Share
Explore BrainMass

Wealth Maximization for Read Scenario and Lester Electronics

I need a worksheet filled out based on the scenario attached. I also need the 2 questions at the end answered with no less than 100 words each.

Wealth Maximization Concepts Worksheet
Read Scenario One: Lester Electronics, Inc. (BELOW). As you read the scenario, think about some of the opportunities facing the companies in the scenario with regard to maximizing shareholder wealth.
Complete the Wealth Maximization Concepts Worksheet following the instructions provided on the worksheet. You may find it easier to fill out column B before column A.

COMPANY OVERVIEWS

Lester Electronics, Inc.
In 1978, Shang-wa Electronics, a small Korean manufacturer of capacitors, entered into an exclusive United States distribution contract with Bernard Lester, who then officially founded Lester Electronics, Inc. (LEI). LEI grew rapidly as Bernard added additional components to its product line, and made inroads with two large domestic manufacturers that use capacitors in both consumer and industrial products.

As a consumer and industrial electronics parts master distributor, Lester markets its products to small- and medium-sized original equipment manufacturers (OEMs), repair facilities and small local distributors throughout the Americas and Europe. To date, however, Lester has never marketed domestic-made parts outside of the United States. Operating in this way, the company's revenues approximate $500 million a year.

In 1984, Bernard took his company public, and it is now traded on the NASDAQ market and rated Baa by a nationally recognized rating agency.

Shang-wa Electronics

Shang-wa CEO John Lin began manufacturing capacitors in 1969, building a small, well-respected business in Korea. In 1978, John entered into an Exclusive Supply Agreement with Bernard Lester. Under the contract, Shang-wa granted Lester the exclusive right to sell Shang-wa capacitors in the United States for 65 years, as long as Lester maintained a minimum annual purchase of $1 million wholesale; as a result, Shang-wa is Lester's primary supplier of capacitors for the U.S. market. In exchange, Shang-wa cannot knowingly sell its capacitors to anyone intending to market to U.S. buyers.

For the past 35 years, the agreement -- which must be renewed annually -- has served both companies very well, and John and Bernard now consider themselves friends as well as business partners. In fact, five years ago, Bernard invited John to sit on the LEI Board of Directors. During his past two visits to the United States for Lester's quarterly Board meetings, John has informally suggested that Shang-wa is open to growth opportunities that could position the company to meet growing demand.

Transnational Electronics Corporation (TEC)

As a large manufacturer and distributor of electronics components, Transnational Electronics is on the rise. Through recent mergers and acquisitions, the company has finally developed enough resources to expand globally. TEC has recognized the growing domestic demand for the specialty capacitors that Shang-wa manufactures. In fact, last month at an Asian trade show, TEC CEO David Antone casually mentioned to John Lin that TEC might be interested in acquiring Shang-wa.

If this happened, the long standing Lester/Shang-wa exclusive distributorship agreement would most likely not be renewed at year end, creating a 43 percent reduction in Lester revenues over the next five years.

Avral Electronics, S.A.

An electronic equipment and component parts manufacturer headquartered in Paris, Avral also has manufacturing facilities in Ireland, France and three Asian nations. Through shares traded on the Paris Bourse, and both the Frankfurt and New York Stock Exchanges, Avral enjoys a wide shareholder base and, in just the past five years, has increased annual revenues from $300 to $900 million. Good financial health has given Avral execs reason to explore an electronics distributorship business in the United States.

The Players:

Bernard Lester, CEO and founder of Lester Electronics: After graduating college in the mid-1960s, Bernard immediately entered the electronics business as an apprentice customer service/salesperson at his family's capacitor manufacturing plant in New England. Though Bernard's father had been in business in New England since the 1920s, by the 1950s, he was finding it hard to stay competitive in the region, and relocated the plant to South Carolina, where labor costs were significantly lower. By the '70s, with labor rates escalating even in South Carolina and overseas manufacturers encroaching on his business, Bernard Sr. -- now in his late '60s -- sold his remaining business to a Japanese capacitor manufacturer and retired.

