothell, Washington recently proposed a merger with CardioDynamics; which

specializes in impedance Cardiography (ICG) catering to non invasive hemodynamic

assessment.

SonoSite saw the potential to capitalize on the ability to assess both mechanical and

electrical cardiovascular function. In order to capitalize on this merge, it had to be approved by

CardioDynamics shareholders. In addition, a capital finance plan had to be incorporated into

this merge

Like Lester and Shang, when SonoSite and CardioDynamics proposed to merge, closing

the deal involved some type of financial expenditure. The decision concerning how this project

will be valued may be described as the weighted-average-cost-of-capital. According to Ross

(2004), this approach begins with the belief that some projects are financed with both debt and

equity. The relationship between this cost of capital is depicted as weighted average of the cost

of debt (WACC) and the cost of equity, represented as;

(Ross 2004, p 401)

Outcome of the response

The merger between CardioDynamics and SonoSite was solidified at a price of about

12.3 million dollars, with 10 million associated with debt and the rest in cash. This acquisition


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was approved by the shareholders of CardioDynamics on August 11th 2009. The shareholders for

CardioDynamics will receive $1.35 per share in the form of a cash dividend. (Deals Round Up,

2009)

Even though Shang does not have shareholders to approve the merger, the whole merge

has to be financed either with equity or debt or in a combination of the right mix of both. The

outcome of the merge of Shang-LEI may also lead shareholders (Lester Electronics) to vote on a

new board of directors.

A Leverage buyout (LBO) is comprised of an acquisition of a company, by

another company whether public or private who finances the deal through debt (Ross, p497).

Shang-LEI is faced with this issue and if they decide to take the LBO route, then they will be

expected to generate enough cash flow early on to pay this debt off based on a time table. When

the debt needed to finance future operations is known and can be forecasted, then the Adjusted-

Present-Value (APV) is used in place of the WACC.

The firm can look into short term financing which is considered current liabilities and

relates to net working capital and usually is expected to require a payment within one year

represented by this equation Net working capital = cast + other current assets- Liabilities.

(Ross, pg732)

Whichever decision that is made regarding their capital structure will have to be in the

best interest of the shareholders quote 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 (Ross, pg 404).


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Table 1

Issue and Opportunity Identification

Issue Opportunity Reference to

SpecificCourse Concept

(Include citation)

Concept

A proposal was suggested from Avral

to acquire Lesterelectronics. Shang-

Wa's owner gave Lester the exclusive

right to sell capacitors in the US for

65 years; it has only been 35 years

though since that agreement. In

actuality this would affect

shareholders wealth due to the timing

of this merge if it had progressed

further before the last quarter of sales.


In the scenario

LEI/Avril can complete

the merger, Lei can also

manufacture its own parts

domestically since

merging with Avril null

and voids any previous

agreement contract held

with Shang,

(University of Phoenix,

2009).

A merger is an

acquisition where

the acquired firm

ceases to exist as

a separate entity.

The acquiring

firm retains its

name and

identity.

(Ross, 2004 p.

797)

Merger

Shang-LEI is faced with this issue and

if they decide to take the LBO route,

then they will be expected to generate

enough cash flow early on to pay this

debt off based on a time table


When the debt needed to

finance future operations

is known and can be

forecasted, then the

Adjusted-Present-Value

(APV) is used in place of

According to

Ross (2004),

deciding to

finance through

debt or equity

defines the

CapitalStructure


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the WACC.

These are the tools used

in a leveraged firm.

(Ross, 2004)

companys capital

structure or the

value of the firm

(Ross, pg 402)

When a merger is announced that the

acquirer experiences slightly negative

returns, but two weeks after the

announcements, returns turn slightly

positive. When it comes to the

acquired company for non financial

acquisitions (banks), they experience

abnormal returns with the first week

displaying a very large abnormality

followed by 10 weeks of cumulative

abnormalities (Deals Round up

2009).

In the scenario

In 1984, Bernard took his

company public, and it is

now traded on the

NASDAQ market and

rated Baa by a Nationally

recognized rating agency

(University of Phoenix,

2009).

Surely Bernard has

shareholders whose

wealth is maximized by

the payout of dividends.

