Lester Electronics was established by Bernard Lester, Sr. LEI is a producer of capacitors and an industrial electronics parts master distributor. (University of Phoenix, 2008) LEI customers consist of small and medium sized original equipment manufacturers, in Europe and throughout the Americas. Shang-wa Electronics was established in 1969 by John Lin as a manufacturer of capacitors in Korea. In 1978, John looking to expand his business to the United States entered into an exclusive supply agreement with Bernard Lester to manufacture capacitors for 65 years in the United States.
Over the years CVS has acquired several smaller pharmacy companies, such as Revco in 1997, Arbor Drugs in 1998, Eckerd Stores in 2004, Sav-on and Osco in 2006. (CVS Caremark, 2008) With the transformational merger with Caremark, making the nation’s premier integrated pharmacy service provider. The latest acquisition in took place in 2008, of Longs Drugs, helped solidify CVS Caremark position as the largest provider of prescriptions in the nation, filling more than 1 billion prescriptions annually. Like, CVS Caremark, LEI has the opportunity to grow promoting both internal and external growth for the company.
By, acquiring Shang-wa LEI would increase its revenue sales as well as establish new facilities in the Asian market. “The firm ensures growth in assets by having a plan in place to finance such growth. ” (Ross, et al. , 2004, pg. 47) If LEI does not acquire Shang-wa, they stand to lose 43% of its revenue over the next five years, making this particular merger a win-win situation for everyone. However, with any acquisition risks are involved. By analyzing the risk associated with investment decision gives the company has an opportunity to explore the possibility of such risk.
In the case of CVS Caremark, CVS revenue sales for 2007 were $76,329,500,000 an increase of $32. 5 billion over 2006, gross profits increased $4. 4 billion to $ 16, 107, 700,000 after the merger with Caremark. (CVS Caremark, 2008) Some of the risks considered were the loss of existing client and new clients, increased pharmacy competition in the market, maintaining purchasing discounts, and changes related to industry pricing.
When making an investment risks are always a factor and not guaranteed. To demonstrate such a risk CVS issued 1.67 shares of stock for each Caremark stock and dividend. These risk will be measured acknowledge in the companies expected return on a portfolio. “The expected return is simply a weighed average of the expected return on individual securities. ” (Ross, et al. , 2004, pg. 261) LEI and Shang-wa must weigh the contributing factors of risk to the securities of the portfolio. Having a well-diversified portfolio will ensure unnecessary risks to be avoided. This merger will insure a more stable environment for investors. ExxonMobile Corporation.
ExxonMobil Corporation is one “of the world’s largest publicly traded oil and gas companies” globally. As one of the leaders in oil and gas resource inventories, refiners and marketers of petroleum products worldwide, ExxonMobil is one of the largest ranked chemical companies. Many are unaware ExxonMobil is also deals with technology applying innovation and science to create safer, eco-friendly ways to deliver worldwide energy needs. ExxonMobile is a worldwide brand of market fuels and lubricants. The three major brands they work under are Esso, Exxon, and Mobil.
(ExxonMobil, 2009) ExxonMobil identifies new exploration of opportunities, cross-border growth or acquisitions, by first understanding the petroleum industry. This entails hard work and a great deal of research. They understand the industry of geology as “the ‘rock’ that hold hydrocarbons” (ExxonMobil, 2009). Acquisitions and growth is best stated by the Exploration President Tim Cejka, “Harnessing science and human brain power, ExxonMobil take the search for new energy supplies to the farthest reaches of the globe” (ExxonMobil, 2009).
In recent years, many organizations have used mergers and acquisitions (M ;A) to improve and expand business operations into the global market. Cross-border acquisitions represent a small percentage of all M;A although they are a large part of foreign investments. Cross-border acquisitions account for the largest means of integrating the world’s economies and total foreign direct investments aimed at restructuring global strategic positioning.
With the Exxon and Mobil acquisition, a large merger of opportunity combining the two companies qualities, economic potential, resources and investment (ExxonMobil, 2009). With the cross-border acquisition came prioritizing, selecting, and trimming a list of opportunities into a newer list, “10 to 15 new assets a year, and increased acreage holdings” (2009). As Lester Electronics Inc. , ExxonMobil is looking to tap into new markets deals, customer bases in order to obtain new technology and product brands (Zabinski, et al., 2009).
