Case Study 3
Due on Dec,
4th, 2018
Teletech
Corporation, 2005
Raider Dials Teletech
“Wake-Up Call Needed，” Says Investor
New York-The reclusive
billionaire Victor Yos- sarian has acquired a 10 percent stake 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 CEO, Maxwell Harper. “The firm is misusing
its resources and not earning an adequate return，”theletter said.“The company should abandon its misguided entry intocomputers, and sell its Products and Systemssegment. Management must focus on creating value for shareholders.”Teletech issued a brief statement emphasizing the virtues of a link betweencomputer technology and telecommunications.
Wall Street Daily News, 15 October
2005
Margaret Weston, TeletechCorporation's chief financial officer (CFO), learned of Victor Yossarian’sletter late one evening in early October 2005. Quickly, she organized a team oflawyers and finance staff to assess the threat. Maxwell Harper, the firm’schief executive officer (CEO), scheduled a teleconference meeting of the firm'sboard of directors for the following afternoon. Harper and Weston agreed thatbefore the meeting they needed tofashion 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’sreturns, and shehad to recommend new policies as necessary. Whatshouldthe hurdle rates be for Teletech’s two business segments,Telecommunications Services and its newer Products and Systems unit? Was theProducts and Systems segment really paying its way?
The Company
The Teletech Corporation,headquartered in Dallas, Texas, defined itself as a “provider of integratedinformation movement and management,” The firm had two main business segments:Telecommunications Services, which provided long-distance, local, and cellulartelephone service to business and residential customers, and the Products andSystems segment, which engaged in the manufacture of computing andtelecommunications equipment.
In 2004, TelecommunicationsServices had earned a return on capital (ROC)[if !supportFootnotes][1][endif]of 9.10 percent; Products and Systems had earned 11 percent. The firm's currentbook value of net assets was $16 billion, consisting of $11.4 billion allocatedto Telecommunications Services, and $4.6 billion allocated to Products andSystems. An internal analysis suggested that Telecommunications Servicesaccounted for 75 percent of the market value (MV) of Teletech, while Productsand Systems accounted for 25 percent. Overall, it appeared that the firm'sprospective ROC would be 9.58 percent. Top management applied a hurdle rate of9.30 percent to all capital projects and in the evaluation of the performanceof business units.
Over the past 12 months, Teletech'sshares had not kept pace with the overall stock market or with industry indexesfor telephone, equipment, or computer stocks. Securities analysts had remarkedon the firm's lackluster earnings growth, pointing especially to increasingcompetition in telecommunications, as well as disappointing performance in theProducts and Systems segment. A prominent commentator on TV opined, “There's noprecedent for a hostile takeover in this sector but, in the case of Teletech,there is every reason to try.”
Telecommunications Services
The Telecommunications Servicessegment provided long-distance, local, and cellular telephone service to morethan 7 million customer lines throughout the Southwest and Midwest. Revenues inthis segment grew at an average rate of 3 percent over the 2000-2004 period. In2004, segment revenues, net operating profit after tax (NOPAT),and net assetswere $11 billion, $1.18 billion, and $11.4 billion, respectively.
Since the court-ordered breakup ofthe Bell System telephone monopoly in 1983, Teletech had coped with the gradualderegulation of its industry through aggressive expansion into new services andgeographical regions. Most recently, the firm had been a leading bidder forcellular telephone operations and for licenses to offer personal communicationsservices (PCS). In addition, the firm had purchased a number oftelephone-operating companies through privatization auctions in Latin America.
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Finally, the firm had investedaggressively in new technology—primarily, digital switches and optical-fibercables-in an effort to enhance its service quality. All of those strategicmoves 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.
Unfortunately, profit margins inthe telecommunications segment had been under pressure for several years.Government regulators had been slow to provide rate relief to Teletech for itscapital investments. Other leading telecommunications providers had expandedinto Teletech's geographical markets and invested in new technology andquality-enhancing assets. Teletech's management noted that large cable-TVcompanies had aggressively entered the telecommunications market and continuedthe pressure on profit margins.
