Gap analysis for Lester Electronics and Shang-Wa merger

Gap Analysis: Lester Electronics

The stockholders own the company and elect the board of directors, who appoints the management team. Thereafter, Management, functions in the interests of the stockholders. Bernard Lester and John Lin have the decision to merge so they are not forced into a hostile takeover. With the merger, there are many opportunities for them as they capitalize from the strengths and weaknesses of each other. Furthermore, the two companies will have an opportunity to develop a financial plan that will allow them to forecast their financial future. Along with that, they will be able to determine the viability of pursuing leasing equipment (Lester Electronics).

Situation Analysis

Issue and Opportunity Identification

Lester Electronics, Inc. (LEI) is an electronics parts master distributor, marketing its products to small- and medium-sized original equipment manufacturers (OEMs), repair facilities and small local distributors throughout the Americas and Europe. LEI has had an exclusive distribution contract with Shang-Wa Electronics for the United States. This agreement has served both companies very well because they both have proven that they can meet the growing demands of the market and now both CEO's have been approached by other companies wishing to acquire them. With the threat of a hostile takeover, John Lin, the founder and CEO of Shang-Wa Electronics approached Mr. Lester about a merger to protect Shang-Wa and prevent LEI from losing 43% of its revenue over the next five years if it loses Shang-Wa as a manufacturer.

With the merger, a new financial plan will need to be developed to allow the joint company to prosper because separately, they have been operating with the intent to maximize the value of their respective companies and stockholders. However, they will be merging due to the fact that they must develop a plan to continue maximizing the new company while deciding who the stakeholders will be. "Accountants generally argue that a firm's financial strength is inversely related to the amount of its liabilities" (Ross-Westerfield-Jaffe, 2004, Chapter 21, p.596). It appears that Shang-Wa may not have been taking full advantage of leasing since their net income for the last reporting year was one third of LEI's. However, their total liability was significantly higher. Shang-Wa's long-term debt is 48 times higher than LEI, which makes it an opportunity for the combined company to evaluate their strategy for paying long-term debt (Lester Electronics).

Gap Analysis

Two independent companies are merging in order to create a stronger company. With a vision of maximizing shareholders wealth there is a multitude of opportunities. As separate entities, they have developed their own financial plans to maximize their company's value and shareholders wealth. "Financial planning formulates the method by which financial goals are to be achieved" (Ross-Westerfield-Jaffe, 2004, Chapter 3, p.44). There are common elements that should be contained. A couple of major items to be addressed after evaluating the separate income and balance sheets are the capital spending and debt policy of the combined company. Mr. Lester will need to decide how to use net working capital and how the new company will raise equity (Lester Electronics)..

Mr. Lin feels that merging with Lester Electronics will create a much stronger and more viable company. "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 firm's stockholders" (Ross-Westerfield-Jaffe, 2004, Chapter 15, p.404).

According to the income and balance sheets for Shang-Wa Electronics and Lester Electronics, Shang-Wa's total liability is higher than Lester Electronic even though they have one third less income. Since Shang-Wa Electronics makes the electronic components, they would have large equipment (Lester Electronics). "Since the lease liability is hidden with an operating lease, the balance sheet of a firm with an operating lease looks stronger than the balance sheet of a firm with an otherwise-identical capital lease" (Ross-Westerfield-Jaffe, 2004, Chapter 21, p.596).

Shang-Wa's long-term debt is 48 times higher than LEI which the interest on this debt may be considered a cost of doing business. However, if it is too high and cannot be repaid, it is a liability. This liability could lead to liquidation if it is not monitored (Lester Electronics). "At its crudest level, debt represents something that must be repaid; it is the result of borrowing money. When corporations borrow, they promise to make regularly scheduled interest payments and to repay the original amount borrowed" (Ross-Westerfield-Jaffe, 2004, Chapter 14, p.389).

Conclusion

Lester Electronics and Shang-Wa Electronics are conducting a merger. They need to assess the financial situation of each other. The final combined company has the opportunity to maximize its wealth as well as the wealth of the future stockholders. After the strategic goals and objectives are established, a financial plan describing each of the activities, resources, equipment and materials t0hat are needed to achieve these objectives, as well as the timeframes involved will be needed. Shang-Wa Electronics has more total debt and long-term debt compared to Lester Electronics while having less net income. Lester Electronics will have the opportunity to evaluate different methods to balance this ratio like leasing equipment vice purchasing.