Though jobless, Bernard Jr. realized that he still had extensive contacts and experience in the specialized sector of the electronic component parts industry. Using negotiating skills honed over the past 15 years, Bernard entered into business with the small Shang-wa Electronics, becoming the company's exclusive distributor of capacitors in the United States. Now, at age 64, Bernard is CEO of the public Lester Electronics, Inc. which earns $500 million annually.

Anne Lorale, CFO, Lester Electronics: Upon earning a business degree from Ohio State University, Anne took a job at medium-sized CPA firm, which served as LEI's independent auditor. She worked with Lester as a junior accountant and was promoted to account manager when she passed her CPA exam. Anne continued to work with the company as it grew, ultimately becoming the senior manager responsible for the annual audit and quarterly reviews. In 1989, Bernard Lester realized he needed a full-time CPA, and offered Anne the job as company Controller. A loyal employee, Anne was promoted to Chief Financial Officer in 1999.

John Lin, founder and CEO of Shang-wa Electronics: John has no formal education beyond grade school, and has been manufacturing capacitors -- the small components used in myriad consumer and industrial appliances -- nearly all of his working life. What started as a janitorial job in a capacitor factory at age 14 led to an assembly line position and ultimately clerk, where John processed paperwork to export the company's products to the U.S. By age 32, John was married with two sons and itching to be his own boss. With backing from his father-in-law, he quit his job to found Shang-wa. In the 36 years since, John has proven himself a skilled businessman and negotiator.

Now, at age 68, John looks forward to spending less time on business and more time with his grandchildren while they are still young. The problem? John has never groomed a successor and without one, the business cannot afford for him to slow down. With one son a doctor and the other a commercial architect, John has begun to explore other options that might afford him retirement.

Recently, John has informally suggested to Bernard that they partner to establish a new capacitor manufacturing facility in a neighboring Asian country. Though the joint venture would enable both companies to meet growing demand for the niche product Shang-wa offers, John knows it would also provide Shang-wa with much-needed management talent and a long-term opportunity to exit the business if Lester were willing to buy Shang-wa outright a few years down the road.

David Antone, CEO, Transnational Electronics Corporation: After graduating with honors from a major state university, David took a job in the management intern program of a leading domestic auto manufacturer. He spent 15 years in various mid-level executive capacities in the company before being recruited by a headhunter for the Executive Vice President's job at TEC. A year ago, after 12 years with the company, David was appointed CEO.

Robert Paget, Vice President of Acquisitions, Avral Electronics: A charismatic personality and a top-10 percent ranking in college landed Robert a job in Avral's newly created Paris acquisitions office immediately after graduation. In his five years with the company, he has shown himself to be an aggressive go-getter, successfully negotiating and acquiring six significant electronics companies, each of which complemented Avral's core business. "Rainmaker" Robert's deals were crucial in bringing Avral's external revenue from $300 to $900 million annually. As a reward, he was promoted to Vice President last year.

Peter Zack, Managing Director, Silver Socks Company: Though Peter never studied hard in school, he's well connected through his old money Philadelphia family. After college -- where he roomed with Robert Paget of Avral Electronics -- he spent a year traveling through Europe before returning home to a pre-arranged sales job at Silver Socks, a Wall Street Investment Banking firm owned by a friend of his father. An avid golf and tennis player, Peter is a genuinely likable person with a knack for recruiting well-heeled investors. As such, he is a consistent "rainmaker" of deals for Silver Socks.

MARCH 9, 2005 -- CEO reception at the ELECTRONICS INTERNATIONAL TRADE SHOW, BANGKOK

David Antone: Mr. Lin? Hello, I'm David Antone, Transnational Electronics.

John: Nice to meet you, David. I've been hearing about your company lately. You recently acquired Turnaround Tech, didn't you? That was a bold move.