Both corporations look “to access experienced management, increase overall scale, diversify geographically, remove” competition, integrate vertically, and to capture the cooperative interaction from cost cutting and enhancing future purchasing power or cross-selling opportunities (Zabinski, et al. , 2009). As Exxon with Mobil and Lester Electronics with Shang-wa, optimistic buying takes advantage of market dislocation to acquire assets in the same industry at low valuations, such as commodities and infrastructure.
The challenges ExxonMobil faced are the same legal and regulatory regimes as other companies, as required in complying with different cross-border rules. Some rules may be incompatible with each company and country, including trustee duties, securities laws, requirements and structures. An example would be hegemony following different country specific stock exchange rules, securities and corporate law decrees becoming major challenges in making a cross-border acquisition successful.
Political considerations like rival national security interests differing by policies on foreign investment, antitrust, labor and employment making matters worse in cross-border growth strategies resulting in conflicting requirements (Zabinski, et al. , 2009). Inexperience dealing in cross-border investments and foreign business integration decreases the chances of success. Not surprising, many cross-border deals fail bringing bad press stressing the costs and how these acquisition are considerably worse for foreign buyer than those of an overlooked cross-border opportunity (Zabinski, et al., 2009).
The challenge Lester Electronics will face with Shang-wa is being proficient in marketing and capitalizing upon product expenditure in Europe to increase demand. ExxonMobil’s approach to cross-border growth avoids a hostile takeover bid from a competitor and maximizing profits for both LEI and SWE by identifying the values and beliefs of all stakeholders, cross-border, to determine any possible dilemmas facing the companies.
Like ExxonMobile, LEI enabled themselves “to look at the characteristics of a successful field in one part of the world and to search for a field with the same characteristics in another region” (ExxonMobile, 2009). Having the confidence to plan and budget for proceeding years to add new resources and opportunities to be the best in each, and to increase the strength of internal and external growth and potential by setting and meeting their cross-border growth strategy goals through successful acquisitions. Alternative Solution Analysis Recommend a Financing Mix that Optimizes the Capital Structure.
To recommend a financing mix optimizing the capital structure, one must first understand capital structure. Capital structure is a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. (Investopedia, 2009) To achieve the goal is to answer the following question. What is the appropriate amount, mix, structure, cost of debt, and equity to support the organization strategic financial goals? (CBS Interactive Inc., 2009)
Lester Electronic debt is based on long term notes payable or debt within the organization, short term debt is also include in the capital structure, after the merger this will also include any long-term and short-term debt from Shang-wa. The essential elements are increasing capital access and flexibility while lowering the cost of capital. Within a company a few key elements are essential for the right capital structure, being supportive of the company’s strategic financial goal, optimizing flexibility, and minimizing overall cost. After some research I found a mix that would be effective for Lester Electronic.1)
Organizing a management team for capital structure through proper education. Lester Electronic team must be established that is educated and able to define what risk the company is prepared to take. 2) Determine the company level of debt capacity. Lester Electronic must look at the amount of debt after the merger that the company is able to support. 3) Determine debt-to-equity financing. After determining Lester Electronic debt capacity, the amount of financing available will be established. 4) Lester Electronic must select the right mix of variable to fixed rate debt.
This will vary based on the company amount of cash available, bond rating and insurance, attitude of risk for the company, interest ratings. 5) Avoiding exposure to one risk and diversifying variable-rate debt. Variable rate debt refers to the quantity of debt with interest rates that may vary depending on market conditions. (Wikinvest, 2006-2009) 6) Manage the company the capital structure and cost of capital. Lester Electronic capital structure must remain flexible; to achieve this goal certain mechanism may be used such as interest rate swaps.
An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period. Swaps are derivative contracts and trade over-the-counter. (PIMCO, 1999-2008) As an essential part of the fixed income market, these derivative contracts, consists of floating rate interest payment that have been exchanged or swapped. The concept is a vital tool used to speculate, hedge or manage risk within the company. 7) Establish a debt structure with long-term final maturity. 8) Monitor and make appropriate adjustments to the company debt portfolio.
