Lex Service Plc

4708 WordsFeb 25, 201319 Pages
Harvard Business School 9-296-003 Rev. March 13, 1998 Lex Service PLC—Cost of Capital On November 25, 1993, the directors of Lex Service PLC, received a memorandum from G. Lionel Harvey, the company’s deputy chief executive, concerning the approaching board meeting on December 2. Attached to the memo was a report by the L.E.K. Partnership, a London-based consulting firm, concerning Lex’s cost of capital. The report and its implications for management were to be discussed at this board meeting. Recent developments at Lex had focused top management’s attention on the company’s capital budgeting procedures and its cost of capital. Between 1991 and 1993, various sales of subsidiaries and other assets had provided Lex with more…show more content…
The latter was initiated in 1981, when Lex acquired Schweber Electronics, the third largest electronic components distributor in the United States. This acquisition provided the foundation for Lex’s new core business. By the end of 1983, Lex was structured around two principal groups—Lex Automotive and Lex Electronics Worldwide. Lex Electronics accounted for approximately 30% of Lex’s total sales, and nearly 90% of this was contributed by Schweber in the United States. Recent Developments The U.K. car and truck market hit a decade low in 1991. As a result, Lex’s sales were badly affected, and the company reported a loss of £3 million compared with a profit of £5 million in 1990. However, in 1991 Lex implemented a new business strategy that refocused the company’s efforts on its core competence in automotive distribution and leasing. In doing so, Lex engaged in several transactions that strengthened the balance sheet, providing the resources necessary to expand its traditional businesses. In September 1991, Lex sold its electronics businesses to Arrow Electronics, Inc., the second largest electronic component distributor in the world. Lex received $109 million (approximately £58 million) in cash along with 6.8 million shares of Arrow’s common stock valued at £57 million at the time of the sale. Then in February 1992, Lex sold

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