David: Thank you very much; I had a big part in that. I hope you don't mind me being forward, Mr. Lin, but TEC has been discussing global growth opportunities. Would it surprise you to hear that Shang-wa is one of the names that came up?

John: Really? Why is that?

David: Well, you obviously know Shang-wa's strengths, and they're all qualities that would benefit TEC as well. But, and I hope this is public knowledge, I've also heard that you're looking to slow down a little so that you might be open to discussion. Do you think you might be ready to talk?

John: Why don't you send me a proposal that I can discuss with some of my key people? I promise to give it serious consideration and get back to you.

David: I will be on that as soon as I return to the states. It was a pleasure meeting you, Mr. Lin.

John: Likewise, David.

MARCH 10, 2005

E-MAIL
To: Bernard Lester
From: John Lin
Re: David Antone of TEC

Bernie,

David Antone from TEC approached me at the CEO cocktail hour last night and outright told me that TEC is interested in acquiring Shang-wa. You and I know both know that TEC is large enough to go from "asking" to takeover rather quickly; did you see what they did to Turnaround Tech two months ago? If TEC decides it wants Shang-wa, I have nothing in place to prevent Antone from taking it.

I can't speak formally about this without lining up support at Shang-wa, but I still think a partnership between us would be valuable. I know that we just approved a capital expenditure for Europe at Lester's last Board meeting but, in light of these new developments, this may be a better way to meet the increased global demand and protect us both.

I admit that I have some personal interest in a joint venture as well. You know I wish to retire soon, and I would like to know that Shang-wa is in good hands. For you, it would be insurance that Lester doesn't lose Shang-wa as a key supplier. You've never really given me your thoughts about this, but I think the time has come.

John

MARCH 14, 2005

TELEPHONE CALL FROM PETER ZACK TO BERNARD LESTER

Peter: Good afternoon, Mr. Lester. My name is Peter Zack from Silver Socks.

Bernard: Hello, Mr. Zack.

Peter: I am calling on behalf of a client who has expressed interest in acquiring Lester Electronics.

Bernard: Please, Zack. I can't entertain this conversation over the phone. If you want me to listen to you, please forward a two-way non-disclosure agreement to my office at your earliest convenience. And don't forget to include your client's name, so my staff can conduct due diligence.

Peter: I will do that, Mr. Lester. Thank you for your time.

MARCH 14, 2005

E-MAIL
TO: John Lin
FROM: Bernard Lester
RE: The vultures are circling...

John,

One of my staffers ran the numbers. If Lester loses Shang-wa as a manufacturer, it loses 43 percent of its revenue over the next five years. Could you send over a capital budget for the joint venture manufacturing facility and Shang-wa's recent financial statements? I'm ready to talk.

Bernard

MARCH 16, 2005

LETTER TO BERNARD LESTER FROM PETER ZACK

Dear Mr. Lester:

Enclosed, please find a non-disclosure agreement executed by my client, Robert Paget of Avral Electronics. After you have signed and returned the NDA to me, I will make sure you have a term sheet from Avral with its broad brush terms within three days.

Though I'm sure you know this, you can find all of Avral's financial information on the SEC's Edgar Web site should you wish to conduct your due diligence.

Sincerely,
Peter Zack

MARCH 14, 2005

E-MAIL
TO: David Antone
FROM: John Lin
RE: Your term sheet

David:

I received your term sheet for TEC's proposed acquisition of Shang-wa; thank you for being so prompt. Once my staff and I have reviewed it and conducted the appropriate research, I will respond. Please give me a week.

John

MARCH 17, 2005

CONFERENCE CALL AMONG LESTER BOARD OF DIRECTORS

Bernard: Thank you all for taking this call today. I'm sorry we didn't have time to arrange an in-person meeting, but in the past week, some things have arisen that could seriously affect LEI's future and they need immediate attention or you'll be reading about them in the news.

