Teletech Company Case
TeleTech is a Dallas based IT provider. The corporation divides its operations into two major business segments, Telecommunication services and Products and systems. In 1995, the telecommunications services earned a ROC of 9.8% while Products and Services earned 12.8%. Telecommunications services also accounted for $11.4 billions of the firm’s $16 billion in net assets and accounted for 75% of the firm’s market value. In the past year, the firm’s shares have not kept pace with industry indices.
Teletech’s telecommunications services segment provides telephone services to 7 million customers in the United States. Its revenues have been growing at an average rate of 3%. Teletech has been aggressively expanding its services in the recently deregulated industry. This expansion included licenses for personal communication services, purchasing telephone companies in Latin America and investment in new technology. The capital budget in telecommunication services varies between $1.5 and $2 billion in the past ten years. Although profit margins in this segment have been under pressure from regulation.
Through its strategy of merging telecommunications with state of the art computer technology, the product and systems segment of Teletech increased sales by 40% in 1995. While being a leader in this industry, Teletech needed to put large investments in R&D and fixed assets. Furthermore, Teletech witnessed sudden write offs of newly obsolete technology and faced stiff competition.
Teletech adopted a measure of value creation in both the segment and business level. The measure, called economic profit, multiplied the excess rate of return of the business unit time the capital it used. Teletech used economic profit to make strategic decisions and compensate management.
Teletech’s hurdle rate had been based on its on an estimate of its WACC. Management was satisfied with the intellectual relevance of using the 10.41%