Gap Analysis: Lester Electronics - Report Example

Running head: GAP ANALYSIS: LESTER ELECTRONICS Gap Analysis: Lester Electronics Goes Here of Phoenix Gap Analysis: Lester Electronics Humans who constitute an organization can only ‘script’ a success story for the organization. That is, all the humans from employees to the management team can only put an organization in a cruise mode in terms of production, profit etc, with their knowledge, skill, hard work etc, etc… Even with all the computerization and automation happening in every segments of organization, the decision-making process mainly rests with the management. This important aspect of decision making comes into focus in the case study that deals with the merger of fictional organizations, Lester Electronics and Shang-wa. The process of merger is set in motion by Shang-wa CEO John Lin, as he thinks that the merger will give his company a much needed secured future. On the other hand, Lester Electronics CEO Bernard Lester feels that the merger will prevent future revenue losses. These merger plans were initiated by the actions of two other companies, Transnational Electronics and Avral Electronics, who try to take over Shang-wa and Lester Electronics respectively. But, if the merger plans between Lester and Shang-wa gets actualized it will nullify the other two companies take over bid. Along with that advantage, the merger will also create a lot of opportunities and bring in profits. But, even with all the opportunities, there exist some financial issues or threats that will cause the merger to fail. So, the correct decision has to be taken after analyzing the key financial issues, with the involvement of all the key people and departments, including the accounts department and its head Anne Lorale. “Good decision-making starts from the right place” (Paul & Elder, 2006 Situation Analysis Issue and Opportunity Identification In the scenario, the merger of Lester and Shang-wa could spring up many issues particularly in the financial sector. Normally, in times of merger between two companies existing in different countries, the financial issues have to be dealt firstly, to make the merger a success. So, Shang-wa’s balance sheet and incomes statement has to be properly analyzed by Anne Lorale and her team, before going with the merger. As the income statements will clearly gauge the financial performance of a company over a specific period of time, it will surely aid Lester to grasp the financial condition as well as the value of economic assets of Shang wa. From the analysis of the financial statements, it is clear that the merger of Shang wa and Lester would lead to a low debt to equity ratio, increasing the chances of bankruptcy in the long run. The other issue that will arise in the case of merger is the problem with foreign exchange rates. That is, Shang wa being a foreign company will have a higher economic exposure, so there will be appreciation and depreciation of Korean Won in relation to the US dollar. This will negatively affect the global operations of the merged entity mainly cash flows and financing of new projects When the merger is actualized, it will give a good number of opportunities for both Lester as well as Shang-wa. One of the opportunities that will arrive after the merger, is the appropriate use of working capital. That is, currently Lester is using a surplus working capital, which is clear in the 2004 inventory. And, when the Lester merges with Shang-wa, it will enable it to use, their working capital effectively. After the merger, both the companies can use some hedging strategies to nullify the risks associated with the economic exposures. The other opportunity that could beckon and further strengthen the merged entity will be establishment of manufacturing facilities in Asian countries, where the operating costs can be kept at low levels. Stakeholder Perspectives/Ethical Dilemmas Lester Electronics: The main stakeholder in this scenario is Lester electronics, the master distributor of consumer and industrial electronic parts, started by Bernard Lester. The question that is ‘seeded’ in the mind of Lester is, whether to go for the merger or not, based on the financial statements and future opportunities. The fact is, Lester’s merger with Shang-wa can surely develop the company, but at the same time can also destroy it. Development in the sense, after the merger, Lester and Shang-wa could establish a low cost joint manufacturing facility in Asia. Also, the merger could give Lester, the opportunity to make an outright purchase of Shang-wa, which can optimize its growth. But, the dilemmas will come into the picture, where Shang-wa’s financial statements are taken into account. As discussed above, the low debt to equity ratio is a cause for concern. But, if this issue is given a serious thought, the other dilemma will arise, which is, whether Lester is ready to lose 43% of its revenues. That could happen, if Shang-wa merges with Transnational Electronics, instead of Lester Shang-wa: In the scenario, the perspective of Shang-wa particularly its CEO, John Lin is to give hand over his company to capable hands. That is, as John wants to spend less time on business and more time with his family, he is expecting someone to takeover his company. He is in favor of handing over it to Bernard Lester because of his capabilities. But, his dilemma is, whether to go with Lester or accept the hostile takeover bid by Transnational Electronics. Transnational Electronics