Lester Electronic must maintain flexibility, lower interest, and maintain an acceptable risk level, while making adjustments in the company portfolio based on current market changes. Appraising corporate performance using financial statements and ratio analysis. For any company to effectively and efficiently measure performance and management, there must be a clear understanding of their objectives and goals. Evidently the most common objective for any company is to maximize the value of the owner’s interest in the company and making a profit.
The company’s value is dependant on the earnings used to reward the investors and to reinvest into assets expected to generate future earnings (Ross et al. , 2004). Interdependence between value and earnings leads to maximization of profits. Value, earnings and profits of a company are found in financial statements and ratios. The amount of information found in a company’s financial statements ample, spanning a company’s internal operations, the global relationship, and relationship within the company’s stakeholders, creditors, management, employees, and prospective investors alike.
The financial information must be understandable, valid, and suitably limited data to be useful to measure accurately the company’s performance. Financial statement analysis is beneficial in weighing a company’s strengths and weaknesses. A company’s, like Lester Electronics, data from their financial statements reveals the financial condition the company is in. Examining the financial statements, cash flows, and financial ratios provides the company’s management, employees, and creditors with an insight on the aforementioned strengths and weaknesses.
LEI can use the value of any particular ratio to compare with a target range of values indicative of any potential areas to become problems whilst merging with Shang-wa and shortly after. The values of these ratios indicate the company’s financial health. With this said, ratio analysis can also be indicative of any areas being mismanaged and potential a problem area. LEI should be wary in using analytical methods such as financial statements, cash flow, and financial ratios in lieu of relevant facts.
LEI must be reminded financial statements are just a glance at a company’s past, a particular chosen point in business. In such an industry as LEI, conclusions drawn through ratio analysis are dependent on the period being analyzed. The electronics industry has peaks in production, earnings, and profit known as high seasons. These seasons may be March, April and May of every year. It is imperative to analyze the high seasons and low seasons appropriate to show both strengths and weaknesses contributing to these times.
Historical comparisons add to the analysis. LEI would benefit from appraising financial statements and ratios in measuring performance and appraising company effectiveness and efficiency by measuring financial activity and fluctuations to improve on weaknesses, focus on how investments are financed, by profitability, and by financial leverage (allowing the firm to acquire assets beyond those available), in getting an overall global assessment of the company’s real financial health, performance, and management. (Ross et al. , 2004).
With financial statements and ratio analysis, come some cautions to any company. LEI should make certain understanding of these cautions before appraising any financial statements and ratios to measure performance whilst and after merging with Shang-wa. Financial statement and ratios analysis should be cautious of the following: 1) No single ratio provides sufficient information to judge overall performance. 2) Financial statements should have identical dates from the same time of the year. 3) Audits on financial statements should be used in the calculations of ratios.4)
Compared data should be similar and consistent in accounting rules being used. 5) Difficulty in properly defining by category what is considered a good or bad ratio. The preceding cautions are very subjective by both preparer and reader. Conclusion Lester Electronics, Inc. has to make an important financial decision to acquire Shang-wa in order to continue to produce the capacitors and increase future revenues. While this is a tough financial decision for LEI, Disney made the decision to acquire Pixar before the competition.
As a result, Disney increased its technology and company profits. CVS diversified their portfolio increasing the company’s revenue and customer base. Disney Corporation, CVS, and ExxonMobil have all demonstrated benchmarking strategies to get out of the similar situations Lester Electronics, Inc. are in and were able to profit from their opportunities. LEI must make a critical decision to acquire Shang-wa before a potential competitor. LEI determined it would lose approximately 40% of revenue if the company is unable to continue the relationship with Shang-wa.
Ultimately, acquiring Shang-wa would provide a continuation of the business LEI already enjoys, add shareholder value by expanding its capabilities globally and increase revenue with new business lines.
References
CBS Interactive Inc. (2009). B. NET. Retrieved July 24, 2009, from www. http://find articles. com CVS Caremark. (2008). CVS Caremark Corporation. Retrieved July 1, 2009, from http://info. cvscaremark. com Disney Corporation. (2009). Company Overview. Retrieved July 5, 2009, from http://www. corporation. disney. go. com/corporate/overview. html
