Teletech

Company History

The Teletech Corporation is broken down into two business segments. They have a Products and Systems segment and a Telecommunications Service segment. Teletech is a dominant service provider but in the most recent year their stock has not preformed as well as the stock market and needs to look at their current company situation to answer concerns from a large investor.

Main Decision

The company’s management must address the demand of investor, Victor Yossarian, for Teletech to sell the Products and Systems segment. Mr. Yossarian’s main argument is the Products and Systems segment is causing resources to be misused and is not earning an adequate return.

To analyze this problem we will look at a few key issues facing Teletech Corporation:

• Is the current rate of 9.30% the appropriate hurdle rate for the company?

• Is the Telecommunications Service segment being financed properly?

• Is the Products and Systems segment being financed properly?

• Should the Products and Systems segment being spun off into a separate entity?

Analysis

To measure value creation, Teletech has been using economic profit at the segment and business-unit level to provide insight into each unit’s performance. Additionally for projects, Teletech uses net present value to determine the increase or decrease to the firm’s value if the project was undertaken. Both segments, the Telecommunications Service and Products and Systems, use the same formulas and hurdle rate which is determined by Teletech’s weighted average costs of capital (WACC).

Teletech has a current split debt rating between A- to BBB+, which would leave there new debt funds costing about 5.88%. Teletech’s beta is 1.15, leaving cost of equity about 10.95%. With weights of 22% for debt and 78% for equity, the WACC is 9.30%.

Both segments beta and bond rating vary greatly. The Telecommunications Service segment would have a beta around 1.04 and a bond rating of A. The Products...