University of Phoenix
August 30, 2008
Maximizing Shareholder Wealth- MBA/540r4
Gap Analysis: Lester Electronics
In 1978 Lester Electronics, Inc. (LEI) entered into an agreement with Shang-wa Electronics under exclusive capacitor distribution contract (Scenario One, 2008). The agreement has been in effect for 35 years proving beneficial to both parties. Due to recent events, LEI is pursuing a merger with Shang-wa and will be seeking appropriate methods of financing the venture. With the completion of the merger LEI and Shang-wa will establish a combined financial and corporate initiative that would include maximizing shareholder value simultaneously meeting to the needs of customers, suppliers, and employees. This paper will discuss the facets of this merger which must be evaluated and adjusted to maximize shareholder wealth while assess financing needs for wealth maximization, while identifying medium term financing alternatives and analyzing financing instruments.
Issue and Opportunity Identification
LEI specializes in the distribution of capacitors and Shang-wa specializes in the production and manufacturing of capacitors. The coordination of these ‘closely related activities’ is referred to as vertical integration of economies (Ross, et al, p. 803).
Several opportunities and risks are ssociated with mergers. Mergers are less expensive avoiding legal and accounting difficulties yet mergers must be approved by the stockholders of each company. The tax and accounting issues fostered in a merger include the type and amount of taxes being dependent on the value of the acquired firm’s assets. Revaluing the acquired firm’s assets to obtain equal value to the acquiring firm is favorable to avoid the capital gains tax. Tax reduction methods due to net operating loss and other tax benefits are also available as cost reductions. (Ross, et al,2005, ch. 29).
The merger should hope to... [continues]
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