PROBLEM SOLUTION: LESTER ELECTRONICS

Problem Solution: Lester Electronics

Problem Solution: Lester Electronics

Lester electronics is merging with Shangwa who currently manufactures an exclusive line of capacitors that represents 43% of Lester's revenue. In the face of Avral offering to acquire Lester and TEC offering to acquire Shangwa, both Lester and Shangwa have decided to merge. This raises several questions for both parties. These questions include but are not restricted to the following: What is the best way to financially structure the merger for all parties concerned? What financial strategies will the post merger organization employ? What new markets will be targeted as a result of these strategies? What changes will be made to the capital structure? What role will financial leverage play in financing of future projects? What solutions will be implemented to execute the new financial strategies? What risks will accompany the different solution selections? What is the approximate timeline that the solution milestones will be completed? These are merely a handful of key questions that surround a merger. (Ross, Westerfield & Jaffe, 2005)

The circumstances that surround the merger underscore the aggressive industry climate that has been foster by giants like Avral and TEC. Lester must chose aggressive growth strategies or watch there market share be consumed by multinationals like TEC and Avral. The solutions must detail an aggressive growth strategy that can sustain long term growth for the post merger Lester electronics. Financial leverage will be increased to sustain growth and lower the current tax burden. With the increased use of leverage the WACC will also increase which will decrease the available project selection by increasing the hurdle rate. However it is projected that there will be more than a sufficient number of projects to drive a minimum of a 25% increase in revenue within two years post merger. Therefore it will be the opportunity cost of capital that will distinguish which projects will be selected. This will be determined by computing the NPV of all competing projects.

Along with financing strategies will be cultural changes and competing stakeholder interests that will require resolution. Each party in the merger has different competitive advantages that the new firm can leverage. One of the key goals is to quickly integrate and feed off of each others strengths. The quicker the two entities can integrate the better the chance of arriving at the best case financials. (Ross, 2005)

Situation Analysis

Issue and Opportunity Identification

The weighted average cost of capital is different for both firms, and up to this point both firms used different financial strategies to optimize capital structure. The different strategies will need to be integrated and overall leverage increased to meet the goals of the new firm. WACC can be used as one of the tools to evaluate the debt equity mix and arrive at the best capital structure of the Lester post-merger.

By the very nature of a merger, there won't be a single financial ratio that won't change. All of the financials of the new entity will be different than either financial of the former ...