If The Baa rating for

Bernard is substantially

high, this will attract

more investors like

shareholders, the more

cash generated then the

higher the dividends, this

Any company

should buy assets

that generate

more cash then

they cost and they

should sell bonds

and stocks that

raise more money

than they cost.

Cash is paid out

to investors in the

form of interest

and dividends

(Ross, 2004 p. 6)

Stock andbonds


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increases shareholders

wealth.

(Ross, 2004 )

Long term financing according to

Ross (2004), is a category that may

include interest, principal payments,

and dividend payments to

shareholders (Ross, pg 743).

In the scenario

In 1984, Bernard took his

company public, and it is

now traded on the

NASDAQ market and

rated Baa by a Nationally

recognized rating agency.

Surely Bernard has

shareholders whose

wealth is maximized by

the payout of dividends.

If The Baa rating for

Bernard is substantially

high, this will attract

more investors like

shareholders, the more

cash generated then the

higher the dividends, this

Any company

should buy assets

that generate

more cash then

they cost and they

should sell bonds

and stocks that

raise more money

than they cost.

Cash is paid out

to investors in the

form of interest

and dividends

(Ross, 2004 p. 6)

Long-termfinancing


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increases shareholders

wealth (University of

Phoenix, 2009).

Net Present value of stock(NPR)

In the scenario

Bernard Lesters

company is traded

publicly

So if a merge were to

occur between his and

another company the

companys cash flow will

be affected which in turn

will affect the present

value of his companys

stock.

When deciding to merge

or acquire each company

presented has to analyze

the NPV in order to

determine if the proposed

investment is a good

investment or perhaps on

The NPR is a

good indicator of

a good vs. bad

investment. NPV

uses cash flows

from a project

which in turn is

used to determine

dividend

payments, other

corporate

projects, or

payments of

corporate interest.

(Ross, 2004 p.

146) That is,

NPV is the

present value of

future cash flows

NetPresentvalue ofstock(NPR)


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that should not be entered

into.

minus the present

value of the cost

of the investment.

(Ross, 2004 p.

62)

Stakeholder Perspectives/Ethical Dilemmas

The stakeholders obviously have the most to lose. To begin you have the Shareholders

who have part ownership within the company due to stocks. The shareholders must be told about

the proposal for an acquisition, for it would be UN ethical to not inform the owners (partial) of

the corporation. This may cause a drop in stocks if the shareholders view this as negative but that

is a risk that must be taken by the company.

Bernard is the owner of LEI (Lester Electronics Inc) all of his financial livelihood is tied

up in the company and is his investment. It is in his best interest to see to it that this project is

successful.

John Lin is the owner of Shang-Wa and likewise his interests are mutual in comparison to

Bernard. It would be most beneficial to pursue the merge and ensure its success.

Table 2

Stakeholder Perspectives

Stakeholder Perspectives

Stakeholder Groups The Interests, Rights, and

Values of Each Group


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Shareholders These individuals own shares in the

company and could stand to lose out financially if

the merger is un successful.Bernard Lester (LEI) He invested all of his assets and liabilities

he is tied and hopeful of the success of this

decision since he has all right to profit share etc.

John Lin (Shang- Wa) He invested all of his assets and liabilities

he is tied and hopeful of the success of this

decision since he has all rights to profit share etc.

Problem Statement

Shang-LEI aspires to increase shareholders wealth, but has not defined the

adequate corporate structure, in order to analyze risks associated with their investment in

order to reach its end state goals. There are multiple opportunities for Shang-LEI to

increase wealth and define company structure, and mitigate risks. There are tools that can

easily help with this problem if used correctly. These tools that are directly related to the

financial aspects of the companys progress in relation to finding a solution to the

problem and reaching their end state goals could potentially include the following;

1. Appraisal of corporate performance using financial statements and ratio

analysis

2. Assessments of corporate performance using discounted cash flow

techniques


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3. Analysis of corporate performance using asset valuation models

End-State Vision

The end state is to increase the profitability of the company and at the same time,

maximize shareholder's wealth. In order to do this, the company needs to decide which areas to

invest in, how to increase cash flows, and how to manage present and future financial affairs.

Table 3

End State Goals

Shang-LEI optimized the greatest solution for increasing shareholders wealth by

merging into one. The potential is there for an increase in manufacturing (expansion of facilities)

and distribution (69% increases with consolidation) capacity (appendix 1). This is due in part

because of previous distribution regions that if combined will fuel the demand for higher

production ultimately increasing sales.

