Problem Solution: Lester Electronics
Corporate growth usually occurs internally when a firm expands its existing departments through normal capital budgeting activities. However, the most dramatic examples of growth sometimes results from mergers. Many reasons have been offered by financial managers to account for frequent merger activity. The primary motivation behind a merger is that it provides an opportunity to bring together and increase the value of the combined enterprise. Mergers also serve to increase market share, gain competitive advantage, and improve shareholder value.
Lester Electronics, Inc. has finally reached its decision: to merge with its long time supplier Shang-wa Electronics. What remains is to prepare a plan for that merger that addresses firm value and financing sources. Shareholders will want to know how this merger will impact them in the short term and how the combined company will look financially in the longer term. Company leadership will want thoughts on the combined capital structure post merger. The CFO will need to determine if the funds exist and how necessary funds can be raised. LEI will want to know how much it can afford and what the capital structure will look like.
Situation Analysis
Issue and Opportunity Identification
When LEI proposed to acquire Shang-Wa many issues and opportunities came up. This vertical acquisition will help LEI immensely because of the different parts of the production line. Since they are different parts of the same industry LEI can benefit. This will help cut costs that would have been otherwise there. Being a merger, LEI will assume all of the outstanding assets and liabilities of Shang-Wa. Fortunately Shang-Wa’s assets and liabilities are much smaller than that of LEI. This will help LEI to continue to grow at the rate that is accustomed to. When LEI merges with Shang-Wa they are taking on more than just a name, with it, come all of the assets and more importantly acquiring them at a fair...