Nevertheless, Teletech was the dominantservice provider in its geographical markets and product segments. Customersurveys revealed that the company was the leader in product quality andcustomer satisfaction. Its management was confident that the company couldcommand premium prices no matter how the industry might evolve.
Products and Systems
Before 2000, telecommunications hadbeen the company’s core business, supplemented by an equipment-manufacturingdivision that produced telecommunications components. In 2000, the companyacquired a leading computer-workstation manufacturer with the goal of applyingstate-of-the-art computing technology to the design of telecommunicationsequipment. The explosive growth in the microcomputer market and the increasedusage of telephone lines to connect home- and office- based computers withmainframes convinced Teletech's management of the potential value of marryingtelecommunications equipment with computing technology. Using Teletech'scapital base, borrowing ability, and distribution network to catapult growth,the Products and Systems segment increased its sales by nearly 40 percent in2004. This segment's 2004 NOPAT and net assets were $480 million and $4.6billion, respectively.
The Products and Systems segmentwas acknowledged as a technology leader in the industry. While this accountedfor its rapid growth and pricing power, maintenance of that leadership positionrequired sizable investments in research and development (R&D) and fixedassets. The rate of technological change was increasing, as witnessed by suddenmajor write-offs by Teletech on products that, until recently, management hadthought were still competitive. Major computer manufacturers were entering thetelecommunications-equipment industry. Foreign manufacturers were proving to bestiff competition for bidding on major supply contracts.
Focus on Value at Teletech
We will create value by pursuing business activities
that earn premium rates of return.
一 Teletech
Corporation mission statement (excerpt)
Translating Teletech’s missionstatement into practice had been a challenge for Margaret Weston. First, it hadbeen necessary to help managers of the segments and business units understandwhatcreating valuemeant. Becausethe segments and smaller business units did not issue securities in the capitalmarkets, the only objective measure of value was the securities prices of thewhole corporation—but the activities of any particular manager might not besignificant enough to drive Teletech's securities prices. Therefore, thecompany had adopted a measure of value creation for use at the segment andbusiness-unit level that would provide a proxy for the way investors would vieweach unit’s performance. This measure, called economic profit, multiplied theexcess rate of return of the business unit by the capital it used:
Economic profit = (ROC—Hurdle rate)[if !vml]
[endif] Capital employed where:
ROC = Return on capital =[if !vml]
[endif]
NOPAT=Net operating profit after
taxes
Each year, the segment andbusiness-unit executives were evaluated on the basis of economic profit. Thismeasure was an important consideration in strategic decisions about capitalallocation, manager promotion, and incentive compensation.
The second way in which thevalue-creation perspective influenced managers was in the assessment ofcapital-investment proposals. For each investment, projected cash flows werediscounted to the present using the firm's hurdle rate to give a measure of thenet present value (NPV) of each project. A positive (or negative) NPV indicatedthe amount by which the value of the firm would increase (or decrease) if theproject were undertaken. The following shows how the hurdle rate was used inthe familiar NPV equation:
Net present value = [if !vml]
[endif]- Initial investment
Hurdle Rates
The hurdle rate used in theassessments of economic profit and NPV had been the focus of considerabledebate in recent months. This rate was based on an estimate of Teletech'sweighted average cost of capital (WACC). Management was completely satisfied withthe intellectual relevance of a hurdle rate as an expression of the opportunitycost of money. The notion that the WACC represented this opportunity cost hadbeen hotly debated within the company, and while its measurement had never beenconsidered wholly scientific, it was generally accepted.
Teletech was “split-rated” betweenA— and BBB +.An investment banker recently suggested that, at those ratings,new debt funds might cost Teletech 5.88 percent (about 3.53 percent after a 40percent tax rate). With a beta of 1.15, the cost of equity might be about 10.95percent. At market-value weights of 22 percent for debt and 78 percent forequity, the resulting WACC would be 9.30 percent.Exhibit 1 summarizes the calculation. The hurdle rate of 9.30percent was applied to all investment and performance-measurement analyses atthe firm.