The projected sales after the merge were up by over a million (appendix 2). This will

easily become reality once each of the previous mentioned potentials are met.

End-State Goals

Shang-LEI have merged as one company and maximized shareholders wealth

Shang-LEI have consolidated assets and capitalized on a core increase of 69% in distribution

Shang-LEI through combined assets have increased their manufacturing capacity

Through increased manufacturing capacity, sales have also increased

Alternative Solutions


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According to Burge (1994, November) many mergers may use multi sources of financing

options. In the most part some of these financing firms require 25%-50% of the purchase price in

equity and returns in the 30% range. (Burge, par 1).

Mr. Burge goes on to describe the differences between a leverage acquisition and a

traditional raised buyout.

In a leveraged acquisition, company A, an operating business, acquires company

B, also an operating business. Lenders can, on a pro forma basis, take the cash

flow of both companies, combine it, and leverage against it. So, the now merged

company can borrow its senior debt and subordinated debt on a combined basis

and use the combined cash flow, including the synergies that are theoretically

achieved by combining the two companies, to pay back the debt. As a result, the

whole becomes worth more than the sum of its parts, creating a high return on

equity. Often when one company acquires another, there is no need to raise

additional equity. There already is equity in the acquiring company and it can rely

on the subordinated debt or senior debt markets to obtain the capital to acquire the

other business (Burge, pars 3, 4).

Historically when it comes to being bought out by a leveraged firm 10% of the purchase

price would be invested as equity, the rest of the debt would be purchased with debt. We use the

example given by Burge (1994, November) which involves a purchase price of 25million dollars

for the purchase of firm B to firm A. In this example 2.5million will be invested as equity and

the rest in debt. It is assumed that in 5years 10million of that debt would be repaid, and if the

company was resold for about 25 million then the 2.5million of the original equity would now be

worth 12.5million or 5 times the original investment price. This would be a 40% rate of return on


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the project over that 5 year period, and while all the company did was repay the debt, each dollar

spent towards the debt was also a dollar of value earned Burge (1994, November).

Now things are different and with leverage financers requiring 25%-40% of the purchase

price in equity, repaying the debt is not simply enough, and what may have required 2.5million

as the down payment in equity may now require 8million in equity and even if the debt is retired

and the company is sold, the rate of return is much lower, say 25% as opposed to historical

returns Burge (1994, November).

Burge speaks of a real closing to help generalize this concept quote

In a $50 million deal that closed recently, the equity sponsor group financed it with 100%

equity. All $50 million came right out of its fund and a $150 million acquisition line was

put in place. The fund is going to create its leverage in the future by acquiring other

businesses with debt (Burge, pars 9).

Also according to Burge (1994, November) senior debt is the lowest risk and has the

lowest return rate and senior secured debt used mostly in situations where cash flows are

uncertain. He also adds that returns and values are more likely to come from improving

operations then from straight debt repayment.

What this means for Shang-LEI is that not only do they need to look at the present

purchase price and come up with 25%-40% equity but they will also have to determine the rate

of return on this debt (discount rate) in order to figure out if the company is making the correct

decision.


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Another issue is cash flows, and the new merger will have to calculate the projected cash

flows to see if they will maintain their debt from daily operations, calculate returns and values to

see if they are enough to cover their long-term debt which can free up additional funding for

future investments.

Determining proper investments of levered vs. unlevered firms differs by the method

used to determine if a project should be accepted. Adjusted Present Value (APV) is more

favorable to a levered firm where Net Present Value (NPV) is used more often in a majority

equity firm. According to Ross (2004), the cost of capital decreases with leverage in which a

normally negative NPV for a project (calculated by an equity firm) may be considered a positive

move for a levered firm.

According to Ross (2004) In words, the value of a project to a levered firm (APV) is

equal to the value of the project to an unlevered firm (NPV) plus the net present value of the

financing side effects (NPVF).

(Ross, 2004, p 477).

