Who are these masters, and what are their demands? Shareholders demand protection of, and a fair return on, their investment. Customers demand delivery of promised goods and services for value received. Employees demand a safe working environment, fair compensation, and honest communication. Senior management demands adherence to direction and policies. "One's personal belief system demands truth to one's self, and our community's demand that we abide by established laws (Lester Electronics). Herein lies the potential for conflicting interests and personal pain" (Schuster & Smith, 1994).
End-State Vision
The joint company of Lester Electronics and Shang-Wa Electronics maximizes the value of the company and the shareholder wealth.
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...
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.
