Teletech Corporation, 2005 Harvard Case Solution & Analysis

Teletech Corporation, 2005 Case Solution

Introduction

The underlying corporation for detailed analysis in this report is the Teletech Corporation, which was founded in Dallas, Texas. The company’s main line of business is to provide telecommunication services to the long-distanced businesses as well as the residential customers, whereas the other segment added to the main line of business is the product and service segment, which manufactures the computing as well as the telecommunication equipment.

Around 75% of the overall capital of the corporation is invested in the Telecommunication service segment with 7 million above loyal customers in the Southwest as well as Midwest regions of US. The segment with its tremendous performance and the non-compromising behavior over the quality of services provided has achieved a leading position in the overall geographic market. But due to some issues in the 25% of the other segments, the company’s overall profits are declining. The Product and Service segment of the corporation invests huge amount on the research and development cost in order to come up with new and innovative technology products,which negatively affects the overall return that could be generated for shareholders. In addition to this, other major issues that this segment was facing were related to the tough competition from the foreign producers of such goods.

Later in the year 2005, the company was faced with another challenge when Victor Yossarian, a billionaire, acquired 10% of Teletech’s stock and required two seats in the firm’s board of directors. According to his deep analysis on the performance of the company, he believed that the Product and System segment of the company should be shut down due to its non-yielding required rate of return and its high cost spending.Moreover, Yossarian proposed that the company should stick to its core products that could significantly help in generating the required rate of return, which could satisfy the needs of the shareholders of company.

The other major concern raised by the billionaire is regarding the use of single hurdle rate for the evaluation of the different segments of the company. The Telecommunication Service segment of the corporation was also against the use of single hurdle rate as opposed to the other segment because the two segments have different risks associated with them that are their non-diversifiable risks and it would not be wise to compensate the increased cost of borrowing capital in segment, which should be barred by the other segment. It can be seen that the risk associated with the Product and Service segment is relatively high, mainly because of the continuous advancement in technology that could obsolete the previous launch very early.

Whereas on the other hand, the belief raised by Product and System segment is that the two segments should be evaluated on the basis of single hurdle rate because the investor has invested in the overall corporation without focusing on its individual segments. In addition to this, it can also be seen that the fundraising for the overall corporation is done from the same source on the basis of the diversified portfolio of the whole company. Therefore, according to this segment, it would be unrealistic to use different hurdle rates for different segments.

Problem Statement

The case depicts difficulties faced by Teletech Corporation due to the non-performance of its Products and System Segments due to some typical reasons and also illustrates the issue of using single hurdle rate or the multiple rates for the different segments of the overall corporation.

Analysis of the Problem

It can be seen that irrespective of the different risk associated with different segments of the overall organization, the company uses one single hurdle rate to evaluate the performance,which are causing negative effects on the price to earnings ratio for the real owners of the company...................

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