The four things affected by this equation are Tax subsidy to debt, cost of issuing new

securities, the cost of financial distress, subsidies to debt financing. (Ross, 2004)

We find these familiar terms mentioned in the merger between Transcend Services and

MDI etal.. $2 million note payable to the selling shareholder due one year after closing, and $2

million of Transcend common stock (119,940 shares)

Analysis of Alternative Solutions


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Based on the research by Burge (1994, November), a 40/60 equity to debt financing

option was assumed and Rated a 5(high) for aligning with the goal of creating the right financial

mix and according to Burge, the equity financing should be 25%-40%.

Financing with a 40/60 mix had little to do with the 69% in distribution assets, but the

merge itself is what played the biggest part in relation to this goal. Since the type of financing

itself had little correlation with the distribution increase, this was rated a 1(low).

The 40/60 financing mix did not contribute totally to the increase in sales but had an

impact on sales, since without the financing the merger would not exist, and there would not be

any potential to raise revenue etc. This was rated a 3(middle), even though the association was

weaker, but stronger then the correlation between the financing and the distribution percentage

increase. The overall ratings for the before mentioned in relation to meeting the goals that were

specified was given a 3.15.

The Next alternative which is the consolidation of distribution assets in correlation with

the goals of financing with the right mix of equity received a one. It is significant that the merger

occurred which would allow the alternative, but the actual financial mix bares little relevance.

When it came to the 69% increase in distribution assets and sales in relation to the

alternative of consolidating distribution of assets, they rated a 5(high) for each in which created

the accumulative avg. of 3.46

The last alternative of increasing production through combined assets in relation to the

financial mix received a 5(high) because the correlation between the two goes hand in hand.

When referring to the 40/60 representation, the 40 corresponds to the assets used in financing.


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This rate was giving to the increase in distribution and increase in sales creating a 5.0 overall

rating.

Even though financing the correct mix is important sales and asset distribution seem to be

the driving force, pertaining to the overall goal, which is the maximization of shareholders

wealth.

Table 3



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Financemergerw

ithrightequi

mix

69%indistributionGoalB

increasesales

5 4 4

A)Financeusing 40/60equity debt

ratio 5 1 3 3.15B)Consolidate distribution assets 1 5 5 3.46C)increaseproduction through

combined assets 5 5 5 5.00D) -E) -

---

Note: This table format varies from APA standards in conformity with guidance contained in the preface to

the APA Publication Mannual, 5th edition.

3 = Middle

2 = Low to Middle

1 = Low

SCALE==>

5 = High

4 = Middle to High

Alternative Solution Evaluation Matrix

GOALS

Secondary Alternative Solutions

Primary Alternative Solutions

ALTERNAT

IVESOLUTION

Relative Importance (Weight)==>

Final

Rating


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Risk Assessment and Mitigation Techniques

According to Haim (1978) the economic cost of bankruptcy should be factored in to any

decision regarding capital structure. The article goes on to state that the value of a firm increases

with leverage. In order to demonstrate an example was given of a firm whose value increased up

to 10, 000 in debt alternative, but declined at 15,000. This proved that at 10,000 the debt equity

ratio was 50% and was considered the optimum financing for the firm. The article further states

that incorporating the bankruptcy risk into the valuation model that the probability of financial

failure increases as the financial ratio increases (Haim, pg1).

Shang-LEI can use to benefit from a lower debt equity ratio if it is to help them from

defaulting in the future, based on the burden of debt that the newly merged company is carrying.

According to Shrivastava (1986), the merger who aspire to maintain growth and

diversification are not always successful quote;

In 1984 alone, over 2,500 mergers

worth $122 billion collectively were accomplished.

Even though the number of mergers has

been increasing considerably, mergers aimed at

attaining growth and diversification are not always

successful. For instance, activities of Lytton

Industries before the 1980s provide a spectacular

example of a company that used a merger

strategy for this purpose. From 1953 to 1967,


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Lytton Industries grew from a $200 million company

to a $1.6 billion conglomerate. But in the

next decade, the size of the company declined

severely (Shrivastava, par 1).

The author goes on to state a correlation to un related diversification and conglomeration

to related diversification as being a difference in financial performance, capital productivity,

higher market risks, and higher degrees in variance in relation to performance (Shrivastava

1986).

All of this can be contributed poor choice in merger partners, in appropriate pre merger

analysis, poor design of a diversification strategy, and lack of integration between merged firms.

