Teletech Corporation - en anglais

1. Introduction

1.1 General Information about the Teletech Corporation

Teletech Corporation is headquartered in Dallas, Texas, and defines itself as a “provider of integrated information movement and management”.

The company’s mission is to “Create value by pursuing business activities that earn premium rates of return”.

It operates in two business segments:

• Telecommunication Services – long-distance, local and cellular telephone service to business and residential customers

• Products and Systems – manufacturing of computing and telecommunications equipment

1.2 Key facts about Telecommunications Services segment:

• Teletech is the leader in product quality and customer satisfaction

• Dominant service provider in its segment and geographical market

• Aggressive expansion into new services and geographical regions took place during past years

• Capital budget varied between $1.5 billion and $2 billion in each of the previous 10 years

• Its segment environment is considered to be less risky than the Products and Services' segment

However:

• Profit margins have been under pressure for several years

• Competition in the segment is increasing

1.3 Key facts about Products & Systems segment:

• Teletech entered the segment after the acquisition of a leading computer-workstation manufacturer 5 years ago

• The segment increased its sales by nearly 40% last year

• Teletech is regarded as the technology leader in the industry

However:

• Leadership maintenance required sizable investments in R&D and fixed assets

• Disappointing performance in the segment

• Segment is considered to be relatively risky

1.4 Company performance

• Teletech’s shares are currently underpriced compared to Market & Industry Indexes

• Corporate hurdle rate is 9.30% to all corporate projects and the evaluation of the performance of business units

• According to the currently used hurdle rate, the Teletech Corporation creates value for shareholders: ROC (9.58%) > hurdle rate (9.30%)

Telecommunication Services Products & Systems Corporate

Bond rating A BB A-/BBB+

Net assets $11.4 billion $4.6 billion $16 billion

NOPAT $1.18 billion $480 million $1.66 billion

ROC 9.10% 11% 9.58%

MV asset weights 75% 25% 100%

1.5 SWOT - Analysis

We decided to do two different SWOT analyses in order to present the differences that exist between the two divisions of Teletech, the challenges they face are quite different.

1.5.1 Telecommunication Services

1.5.2 Products & Systems

Overall, the SWOT analyses seem to underline slightly better prospects for the

Telecommunication Services division than for the Products and Systems division. We would also like to mention the threat of a takeover affecting the entire company, as its share price has been significantly below industry indices for some time.

2. Issues

• The WACC or Hurdle Rate is computed at the company level to evaluate the opportunity cost of capital

• Should the cost of capital be calculated at the segment level i.e. one for Telecommunication Services (TS) and one for Products and Systems (PS)?

Arguments in favor of Risk-Adjusted Hurdle Rates

 Telecommunications Services has lower cost

of capital

 Funds would be allocated more efficiently

 Differences between divisions

 Industries

 Level of risk

 Rates of return

 Maturity phase

2.1 CFO M. Weston’s concerns

Teletech’s CFO is particularly concerned about multiple hurdle rates as they make justifying high technology research and application proposals more difficult, she is afraid that with multiple rates for discounting cash flows, the NPV and economic-profit calculations would lose their meaning and comparability across business segments. She thinks that multiple hurdle rates may be the right idea but asks herself why it should not be based on strategic consideration rather than capital costs.

3. Analysis

As stated in the case study, Teletech planned to invest nearly $2bn

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