Teletech Coporation 2005

Case problem

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 sent a letter Teletech Corporation’s CEO Maxwell Harper which stated that was not properly using its funds and that its products and system segment of the business of the company should be sold, because it does not earn a satisfactory rate of return. The CFO of this telecommunication’s company, Margaret Weston, was faced with the challenge of responding to this a letter, assessing the viewpoints on Teletech’s returns and recommending new necessary policies. Company management had been debating about the hurdle rate used by the company to evaluate performance, and thus, returns.

Company details

Teletech Corporation is a large regional telecommunications company who was a provider of integrated information movement and management. Teletech comprises of two segments: telecommunications services and product & systems services. The telecommunication segment provides long distance, local and cellular telephone services to business and residential customers and accounts for 75% of the market value of the company. The product and system service segment is engaged in the manufacture of computing and telecommunications equipment and accounts for 25% of the market value of the company. In 2004, Telecommunications Services had earned a ROC of 9.1% and Products and Systems had earned 11%. Teletech used one constant hurdle rate to evaluate all the projects for both segments, and it used its WACC as its hurdle rate, which is 9.3%.over the past year the market and industry indexes such as telecommunications and telecommunication equipment have outperformed Teletech. Their price earnings ratio was also below investor expectation. The company is expected to invest nearly 2 billion dollars in capital projects in the coming years.

Revenues in the telecommunications segment grew at an...