Examples of which are quoted;

This lack of integration

has led many recent mergers to disastrous performance.

Coca-Cola acquired Wine Spectrum,

hoping to bring its marketing prowess to a sleepy

wine industry. A few years later and after several

million dollars in losses, Coca-Cola divested Wine

Spectrum. In 1981, Fluor Corporation played

white knight to St. Joe Minerals Corp. and saved

it from Seagram Company's takeover attack in a

deal that cost $2.2 billion. In the past four years, a

clash of corporate cultures, an exodus of key

personnel, and an overall failure to integrate has


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caused St. Joe to lose millions of dollars. However,

few analysts have examined the problems of

integrating firms after the merger has been consummated

and the impact of this lack of integration

on performance (Shrivastava, par 3).

What it all boils down to is that a merger has to integrate the newly merged firm into a

single unit. According to the author this must occur at several levels such as; accounting systems,

physical assets, product line, production systems, technology, and cultural levels (Shrivastava,

1978).

This leads to the last two alternatives for Shang-LEI, who can also take the opportunity to

integrate its assets in order to reach its end goals.

Table 4



Alternative

Solution

Risks and

Probability

Consequence

and Severity

Mitigation Techniques

Finance

using 40/60

equity debt

ratio

If the

return rate

is negative

or lesser

than the

asset, the

project can

be in

A

negative

return

could

cause

risky cash

flows

(Ross,

Return Variance can be expected, the term

standard deviation can be calculated using

the square root of the variance formula

(Ross, pg 257)

You can use the results of the returns in

comparison from the expected returns to

make a managerial decision to get the


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jeopardy

(Ross, pg.

321) (High

risk)

A possible

risk is that

if during

debt

managing

and

monitoring

one

realizes the

discount

rate should

be higher

(High)

A project

should be

taken only

if the

return rate

is greater

2004)

Default on

debt (Ross

pg 434)

A higher

discount

rate could

be riskier

then the

investmen

t decision

(Ross, pg

213)

project back on track.


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than the

financial

asset of the

risk (Ross,

2004)

The

probability

of the

merger

taking on a

project

with a

negative

return is

low

Consolidate

distribution

assets

If the

distribution

markets

become

smaller due to

economy or

things out of

the mergers

This will

affect the

bottom

line, in my

opinion.

In my opinion research is the key to

possibly predicting future trends.


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control,

The

chances of

predicting this

is slim, but the

chance of this

occurring at

the moment of

the merge is

also minimal.

Increase

production

through

combined

assets

More

assets may be

needed as

opposed to just

consolidating

This is

highly

probable if the

company

chooses to

expand

globally right

This could

cause for a

need in

more

capital

If the debt ratio is high then expand later,

make what money you can now.


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after the

merge.


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Optimal Solution

In putting it all together it would appear that the optimal solution is to merge as a levered

firm. I have researched how several companiess dealt with the merger decision and their choice

of capital structure. Based on the research by Burge (1994, November), a 40/60 equity to debt

financing option was assumed and Rated a 5(high) for aligning with the goal of creating the right

financial mix and according to Burge, the equity financing should be 25%-40%.

After financing the merge, the next thing is to consolidate or integrate. According to Shrivastava,

(1978), quote

The primary problem in effectively managing

merged firms is integrating them into a single unit.

This integration must occur at several levels. The

initial and perhaps easiest integration of the

merged firms is done through the integration of

procedures that is achieved by combining the

accounting systems of the two firms and creating

a single legal entity. Another type of integration is

the integration of physical assets, product lines,

production systems, and technologies. The most

critical type of integration is cultural integration

(Shrivastava, par 4).

It would appear that the consolidation of these assets would improve performance and in the long

run improve profitability of the firm. These sets of solutions combine as one in order to

incorporate the most maximization, of shareholders wealth.


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Implementation Plan

Table 5

Optimal Solution Implementation Plan

Deliverable Timeline Who is Responsible

Secure financing from a capital

investment bank

April 08, 2005, merger close

date April 15th

Lead CFO (Anne Lorale)

Begin the initiative to start

implementation of all systems.

Each department head will co

lead the project, for their

specialized departments, creating

detailed documentation of the

working of every aspect of their

department, which will be turned

in later, to the directors who will

meet with top executives.