Arguments for Risk-AdjustedHurdle Rates
How the rate should be used withinthe company in evaluating projects was another point of debate. Given thediffering natures of the two businesses and the risks each one faced,differences of opinion arose at the segment level over the appropriateness ofmeasuring all projects against the corporate hurdle rate of 9.30 percent. Thechief advocate for multiple rates was Rick Phillips, executive vice presidentof Telecommunications Services, who presented his views as follows:
Each phase of our business
is different. They must compete differently and must draw on capital
differently. Given the historically stable nature of this industry, many
telecommunications companies can raise large quantities of capital from the
debt markets. In operations comparable to
Telecommunications
Services, 50 percent of the necessary capital is raised in the debt markets at
interest rates reflecting solid A quality, on average. This is better than
Teletech’s corporate bond rating of A—/BBB +.
I also have to believe that
the cost of equity for Telecommunications Services is lower than it is for
Products and Systems. Although the Products and Systems segment's sales growth
and profitability have been strong, its risks are high. Independent equipment manufacturers
are financed with higher-yielding BB-rated debt and a greater proportion of
equity.
In my book, the hurdle rate
for Products and Systems should reflect those higher costs of funds. Without
the risk-adjusted system of hurdle rates, Telecommunications Services will
gradually starve for capital, while Products and Systems will be
force-fed—that's because our returns are less than the corporate hurdle rate,
and theirs are greater. Telecommunications Services lowers the risk of the
whole corporation, and should not be penalized.
Here’s a rough graph ofwhat I think is going on(Figure 1): TelecommunicationsServices, which can earn 9.10 percent on capital, is actually profitable on arisk-adjusted basis, even though it is not profitable compared to the corporatehurdle rate. The triangle shape on the drawing shows about whereTelecommunications Services is located. My hunch is that the reverse is truefor Products and Systems (P&S), which promises to earn 11.0 percent oncapital. P&S is located on the graph near the little circle. In decidinghow much to loan us, lenders will consider the composition of risks. If moneyflows into safer investments, over time the cost of their loans to us willdecrease.
Our stockholders are
equally as concerned with risk. If they perceive our business as being more
risky than other companies are, they will not pay as high a price for our
earnings. Perhaps this is why our price-to-earnings ratio is below the industry
average most of the time. It is not a question of whether we adjust for risk—we
already do, informally. The only question in my mind is whether we make those
adjustments systematically or not.
While multiple hurdle rates
may not reflect capital-structure changes on a day-to-day basis, over time they
will reflect prospects more realistically. At the moment, as I understand it,
our real problem is an inadequate and very costly supply of equity funds. If we
are really rationing equity capital, then we should be striving for the best
returns on equity for the risk. Multiple hurdle rates achieve that objective.
Implicit in Phillips’s argument, asWeston understood it, was the notion that if each segment in the company had adifferent hurdle rate, the costs of the various forms of capital would remainthe same. The mix of capital used, however, would change in the calculation.Low-risk operations would use leverage more extensively, while the high-riskdivisions would have little to no debt funds. This lower-risk segment wouldhave a lower hurdle rate.
FIGURE 1
Rick Phillips' Assessment of
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Risk Level
Opposition to Risk-AdjustedHurdle Rates
While several others withinTeletech supported Phillips’s views, opposition was strong within the Productsand Systems segment. Helen Buono, executive vice president of Products andSystems, expressed her opinion as follows:
All money is green.
Investors can't know as much about our operations as we do. To them the firm is
a black box; they hire us to take care of what is inside the box, and judge us
by the dividends coming out of the box. We can’t say that one part of the box
has a different hurdle rate than another part of the box if our investors don^
think that way.
Like I say, all money is
green: all investments at Teletech should be judged against one hurdle rate.
