Scenario Financing Solution Paper

Lester Electronics, Inc. and Shang-Wa's issues are related to the financial history of the corporations and the John Lin wanting to retire, which led into the current problem of other corporations wanting to take over the companies. First, to understand the problem, one needs to understand the situation surrounding these two companies. 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. 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.
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.
Publicly traded corporations are continuously faced with important decisions which will affect the financial health of the firm and because these firms depend on financial investments from shareholders; all decisions should turn around maximizing the shareholders wealth. The wealth of shareholders can be maximized through many financial tools which include: the analysis of financial statements, capital structures, accounting, and financial stability. Financial statements, capital structures, and company accounting can also be used to gain insight on a company’s future performance. These tools aid in maximizing the shareholders wealth because they provide investors with an oversight of the firm’s progress which can aid in investment decisions. These tools also provide financial managers with the metrics needed in order to track and measure goal progression.
“Shareholder wealth maximization is usually accepted as the appropriate goal in American business circles. The norm though makes some uneasy: after all, why should shareholders, who usually are favored members of their society, prevail over, say, current employees, who usually are less favored? The utilitarian justification is that this is the price paid for strong capital markets and allocative efficiency, and that these benefits are so powerful that they overwhelm the normative benefit of any distributional favoring of current employees over current shareholders.” (1)
Some corporate costs vary across geography. For example, wages, taxes, rental rates, utilities, raw materials, components and transportation costs can vary significantly. At first glance, one may assume that locating to a lower cost area will always enhance shareholder wealth. However, that is not always the case. Corporate profitability is affected by differences in sales volume and prices as well as cost differences across space. Furthermore, shareholder wealth is affected by differences in the timing of the cash flow and cash flow risk that varies among prospective sites.
Maximizing shareholder wealth should become the overarching corporate goal, and whatever it takes to accomplish that seems to be deemed ok. Ethics—that is, notions about honesty, transparency, and a concern for a wide range of constituencies—must be pushed aside and replaced by a technical definition of what is acceptable. So there's also no question that they need to strengthen the internal systems that guide conduct within a firm: performance evaluation systems, reward and punishment systems, compliance systems.
“An important goal of any investor-owned organization is to maximize shareholder wealth. And, although the fundamental goal of shareholder wealth maximization is widely accepted, financial managers must recognize that maximizing shareholder wealth is not the same thing as maximizing the organization's total market value. An organization's total market value can be increased by raising and investing as much capital as possible, which increases the size of the organization and, therefore, often benefits managers. However, this strategy rarely is in the best interests of shareholders because it ignores the fact that shareholders have opportunity costs, and must earn a reasonable rate of return on their investments.”
(2)
The idea of emphasizing shareholder wealth is not a bad message. It will be useful also to expose participants to the concept of shareholders value management and strategies for enhancing shareholders value. As a conclusion, we can give a citation from (3)
“Successful companies, ones that maximize shareholder value, enjoy higher overall productivity and competitiveness and are able to raise more favorable financing. These companies create employment, remunerate workers at levels that minimize dissatisfaction, and enhance job security as demand for their products and services are higher. Customers will receive higher quality goods than their competitors at a reasonable cost, and debt holders have better overall security and become eager to lend even more capital. This cycle becomes self-propelling to create momentum within companies, which strengthens the various stakeholder positions. Increased shareholder value should focus on strategies that maximize long-term cash flows.
Building shareholder wealth is a long-term proposition. Momentum and commitment must be sustained over the long haul.”
1. http://www.law.harvard.edu/programs/olin_center/corporate_governance/papers/No339.01.Roe.pdf
2. http://findarticles.com/p/articles/mi_m3257/is_n3_v50/ai_18193961
3. http://www.grantthornton.ca/mgt_papers/MIP_template.asp?MIPID=37