and Avral Electronics: Both TEC and Avral are silent stakeholders in this scenario, with each making their bid to purchase Shang wa and Avral respectively. They have no dilemmas and are clear in taking over the companies for further growth. Shareholders: The perspectives as well as the dilemma of Shareholders in this scenario are, whether they should approve the merger, without losing the money they invested. End-State Vision If the merger between Lester electronics and Shang-wa is actualized, then the end state vision for both the companies will look favorable. With the merger, Lester’s stability and financial position will increase manifold, while Shang-wa’s future will be secured. After the merger, the merged entity’s assets value can increase by at least 20 percent. Same way, the main issue of low debt-equity level can also be corrected, by increasing the level to a desired level of 60 percent. With the merger, there is a good possibility of establishing a joint manufacturing facility and that will surely minimize the production costs. The end state vision will also look good with the possibility of a favorable financial Leverage. That is, Lester will be able to increase its dependency on equity by at least 5 percent. Lester will also be able to increase Return on Assets (ROA) on a positive side. That is, “Return on assets measures a company’s earnings in relation to all of the resources it had at its disposal [the shareholders’ capital plus short and long-term borrowed funds]” (Kennon). So, the higher the ratio in relation to funds, greater will be the return on assets. So, if Lester electronics is able to solve all their problems and realize their opportunities, the above discussed end-state goals could be accomplished. Gap Analysis The achievable end-state vision, which can benefit both the companies both in the short run as well as in the long run, is a continuous and challenging process. As discussed in the above sections, the merger will be a success only if several financial issues are taken care. That is, the Shang-wa’s balance sheet and incomes statement has to be carefully analyzed to find out any irritants that could derail the merger plans. So, the role of Anna Lorale and her team is crucial because they only need to properly analyze the documents and give a correct suggestion or recommendation to it. Apart from Lorale, the other managerial officers at Lester, including treasurer, department heads or mangers, should also give their perspectives about the documents and thereby try to bridge the gap in financial related issues. Also, the merged company’s capital budgeting and net working-capital actions should also be monitored to make the merger success. Thus, the above discussed steps have to be taken to reach the end state vision from the current situation in the case of Lester Electronics and Shang-wa Conclusion Normally, organizations which want to expand their reach and thus make an imprint in various markets, will initiate various strategies to achieve that goal. And merger is one the strategies which will aid the organization to grow further with the aid of additional resources. But, for the merger to succeed, the organization had to take effective steps with the aid of various departments and its workers. This will be the norm for any organization wanting to go for a merger or acquisition. And in the case of Lester electronics, its merger with Shwang-wa can be made a success only if all the financial issues are taken care. So, in-depth research has to be carried out before the decision is made. So, the decision to go ahead with the merger should be backed up with good homework. References Kennon, J. Return on Assets (ROA). Retrieved December 21, 2007 from http://beginnersinvest.about.com/cs/investinglessons/l/blreturnonasset.htm Paul, R. & Elder, L. (2006). Critical Thinking: Tools for Taking Charge of Your Learning and Your Life. Upper Saddle River, NJ: Pearson Prentice Hall Table 1 Issue and Opportunity Identification Issue Opportunity Reference to Specific Course Concept (Include citation) Concept The merger between Lester Electronics and Shwang-wa can be taken forward after analyzing all the financial issues. As a first step, Shang-wa’s balance sheet and incomes statement has to be properly analyzed by Anne Lorale and her team. But, the serious issue that would arose from the merger and this analysis is the low debt to equity ratio. Then it will also cause problem with foreign exchange rates. After the merger, the opportunities will come in the form of correct use of working capital, then both the companies can combine to adopt hedging strategies and joint manufacturing facility can be established. Table 2 Stakeholder Perspectives Stakeholder Perspectives Stakeholder Groups The Interests, Rights, and Values of Each Group Lester Electronics Wants to grow and prevent the loss of revenue Shwang-wa Wants to be taken care by an effective management Transnational Electronics, Avral Electronics and Shareholders Wants to benefit from success or the failure of the merger plans Table 3 End State Goals End-State Goals Lester’s stability and financial position will increase manifold Shang-wa future will be secured and stabilized Merged entity’s assets value can be increased by at least 20 percent. Low debt-equity level can also be corrected Lester will also be able to increase Return on Assets (ROA) on a positive side Establishment of joint manufacturing facility, will surely minimize the production costs Read More