First, our key manufacturer, Shang-wa, has received a hostile takeover bid from TEC. If John accepts it, LEI stands to lose upwards of 45 percent of our expected revenues over the next five years. Fortunately, we do have some options and obviously, we'll have to run some numbers to see what our best course is. But we have to do something; doing nothing will devastate us.

John has expressed interest in establishing a joint manufacturing facility with us. We could also seek to acquire Shang-wa outright. Interestingly enough, at the same time that TEC is going after Shang-wa, Avral Electronics has expressed interest in acquiring us. I signed the nondisclosure agreement yesterday so I should be receiving their term sheet any day.

John Snow, Board spokesperson: Well, Bernard, I think I speak for all of us when I say that this really comes as no surprise, given the positions of Shang-wa and LEI in the industry. But it appears we have some work to do, and rather quickly. Let's have Anne Lorale and her group run all the numbers and give us a report as soon as possible.

Bernard: Great minds think alike, John. I've already asked Anne to do that and will have those figures for all of you as soon as possible. Thank you all again. I'll be in touch.

MARCH 21, 2005

E-MAIL
TO: John Lin
FROM: David Antone
Re: Term sheet

Hello John,

Thank you for your note. I trust upon review, you and your staff will find the terms reasonable and beneficial to everyone involved.

Cordially,
David Antone

E-MAIL
TO: BERNARD LESTER
FROM: PETER ZACK
RE: Term sheet

Bernard,

I trust you have received the term sheet I FedExed last night. Please respond at your earliest convenience.

Peter Zack

E-MAIL
TO: BERNARD LESTER
FROM: JOHN LIN
Re: TEC's term sheet

Bernard,

Attached is TEC's term sheet for their proposed acquisition of Shang-wa. I thought you might you might want to give it to Anne so she knows what she's up against.

John

MARCH 22, 2005

E-MAIL
TO: ANNE LORALE
FROM: BERNARD LESTER
Re: Our options

Anne,

I'm sending over the joint venture capital budget from John as well as the term sheets for both the TEC/Shang-wa and Avral/Lester proposed acquisitions. Go ahead and complete the analyses for all options and create a recommendation that I can give to the Board on Monday.

Best of luck and let me know if you need anything.

Bernard

Attachments

Solution Preview

Bonds
Bonds are a good choice for Lester Electronics, Inc. to obtain financing needed to purchase Shang-Wa Electronics. LEI might consider discount bonds that will help finance the investment. With the added financing provided by the bonds, this will give LEI the capital to acquire Shang-Wa. Additionally, no cash will be paid until maturity of the bonds and the duration of the pure discount bond gives LEI time to build cash flow before repaying the debt.

"Pure discount bonds are often called zero-coupon bonds or zeros to emphasize the fact that the holder receives no cash payment until maturity" (Ross, Westerfield & Jaffe, 2005, p. 107).

Growth Opportunities
By acquiring Shang-Wa, LEI will be presented with growth opportunities. LEI is currently in a position where it can make a major investment by acquiring Shang-Wa and prevent LEI from losing up to 45% of its revenue over the next five years. Also, the acquisition will provide LEI with the opportunity to expand its operations to domestic markets.

"Many firms have growth opportunities to invest in profitable projects. Because these projects can represent a significant fraction of a firm's value, it would be foolish to forgo them to pay out all earnings as dividends" (Ross et al., 2005, p. 119).

Dividend-Growth Model
Once Bernard Lester arrives at a decision, he must convince shareholders that the decision will be a profitable one. Lester can use the dividend-growth model to show shareholders the potential return of both companies.

"A steady growth in dividends results from a continual investment in growth opportunities, not just investment in a single opportunity." (Ross et al., 2005, p. 123).

Operating Exposure
The merger with Shang-wa gives LEI exposure to different markets. LEI has yet to market domestic-made products outside of the United States. Lester must consider the operating exposure that is likely to occur if a merger with Shang-wa is in the cards.

"Formally, ...

Solution Summary

Wealth Maximization for Read Scenarios and Lester Electronics is examined. A worksheet is filled out.

$2.19