Gap Analysis: Lester Electronics

Running head: GAP ANALYSIS: LESTER ELECTRONICS

Gap Analysis: Lester Electronics

University of Phoenix

Gap Analysis: Lester Electronics

Lester Electronics Inc. (LEI) is a consumer and industrial electronics parts distributing company that markets its products to small local distributors throughout North, South, and Central America and Europe. The company also markets to small to medium-sized original equipment manufacturers and repair facilities. In 1978 LEI entered into an exclusive distribution contract with Shang-wa Electronics. This contract has worked favorably for both parties for quite some time, however, another company has shown interest in acquiring Shang-wa Electronics and such an acquisition would be detrimental for business at LEI. The Board of Directors at LEI, after considering many options, has decided to enter into a merger with Shang-wa. This merger could stand to be advantageous for LEI; however, the company must take many precautions and be confident in the success of their final decisions.

Situation Analysis

Issue and Opportunity Identification

Another firm has become interested in acquiring Shang-wa which could mean the loss of the exclusive contract forged years ago between Bernard Lester and John Lin. The loss of Shang-wa as a manufacturer would be detrimental to business at LEI in that LEI stands possibly to lose 43% of its revenues over the next five years as a result. LEI has been presented with a number of growth opportunities, one being the proposed merger with Shang-wa. This opportunity to merge could prove to be quite profitable for LEI and therefore, it would behoove them to invest in the project. As stated in Corporate Finance, "Many firms have growth opportunities, that is, opportunities to invest in profitable projects. Because these projects can represent a significant fraction of the firm's value, it would be foolish to forgo themÐ'..." (Ross, Westerfield, & Jaffe, 2005).

LEI's decision to enter into a merger with its long time "partner" Shang-wa has caused many new opportunities to arise. This merger will by no means be a simple transaction. LEI must now concern itself with the logistics and details of the transaction. However, before the project can move forward the stockholders from each company must vote to accept the board's proposal; "A merger must be approved by a vote of the stockholders of each firm. Typically, votes of the owners of two-thirds of the shares are required for approval" (Ross, Westerfield, & Jaffe, 2005). This means that the stockholders will have to be convinced of the feasibility of the merger before they will accept the proposal. Stock holders stand to gain, and possibly lose, a great deal when a company embarks on new venture; this is why it is vital that stockholders be presented with clear concise information to vote on. Stockholders must understand and agree to the implications of the proposed change.

Should the stockholders vote in favor of the proposal financial planning will be the next step. Financial planning lays the framework for future financial decisions that the company will have to make;

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, Westerfield, & Jaffe, 2005)

Effective financial planning will be essential to the success of the merger with Shang-wa as well as finding the best way to finance the merger. Shang-wa has a debt heavy debt to equity ratio and a merger will mean that LEI must take on that date. The financial goals and needed actions outlined in the financial plan will need to be very specific so that the amount of debt that Shang-wa has will not have an overwhelmingly negative impact on LEI. The two companies have very different capital structures and now LEI will have to find ways to make the situation work in their favor. One way to ensure favorable outcomes and growth is to develop a financial plan that has been carefully researched; "

The growth of a business depends on many factorsÐ'-good leadership, a product or service in high demand and careful financial planning. Putting a plan in place first requires research. Examine both assets and liabilities. Prioritize goals. Incorporate budget details into a feasible plan for the future. (Biz Cap, 2007)

LEI has a number of financing options including the use of its working capital along with the acquisition of Shang-wa's voting stock.

Globalization and operating exposure will also present an issue for LEI. The merger with Shang-wa will make LEI an international company and LEI has not had any exposure to foreign markets. The company must make sure to insulate itself against the negative effects of exchange rate fluctuations. Eun and Resnick state that "As the economy becomes increasingly globalized, more firms are subject to international competition. Fluctuating exchange rates can seriously alter the relative competitive positions of such firms in domestic and foreign markets, affecting their operating cash flows." Globalization also has positive implications such as new markets for increased growth.

Stakeholder Perspectives/Ethical Dilemmas

The share holders of each company are mainly interested in wealth maximization. The shareholders have the right to expect thorough, accurate information on which to base their decisions. The shareholders also have the right to vote against the proposal should they believe that it is not a worthy investment. If the shareholders disapprove the merger the decision would conflict with Bernard Lester's interest in the longevity of the company and its success.

Lester is interested in the continued success of the company. Disapproval of the merger by shareholders would make it quite difficult for LEI to remain as successful as it has been with the threat of losing Shang-wa and 43% of the company's revenues looming. Lester's interests also include increased profits, sales, and market share. Lester has the right to accurate financial data from Shang-wa and a continued business ethic from its employees.

John Lin is another stakeholder who would be conflicted should the shareholders disapprove the merger. Lin is interested in retiring and spending quality time with his family.