April 16st initial meeting held,

weekly meeting will follow

per company protocol, the

actual report for this initiative

is due in 14 days April 30 th.

Directors

Finance

Information technology

Logistics

Production

HR

Research

Distribution combined, assets and

production warehouse combined

and some assets that are no

longer needed and could be sold

off, must be provided within a

report

Report due May 8th, 2005 Production (managers)

Additional research on expansion

after the merger will be required

to check progress on expansion

Report due May 8th, 2005 Finance(managers)

Research(managers)

Logistics(managers)


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plans along with financials, and

necessary resources proposals

After review of expansion policy

the decision is made to postpone

the expansion but integration of

assets begin for departments

IT

Finance

Production

(1st phase)

May 16th, 2005 Management of these

departments will work

with their corresponding

directors

Liquidation of un needed assets

begin and integration of the

remaining departments

Logistics

Hr

Research

(2nd phase)

May 26th, 2005 Management of these

departments will work

with their corresponding

directors

Integration, and asset

consolidation/liquidation

complete

June 6th completion CEO and VP

(responsible for ensuring

completion)

Evaluation of Results


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The end state is to increase the profitability of the company and at the same time,

maximize shareholder's wealth. The company has done this by deciding which areas to invest in,

how to increase cash flows, and how to manage present and future financial affairs.

Shang-LEI has recognized the importance of figuring the right rate of return, and

monitoring deviations of such in order to stagnate negative cash flows. Asset valuation models

were also utilize such as APV, NPF or WACC.

End State Goals

Shang-LEI optimized the greatest solution for increasing shareholders wealth by

merging into one. The potential was maximized by increasing manufacturing, (expansion of

facilities), distribution (69% increases with consolidation) and capacity (appendix 1). This is due

in part because of previous distribution regions that if combined will fuel the demand for higher

production ultimately increasing sales.

The projected sales after the merge were up by over a million (appendix 2). This will

easily become reality once each of the previous mentioned potentials are met.

Table 6

Evaluation of Results

End-State Goals

Shang-LEI have merged as one company and maximized shareholders wealth

Shang-LEI have consolidated assets and capitalized on a core increase of 69% in distribution

Shang-LEI through combined assets have increased their manufacturing capacity

Through increased volume sales has also increased


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Conclusion

In order for Shang-LEI to meet their goals, a series of plans were introduced to finance

using the right mix, along with consolidation and integration of current assets, and liquidation for

un needed ones. By consolidating and integrating the existing manufacturing processes,

production rates increase.

Shang-LEI will have to integrate its whole culture keeping its mission statement the

same. They will have to be more analytical towards spending and future investments allowing

the chance for their cash flow to increase; this is specifically regarding risk management and

performance monitoring. This could mean specialized persons to handle financial planning, risk

management and monitoring of the performance of the company in order to forecast deviations

or suggest contingencies for unfavorable variances in performance. These groups were included

in the implementation plan and included, key personnel for departments like finance, IT, Hr,

research, etc.

Decision making relating to major projects such as mergers and acquisitions do not seem

to be an easy task to decide. You must keep shareholders interest in mind before making a

decision. It is UN ethical to not inform shareholders of propositions for merges etc. They are

owners and have a stake in the business which means they have much to lose.

Financial planning is beneficial for future projections and daily monitoring of risk factors posing

financial hazards. Tools such as accounting balance sheets and cash flow sheets present the data

needed to calculate proper ratios for monitoring of the companys performance and risk factors.

With the above checks and balances in place, end goals are easily met and obtained

throughout the life of the business.


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References

Burge, Steven W. (1994, November). Mix and match plans to finance leveraged build-

ups. Mergers and Acquisitions, 29(3), 31. Retrieved September 12, 2009, from

ABI/INFORM Global

Deals Round Up (2009, August 18). Medical Device Daily. Retrieved September 6, 2009

from ProQuest database.

Haim, L.(1978). Bankruptcy risk and the choice of financial structure. Management

Research News. 1(3), 8-9

Ross, S.Westerfield, R., & Jaffee, J. (2004). Corporate Finance (7th ed., p. 803). New

York: McGraw-Hill.

Shrivastava, P.(1986). Post Merger Intergration.Journal of business strategy.7(1), 65-76

University Of Phoenix (2009) Scenario One: Lester Electronics. Retrieved September 6th,

2009, from University of Phoenix website.

