Case #15 - Case#15 Teletech Corporation 2005 Margaret...

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Case #15: Teletech Corporation, 2005 Margaret Weston: CFO learned of Victor Yossarian’s letter late on evening in early October 2005. Maxwell Harper, 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. 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. The Company The Teletech Corporation headquartered in Dallas, Texas defined itself as a “provider of integrated information movement and management.” Firm had 2 main business segments: Telecommunications Service, 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) of 9.10%. Product and Systems had earned 11%. Current book value of net assets was $16 billion allocated to Products and Systems. An internal analysis suggested that Telecommunications Services accounted for 75% of the market value (MV) of Teletech, which Products and Services 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. Telecommunications Services Provided long-distance, local and cellular telephone service to more than 7 million customer lines throughout the Southwest and Midwest. Revenues in this segment grew at an average rate of 3% over the 2000-2004 period. 1
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In 2004 , segment revenues, net operating profit after tax (NOPAT), and net sales were $11 billion, $1.18 billion, and $11.4 billion. The firm had been a leading bidder for cellular telephone operations and for licenses to offer personal communications services (PCS). In addition, the firm had purchased a number of telephone operating companies through privatization auctions in Latin America. Finally, the firm had invested aggressively in new technology, primarily digital switches and optical fiber cables in an effort to enhance its service quality. All of those strategic moves had been costly: the capital budget in this segment had varied between $1.5 billion and $2 billion in each of the previous 10 years.
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