Teletech CorporationBackgroundHeadquartered 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.
AnalysisWhen 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%.
To summarize, the analysis and the analysis of the TTTM is of interest for the analyst to analyze the potential impact of an increase in a company’s capital structure on the performance of the company’s assets.
For this analysis, a number of considerations were taken into account. First, the company has a large market share in the wireless industry. Second, the firm lacks the resources for the new technology that could be useful for its own business and needs more of these technologies. Third, the company has little competition in other sectors with new entrants, particularly in data networks (in the US, for example). Fourth, the company has little interest in adding new features to its equipment and services. Fifth, there is a strong demand in Asia, where the firm is looking to bring the product to consumers. Sixth, the value of the TTTM at present is at its strongest in the smartphone market, the product has the potential to compete in many other industries.
Conclusion
In this case, there is no doubt that the TTTM has been a significant gain for the company. There will be a continuing improvement in its product and, therefore, a significant future for the company. However, an increasing number of companies have opted out of the development of the product, particularly the iPhone market. Therefore, it is important to consider the implications of a large price drop to the new consumer market as the company’s value will increase. However, it is important therefore to appreciate the fact that many companies are still not investing significantly in their products, and that their value to consumers is not necessarily as strong as their current cost. The company has not invested as much money per unit of the TTTM as is expected since its recent low from its Q3 2015 earnings. The expected impact of the TTTM on the value of its stock will depend on the companies that it develops in it, who might choose to make a small contribution and will not need to invest heavily to ensure greater success.
In general however, we expect a rapid drop in value on the stock. Even before the decline in value could be attributed solely to the TTTM’s increased cost, the company could find itself in a position where it would be unable to make significant investment in new product development with the help of its current investment pool. For example, as of right now however, the technology still uses an average of 11.2% of its current market capitalization and is an interesting and promising discovery.
For more information, please see our investor presentation and the accompanying table.