Appendix 1

Distribution tables

Appendix 2

Consolidated Income statements for Lester and Shang

Appendix 3

Scenario Two

Appendix 4

Statement of Cashflows


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Appendix 1

TEC

Transnational Electronics Corp. Geographical Distribution Table

Europe 27%

Asia 1%

Middle East 2%

Africa 1%

South America 18%

Canada 7%

Central America 9%

United States 35%

Total 100%

Shang-Wa

Shang-wa Geographical Distribution Table

Europe 21%

Asia 11%

Middle East 9%

Africa 3%

South America 13%

Canada 8%

Central America 4%


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United States 31%

Total 100%

Lester

Lester product distribution by manufacturer

Shang-wa Electronics Company 43%

Taiwan Components Company 19%

Indian Electro Parts Company 8%

Caribbean Electronics Company 17%

USA Components, Inc. 13%

Total 100%


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Appendix 2

Income Statements Projections

12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006

Sales539,520.49

604,262.94

676,774.50

757,987.44

848,945.93

Cost of sales420,945.25

475,668.13

537,504.99

607,380.64

686,340.12

Gross profit118,575.24

128,594.81

139,269.51

150,606.80

162,605.81

Operating expenses:

Selling, general and administrative31,570.3

533,148.8

734,806.3

136,546.6

338,373.9

6

Research and development4,500.0

04,635.0

04,774.0

54,917.2

75,064.7

9

Depreciation expense15,971.0

417,004.9

418,105.7

719,277.8

620,525.8

4

Amortization - goodwill - - - - -

Amortization - other intangibles - - - - -

Other operating expense - - - - -

Total operating expenses52,041.3

954,788.8

157,686.1

360,741.7

663,964.5

8

Operating income66,533.8

573,806.0

181,583.3

889,865.0

498,641.2

3


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Appendix 3

March 29, 2005

EmailTo: Executive Leadership TeamFrom: Board of DirectorsCC: Board of Directors

We believe that combining our efforts with Shang-wa will bring success to the firm and thereforepropose a merger with them. Please move forward with creating a financing recommendationwith an analysis detailing all of the possible alternative financing options available to us.


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Appendix 4

Statements of Cash Flow Consolidated

12/31/2002 12/31/2003 12/31/2004

Cash Flows from Operations

Net Income8,417.2

521,582.6

540,931.8

0

Add: Depreciation13,901.0

014,088.0

015,000.0

0

Change in A/R(4,767.0

0)(2,648.3

8)(10,771.9

3)

Change in Inventory(6,507.0

0)(10,457.0

0)(11,220.0

0)

Changes in Other Current Assets(2,389.0

0) 616.00 538.00

Changes in A/P(6,289.0

0)21,417.8

84,790.4

3Changes in Other Current

Liabilities

4,705.0

0

15,358.0

0

(5,245.0

0)Cash flows from Operating

Activities7,071.2

559,957.1

534,023.3

0

Cash Flows from Investing

Purchase of Property, Plant &Equip

(19,537.30)

(39,654.60)

(46,639.80)

Sale of Property, Plant & Equip5,755.0

01,236.0

08,356.0

0

Purchase of Market Investments(202.00

)(17,010.0

0)(4,600.0

0)

Sale of Market Investments 500.00 552.00 765.00

Leasehold Improvements(404.00

)(460.00

)(4,310.0

0)

Cash flows from InvestingActivities

(13,888.30)

(55,336.60)

(46,428.80)

Cash Flows from Financing

Borrowing9,155.0

510,223.9

515,694.0

0

Repayment of Principal(1,618.0

0)(1,618.0

0)(1,618.0

0)

Sales of Stock - - -

Dividends(5,027.0

0)(10,259.5

0)(20,938.0

0)

Cash flows from FinancingActivities

2,510.05

(1,653.55)

(6,862.00)

Net Cash Flows(4,307.0

0)2,967.0

0(19,267.5

0)

Beginning Balance Cash &Equivalents

59,436.00

55,129.00

58,096.00

Ending Balance Cash &Equivalents

55,129.00

58,096.00

38,828.50


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Documents

Problem Solution: Lester Electronics