Raider Dials Teletech
“Wake-Up Call Needed,” Says Investor
New York—The reclusive billionaire Victor Yossarian has acquired a 10 percent safe in Teletech Corporation, a large regional telecommunications firm, and has demanded two seats on the firm's board of directors. The purchase was revealed yesterday in a filing with the Securities and Exchange Commission, and separately in a letter to Teletech's CEO, Maxwell Harper. ‘The firm is misusing its resources and not earning as adequate return,” the letter said. "The company should abandon its misguided entry into computers, and sell its Products and Systems segment. Management must focus on creating value for shareholders.” Teletech issued a brief statement emphasizing the virtues of a link between computer technology and telecommunications. Margaret Weston, Teletech Corporation’s CFO, learned of Victor Yossarian’s letter late one evening in early October 2005. Quickly, she organized a team of lawyers and finance staff to assess the threat. Maxwell Harper, the firm's CEO, scheduled a teleconference meeting of the firm’s board of directors for the following afternoon. Harper and Weston agreed that before the meeting they needed to fashion a response to Yossarian’s assertions about the firm’s returns. Ironically, returns had been the subject of debate within the firm's circle of senior managers in recent months. A number of issues had been
raised about the hurdle rate used by the
company when evaluating performance and setting the firm’s annual capital budget. As the company was expected to invest nearly $2 billion in capital projects in the coming year, gaining closure and consensus on those issues had become an important priority for Weston. Now, Yossarian’s letter lent urgency to the discussion. In the short run, Weston needed to respond to Yossarian. In the long run, she needed to assess the competing viewpoints on Teletech’s returns, and she had to
part Three Estimating the Cost of Capital
recommend new policies as necessary. What should the hurdle rates be for Teletech's two business segments, telecommunications services and its newer products and systems unit? Was the products and systems segment really paying its way?
The Teletech Corporation, headquartered in Dallas, Texas, defined itself as a “provider of integrated information movement and management.” The firm had two main business segments: telecommunications services, which provided long-distance, local, and cellular telephone service to business and residential customers, and the products and systems segment, which engaged in the manufacture of computing and telecommunications equipment. In 2004, telecommunications services had earned a return on capital (ROC)1 of 9.10%; products and systems had earned 11%. The firm’s current book value of net assets was $16 billion, consisting of $11.4 billion allocated to telecommunications services, and $4.6 billion allocated to products and systems. An internal analysis suggested that telecommunications services accounted for 75% of the market value (MV) of Teletech, while products and systems accounted for 25%, Overall, it appeared that the firm’s prospective ROC would be 9.58%. Top management applied a hurdle rate of 9.30% to all capital projects and in the evaluation of the performance of business units. Over the past 12 months, Teletech's shares had not kept pace with the overall stock market or with industry indexes for telephone, equipment, or computer stocks. Securities analysts had remarked on the firm's lackluster earnings growth, pointing especially to increasing competition in telecommunications, as well as disappointing performance in the Products and Systems segment. A prominent commentator on TV opined, “There’s no precedent for a hostile takeover in this sector, but, in the case of Teletech, there is every reason to try.”
Teletech Share Prices vs. Market and Industry...
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