TELETECH CORPORATION 2005 Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

TELETECH CORPORATION 2005 Case Solution

Introduction

Teletech Corporation, the leading electronic service company, not only provides the world class telecommunication services but also engages in the manufacturing of computing and telecommunication equipment’s. The company is headquartered in a place which is known as the center of telecommunication and manufacturing employment in the United States.

The two business segments the company is focusing on are the service and manufacturing side.

As far as telecommunication sector is concerned, the company is catering more than 7 million users from the Southwest and Midwest regions. The company was a leader at some point in time but due to no tax reliefs from the government for its capital investment, its competitors got the chance to enter into the market to compete with it.

Looking at the Manufacturing side, the company was primarily a telecommunication service provider, then it started manufacturing the related products and despite of the rapid advancement of the technology, the company has achieved the remarkable position with respect to its competitors.

As the company is not engaged in issuing securities,therefore the vision of the company now can be achieved by creating value for its existing securities.This can be achieved by issuing responsibility to each segment and analyzing their economic return . Secondly, by applying the appropriate hurdle rate, the best alternative investment opportunitiesshould be analyzed that can create some value for the business.

Analysis and Recommendation

Diversification is always beneficial as said,‘Do not put all your eggs in one basket’ therefore splitting the business in two different segments is good.According to a research, maintaining a portfolio of seven different alternatives can reduce the risk to minimal. Now as the investors are primarily concerned with their return on their invested capital without going into detail what the management is doing in the business,thereforeif the management feels that 9.3% rate of hurdle is the appropriate one thus, it should only accept the projects which can generate a higher rate of return than this hurdle rate and vice versa rejects those that are below it. By taking this hurdle rate 9.3% the return which Telecommunication sector is earning is 9.10% which islooking profitable but actually it is not creating value for the shareholders if we take the corporate hurdle rate. The two alternatives to deal with this case are stated below:

Instead of single hurdle rate, the company should use multiple hurdle rate for its two business segments. Both the segmentshave different capability of providing return on the capital invested. As the company has proposed to invest $2 billion dollars therefore, there should be appropriate decision needed in order to get the return. By analyzing the Telecommunication sector of the company,its cost of Equity is much lower than the Manufacturing sector. On the other hand, the growth in the telecommunication is quite lower also associated with the lower risk. The market is efficient but the rapid advancement in the technology is also a big reason for it. Moreover, on the manufacturing side with the lower bond rating but due to the higher proportion of debt hurdle rate the cost of funding them is higher. Therefore, in order to sum up the return over here as generated by the Telecommunication is much lower as compared to the corporate rate whereas return generated by the Manufacturing side is higher with respect to the current hurdle rate of 9.3%.

Hence, in order to resolve the current issue, it is recommended that as far as financing decision is concerned,multiple hurdle rates should be applied for both the sectors of the business in order to get the appropriate return for the shareholders. This can be achieved by using the accurate betas for the company that are given in the exhibits that are 1.39 for Telecommunication sector whereas 1.33 for the other sector of the business. As the investment theory depicts that the only thing which matters in getting excess return is the company’s non-diversifiable risk therefore, by applying the recommended betas the required rate of returns can be achieved......................

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