Financial planning is linked to the creation of value. This paper will focus on the importance of making an informed decision to create a maintainable competitive advantage. The scenario, as the basis for consideration, proposes a vertical merger between a distribution company Lester Electronics Inc. and Shang-wa Electronics. This paper will perform a gap analysis to include the issues and opportunity identification, stakeholder perspectives in terms of ethical dilemmas, an end state-vision, the gap analysis and a conclusion.
Lester Electronics Inc. (LEI) and Shang-wa Electronics (SWE) have done business together for over 30-years. The two organizations have a million dollar minimum wholesale agreement to develop a money-spinning professional relationship. Recently, both organizations were approached with acquisition interests, leading to accelerate thoughts of potential mergers. Bernard Lester a distribution company owner, and John Lin a manufacturing company owner, has the opportunity to yield vast vertical consolidation synergy.
With both men being of retirement age, the endeavor establishes protection whilst creating an interconnection imperative for a strategic, maintainable competitive benefit. (University of Phoenix, 2002). A new capacitor manufacturing facility is provisionally planned for a nearby Asian country, where the project could take advantage of cost leadership. In order for the joint venture between the two organizations to flourish, depends upon how effective the plan is designed in adapting to cultural and currency revelation.
With pressure from TEC (Transnational Electronics Corporation), a distributor of electronics components, and an acquisition interest from Avral Electronics, a financially strong electronics equipment and component parts manufacturer, time is imperative in merging the two organizations. If Shang-wa or Lester Electronics Inc. decides to allow another distributor or manufacturing service to dissolve the long-term business relationship, there would be great loss. For Bernard Lester, the merger with SWA will save his company from a 43% loss over the next 5 years (University of Phoenix, 2002).
Additionally, Lin realizes Lester helped Shang-wa prosper, preferring to grow the firm while establishing a successor. Situation Analysis Issue and Opportunity Identification. Reframing problems as opportunities is a way of dealing with business decisions. Considering the acquisition offers by TEC and Avral, new issues have surfaced regarding the path of a successful manufacturing facility for Lester and Shang-wa Electronics. After consolidating financial statements for the merger analysis, management prepared optimistic predictions for 2005 and 2006.
Though a steady increase in net worth predicts a positive perspective on the project, important issues need to be qualitatively and quantitatively evaluated. “Perfectly accurate sales forecast are not possible” (Ross et al. , 2005). Increased efficiency may be a priority for the new lower cost facility; however, this discussion will identify the critical success factors of the operation. Efficiency must have strategy to carry a business. Initially, the expected incremental cash flows must be used to calculate a relatively realistic example to determine the Net Present Value.
In order to have synergy, the globally accepted benefits should be satisfied. “It follows from our classification of incremental cash flows that the possible sources of synergy fall into four basic categories: revenue enhancement, cost reduction, lower taxes, and lower cost of capital” (Ross et al. , 2005). The preparation phase includes proven scenarios as stated by the sensitivity analysis of economics. Neither Lester nor Lin wants to waste resources in this venture, a culmination of a 40-year relationship. Two famous trade offs in finance literature are coined the profit margin and turnover, tax subsidies and financial distress trade off.
Constructing a revitalized value chain sustaining a competitive position requires EVA analysis (Economic Value Added) techniques applied to each activity in the operation. Vertical mergers have the opportunity to minimize cost, while maximizing value through reduced financial distress and increased debt capacity. Additionally, in order to maximize value using capital structuring, analysts should rely on marginal benefit analysis to make final decisions on trade offs. “The corporate leverage decision involves a trade off between a tax subsidy and financial distress costs…
the firm’s capital structure is optimized where the marginal subsidy to debt equals marginal cost” (Ross et al. , 2005). The early financial planning stage for the merger will have to use past debt-equity results to forecast future success. By clarifying the strongest combinations, the project can further reduce variability in the firm, often the case when separate entities become one. Maintaining a balance between growth, profitability and optimal leveraging (financial and operational) is the key to sustainable competitive advantage.
Management must organize with the goal of developing a direct correlation between realistic growth and financial planning. Stakeholder Perspectives/Ethical Dilemmas. When a company transitions for increased efficiency and profit maximization, oftentimes stakeholders are the target of financial and ethical dilemmas. For example, the merger between Lester and Shang-wa Electronics could potentially threaten the jobs of many skilled laborers. Depending on the success of the new manufacturing facility, the owners may decide to completely focus again on lower cost by replacing the preceding workers with lower waged labor.
Alongside cost reduction, customers gain compensation or shortcomings depending on chosen management retained earnings. A plethora of companies have proven how management so easily forgets the long-term customer relationships for short-term growth and profit. Management should be reminded interconnectedness and profit maximization depends on strategic alignment and realistic capital budgeting and structuring decisions. As a result, loyalty to the organizational commitment orientation philosophy, instead of a cost cutting mentality, is proven a best practice.
The creation of value should correlate with all activities. End-State Vision The between Lester Electronics Inc. and Shang-wa merger will succeed by recognizing and employing optimal synergy combinations, while respectfully taking advantage of the new efficiency of a unified manufacturing facility. “The main purpose of vertical acquisitions is to make a coordination of closely related operating easier” (Ross et al. , 2005). Increased efficiency for the merger will happen as a result of the economies of scale used.
The two firms are prepared to invest in a facility that will increase value, while improving the sales/cost ratio. Net worth will only grow, under the condition that planning for strategic capital budgeting, cash management and financial planning is a priority. This will only sustain through a management team organized to continuously re-assess and update needs as they surface. Balancing positive cash flow and efficiency will require synergy maximization, minimized variability through informed trade off decisions, organizational alignment and adherence to capital structure principals.
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