Finc 340: Star River Electronics Ltd

Deborah Rivera

FINC 340

Prof. Chishty

Star River Electronics Ltd. Case 26

        Star River Electronics had been founded as a joint venture between Starlight Electronics Ltd, United Kingdom, and an Asian venture-capital firm, New Era Partners. Star River is based in Singapore and had a single business mission: to manufacturer CD-ROMs as a supplier to major software companies. Star River gained fame in the industry due to producing high-quality discs.

        CD-ROM manufacturers grew rapidly in the 1990s as the result of the popularity of optical and multimedia products. Small manufacturers flourished, which created a oversupply that pushed prices down by as much as 40%. Consolidation soon follows as less inefficient producers began to feel the pinch.

        Star Rivera Electronics survived this shakeout, due to their stellar reputation in the industry. While other CD-ROM manufactures floundered, volume sales at the company had grown at a robust rate in the past two years. Unit prices declined because of price competition and the growing popularity of substitute storage devices, particularly digital video discs (DVDs). CD-ROM disc drives composed 93% of all optical disc drive shipments in 1999, a study predicted that this number would fall to 41% by 2005, while the share f DVD drive would rise to 59%. Star River had began to experiment with DVD manufacturing, but DVD only accounted for less than 5% of its sales in 2001. With newly installed capacity, the company hoped to increase DVD revenues.

        On July 5, 2001, Adeline Koh was appointed CEO of Star River Electronics, and she encountered many management problems. Just a week earlier, Star River’s president and CEO had suddenly resigned to accept a CEO position elsewhere. Koh was appointed CEO to fill the position. Several of the issues that Koh had to deal with were financial in nature and either requiring financial decision or with outcomes that would have major financial implications for the firm. Koh had her assistant, Andy Chin, to help her with addressing the issues. She asked Chin to review the historical performance of Star River and give her any positive or negative feedback that might be significant. She asked him for a simple financial forecast for the next two years, which includes income and balance sheet statements.

        According to my forecasted assumptions and calculations, Star River’s financial outlook does not look great. They will need to take some serious steps within the next couple if years by management. Star River is already experiencing heavy competition and it will only increase as DVDs become more popular and CD-COMs become less relevant. They cannot afford to lose their outstanding reputation by getting into financial trouble. The forecast shows that they are maintaining their current levels of operating efficiency, depreciation of existing equipment, but because of the new DVD purchases, they would require additional funds in 2002 and 2003. Based on these conclusions, Star River would not be able to pay off their loans within a reasonable period of time. Star River still has time to work on new projects and innovation of technologies. Their gross profit margin is very low and some areas are not sustainable. The company’s WACC is relatively low and but they can decrease it by increasing their debt portion. In order for Star River to stay relevant in their field, they need to get a strong hold on the DVD market as they did with their CD-ROM sector.