Risk Analysis on Investment Decision
In 1978, Bernard Lester entered into a lucrative and exclusive distribution contract with Shan-wa Electronics, a family owned small manufacturer of capacitors from Korea. Bernard Lester then founded Lester Electronics, Inc. (LEI). LEI grew, and soon became a known distributor of consumer and industrial electronic parts going public in 1984. Today, LEI is a top competitor throughout the Americas and Europe with revenues that approximate $500 million a year (Scenario One: Lester Electronics, 2008).
Recently, the exclusive agreement between LEI and Shang-wa, which must be renewed in a yearly basis, is threatened by Avaral Electronics, S.A., an electronic equipment and component parts manufacturer from Paris, who has expressed an interest in acquiring LEI. Meanwhile Transnational Electronics Corporation (TEC), a large manufacturer and distributor of electronics components, has contacted Shang-wa’s owner and CEO John Lin with an offer to purchase Shang-wa.
With the challenges both companies are facing, LEI has performed an analysis of the impact losing the contract with Shang-wa would have on LEI’s bottom line. Based on the analysis the loss of the contract would translate to a 43% loss in revenue over the next five years. John Lin, CEO of Shang-wa also fears that his company will end up in the wrong hands and has approached Bernard Lester, long time friend and CEO of LEI about a potential joint venture in order to better secure both companies’ future. Both LEI’s executives and board of directors agree that doing nothing for LEI is not an option. In looking at the alternatives, considering the risks on each of the potential alternatives and a ...