Shareholder Wealth

Overall Analysis

Comparison and Contrast

Assess Internal and External Growth Opportunities

In comparing the situation between Sprint Nextel and LEI, many similarities appear. First of all, each firm found itself in a situation where competition threatened survival. For Sprint to grow, additional spectrum space was needed to build a competitive 4G network. For LEI, the potential loss of its primary supplier would cut revenues by almost 45% (University of Phoenix, 2008). For Sprint, the external growth opportunity was found in Nextel. Nextel held a strong subscriber base from the business consumer segment and provided the popular push-to-talk technology (“And then there were four,” 2004). For LEI, the external growth opportunity is to acquire its primary supplier and eliminate the risk of lost revenue.

To financially make these deals work, the internal financial structure must be analyzed. For Sprint, the deal was $35 billion worth of stock. The shareholders of Nextel received 1.3 shares of the new stock for every Nextel share held (“Sprint acquires Nextel,” 2004). For LEI, the proposal could include a portion paid in cash and a larger portion paid through LEI stock. LEI could retain earnings and reduce the dividend per share. In the last two years, the dividend per share has doubled. With the growth opportunity, stockholders may approve such a plan. Another example for LEI in terms of growth opportunities and cross-border growth strategies is that of DiamlerChrysler.

Challenges of Cross-Border Growth Strategies

LEI and DaimlerChrysler are two companies that have turned to acquisitions and mergers in an attempt to expand their business in the global market. Currently, an Exclusive Supply Agreement between LEI and Shang-Wa compares to a similar situation with Mitsubishi (supplier of dual-badge vehicles) and DaimlerChrysler. It was proven from this scenario that just because two organizations currently have ties, it does not necessarily mean that they should merge. Based on the following research, which records the failure of the DaimlerChrysler/Mitsubishi Motor merger, it is imperative that LEI consider their shareholders before attempting to acquire an overseas company. Before presenting to the board, the organization must prove through the financials, that they are currently producing dividends and that an acquisition would be an opportunity for growth and not a loss.

DaimlerChrysler demanded Mitsubishi Motor for an equity share of about 40%, because this would give DaimlerChrysler the veto power over important management decisions and make it the actual number one shareholder. When DaimlerChrysler decided to send a COO to Mitsubishi Motor, its stock on the New York Stock Exchange fell for the fourth consecutive day to the point of almost hitting below the US$50 line. This was a downfall of over 25% compared to the closing price on March 27, 2000 when the basic agreement was reached over investment in Mitsubishi Motor. With the advancement of the post-merger process being slow between Daimler and Chrysler, investors did not appreciate seeing Mitsubishi Motor in the scene with a consolidated interest-bearing debt of over 1.5 trillion yen (Makino, Y. and Takayanagi, M., 2000).

According to Takaki Nakanishi, an automobile analyst with Merrill Lynch Japan, DaimlerChrysler would be taking the risk of being sued by its shareholders if the company purchased a Mitsubishi Motor share at 450 yen, as agreed in the initial contract. By the standards of the U.S. Securities and Exchange Commission, on the other hand further increase in the equity stake or sending of a CEO would mean that DaimlerChrysler is gaining actual control over Mitsubishi Motor. In other words, DaimlerChrysler would have to show the debt of Mitsubishi Motor on its balance sheet, which could aggravate its financials and incur a further fall in its stock price. So, the fact is that DaimlerChrysler tried to keep Mitsubishi Motor outside of its consolidated balance sheet rather than Mitsubishi succeeded in maintaining independence of management against DaimlerChrysler (Makino, Y. and Takayanagi, M., 2000).

On November 11, 2005 Daimler Chrysler finally relinquished its remaining shares in the Mitsubishi Motor Corporation after five financially troubled years of partnership. In the process it effectively ended the company’s ambition to create a truly global car company. The collapse of the merger also signaled the end of the controversial chairmanship of JÐ"јrgen Schrempp, the architect of the deal proving its highest profile casualty. The company then entered a period of introspection as it sought to turn around its ailing holdings of Mercedes and Chrysler (The DaimlerChrysler Mitsubishi Merger: A Study in Cross Border Failure, 2008).

Portfolio Management and Financial Ratios

SK Telecom (SKT), the South Korean communications company, provides a benchmark for LEI in terms of portfolio management and allocation of resources. SK Telecom through the years has made several investments including exclusive agreements, joint ventures and equity investments. To complete these deals SKT required creative portfolio management. One example is the purchase of $1 billion in convertible bonds of China Unicom, that country’s second largest mobile company. After a year of holding the bonds, SKT converted the bonds into a 6.51% equity stake in the company (“South Korea bets a billion,” 2007). The parent company of SKT, SK Corp, sold a $1 billion block of SKT stock to raise capital to cover investments (“SK Corp raises capital,” 2005). The challenge for SKT now is to continue to reduce costs. SKT made investments in new technology and is spending increased amounts in marketing to get subscribers to make the switch. Marketing costs rose almost 43% and profits fell by 29% in the third quarter of 2007 (“All for won,” 2007).

For LEI, the leaders will need to look at the financial statements to determine the funding for any external investment. The firm must ensure assets are allocated to maximize shareholder wealth. The most recent financial statements of LEI indicate the current debt ratio is .36. The debt equity ratio is .56 which indicates that the firm is financing less through debt than equity. Therefore, LEI may be in a position to seek external financing for external opportunities. The addition of debt can be advantageous since interest payments are tax deductible (Ross, Westerfield & Jaffe, 2005). Another company for LEI to benchmark is ASML.

Working Capital Management

ASML