Teletech Corporation
Background
Headquartered in Texas, Teletech Corporation operates under two main business segments: the Telecommunications Services segment, providing various telephone services to business and residential customers and the Products & Systems segment, which manufactures computing and telecommunications equipment. In late 2005, the Securities & Exchange Commission revealed that billionaire Victor Yossarian acquired a 10% stake in Teletech and demanded two seats on the board of directors. He felt that the firm was misusing their resources and not earning a sufficient return. He stated that Teletech should sell off its Product & Systems segment and focus on creating value for the company’s shareholders. A detailed analysis will reveal whether or not Teletech should follow Mr. Yossarian’s requests.
Analysis
When focusing on value creation, the company needs to assess economic profit and net present value for each of its business units. As exhibited in the graph (Figure 1, page 224) prepared by Vice President of the Telecom Segment, Rick Phillips, the firm currently utilizes a constant hurdle rate attained through an estimate of Teletech’s corporate Weighted Average Cost of Capital (WACC). The WACC for Teletech Corp (as a whole) is calculated at 9.30%, which is then applied to all investment and performance-measurement analyses of the firm. When looking strictly at this, the Telecommunications Services is under performing with a return on capital of 9.10%. The Products & Systems segments is well over the required rate of return and appears to be the part of the company with no financial problems, earning a return on capital of 11.0%.
Mr. Phillips suggests that multiple hurdle rates should be implemented since different business units have different risks. Utilizing one hurdle rate assumes equal risk in investing in either the Telecommunications segment or the P&S segment. He feels that the two segments are different in nature (risk and return) and
Headquartered in Texas, Teletech Corporation operates under two main business segments: the Telecommunications Services segment, providing various telephone services to business and residential customers and the Products & Systems segment, which manufactures computing and telecommunications equipment. In late 2005, the Securities & Exchange Commission revealed that billionaire Victor Yossarian acquired a 10% stake in Teletech and demanded two seats on the board of directors. He felt that the firm was misusing their resources and not earning a sufficient return. He stated that Teletech should sell off its Product & Systems segment and focus on creating value for the company’s shareholders. A detailed analysis will reveal whether or not Teletech should follow Mr. Yossarian’s requests.
Analysis
When focusing on value creation, the company needs to assess economic profit and net present value for each of its business units. As exhibited in the graph (Figure 1, page 224) prepared by Vice President of the Telecom Segment, Rick Phillips, the firm currently utilizes a constant hurdle rate attained through an estimate of Teletech’s corporate Weighted Average Cost of Capital (WACC). The WACC for Teletech Corp (as a whole) is calculated at 9.30%, which is then applied to all investment and performance-measurement analyses of the firm. When looking strictly at this, the Telecommunications Services is under performing with a return on capital of 9.10%. The Products & Systems segments is well over the required rate of return and appears to be the part of the company with no financial problems, earning a return on capital of 11.0%.
Mr. Phillips suggests that multiple hurdle rates should be implemented since different business units have different risks. Utilizing one hurdle rate assumes equal risk in investing in either the Telecommunications segment or the P&S segment. He feels that the two segments are different in nature (risk and return) and