Teletech

Tarique Ahmed, Thang Le

Corporate Finance – MBA 8020

Summer 2011

Teletech Corp, 2005

Introduction and Recommendation

Teletech Corporation is a regional telecommunications company with two business segments. Telecommunications Services is its original business. This business provides long-distance, local, and cellular telephone service to business and residential customers. The Products and Systems business is involved in the manufacturing of computing and telecommunications equipment.

Currently, Telecommunications Services earns a return on capital (ROC) of 9.1%. It comprises of $11.4 billion of the company’s total $16 billion book value, and accounts for 75% of the company’s market value (MV). Whereas, the Products and Systems’ business segment earns an ROC of 11%, it consists of $4.6 billion of allocated to the company’s net assets, and account for 25% of the company’s MV.

Billionaire, Victor Yossarian, has recently acquired a 10% stake in Teletech. He has raised concern about the company, stating that he believes the company is “misusing its resources and not earning an adequate return.” His influence has caused management to review the Products and Systems’ business because of its high risk leading to investors’ unwillingness to pay a high price for the company’s stock.

The key issue for Teletech involves: 1) whether or not the company should be using two separate hurdle rates for each segment and if, yes, than what should those rates be, 2) determine how the Products and Systems business is performing, and 3) how should the company respond to Victor Yossarian, the new 10% stockholder of the company.

Key Issues

The first issue involves how to apply a hurdle rate determined by the weighted average cost of capital (WACC). When applying the WACC, there should be separate percentages for the two Teletech business segments. The simplest way is to treat the two businesses as separate business and to have available all the numeric...