Multiple hurdle rates are
illogical. Suppose that the hurdle rate for Telecommunications Services was
much lower than the corporate-wide hurdle rate. If we undertook investments
that met the segment hurdle rate, we would be destroying shareholder value because we
weren't meeting the corporate hurdle
rate.
Our job as managers should
be to put our money where the returns are best. A single hurdle rate may
deprive an under profitable division of investments in order to channel more
funds into a more profitable division, but isn't that the aim of the process?
Our challenge today is simple: we must earn the highest absolute rates of
return that we can get.
In reality, we don't
finance each division separately. The corporation raises capital based on its
overall prospects and record. The diversification of the company probably helps
keep our capital costs down and enables us to borrow more in total than the sum
of the capabilities of the divisions separately. As a result, developing
separate hurdle rates is both unrealistic and misleading. All our stockholders
want is for us to invest our funds wisely in order to increase the value of
their stock. This happens when we pick the most promising projects,
irrespective of the source.
Margaret Weston’s Concerns
As Weston listened to thesearguments, presented over the course of several months, she became increasinglyconcerned about several related considerations. First, Teletech's corporatestrategy had directed the company toward integrating the two segments. Oneeffect of using multiple hurdle rates would be to make justifyinghigh-technology research and application proposals more difficult, as therequired rate of return would be increased. On the one hand, she thought,perhaps multiple hurdle rates were the right idea, but the notion that theyshould be based on capital costs rather than strategic considerations might bewrong. On the other hand, perhaps multiple rates based on capital costs shouldbe used, but, in allocating funds, some qualitative adjustment should be madefor unquantifiable strategic considerations. In Weston's mind, the theory wascertainly not clear on how to achieve strategic objectives when allocatingcapital.
Second, using a single measure ofthe cost of money (the hurdle rate or discount factor) made the NPV resultsconsistent, at least in economic terms. If Teletech adopted multiple rates fordiscounting cash flows, Weston was afraid that the NPV and economic-profitcalculations would lose their meaning and comparability across businesssegments. To her, a performance criterion had to be consistent andunderstandable, or it would not be useful.
In addition, Weston was concernedabout the problem of attributing capital structures to divisions. In theTelecommunications Services segment, a major new switching station might befinanced by mortgage bonds. In Products and Systems, however, it was impossiblefor the division to borrow directly; indeed, any financing was only feasiblebecause the corporation guaranteed the debt. Such projects were consideredhighly risky—at best, perhaps, warranting only a minimal debt structure. Also,Weston considered the debt-capacity decision difficult enough for thecorporation as a whole, let alone for each division. Judgments could only bevery crude.
In further discussions with othersin the organization about the use of multiple hurdle rates, Weston discoveredtwo predominant themes. One argument held that investment decisions shouldnever be mixed with financing decisions. A firm should first decide what itsinvestments should be and then determine how to finance them most efficiently.Adding leverage to a present-value calculation would distort the results. Theuse of multiple hurdle rates was simply a way of mixing financing withinvestment analysis. This argument also held that a single rate made the riskdecision clear-cut. Management could simply adjust its standard (NPV oreconomic profit) as the risks increased.
The contrasting line of reasoningnoted that the WACC tended to represent an average market reaction to a mixtureof risks. Lower-than-average-risk projects should probably be accepted evenwhen they did not meet the weighted-average criterion. Higher-than-normal-riskprojects should provide a return premium. While the multiple-hurdle-rate systemwas a crude way to achieve this end, at least it was a step in the rightdirection. Moreover, some argued that Teletech's objective should be tomaximize return on equity funds, and because equity funds were and would remaina comparatively scarce resource, a multiple-rate system would tend to maximizereturns to stockholders better than a single-rate system would.
To help resolve these issues,Weston asked her assistant, Bernard Ingles, to summarize the scholarly thoughtregarding multiple hurdle rates. His memorandum is given inExhibit 2. She also requested thatIngles obtain samples of firms comparable with the Telecommunications Servicessegment and the Products and Systems unit that might be used in derivingsegment WACCs. A summary of the data is given inExhibit 3. Information on capital-market conditions in October 2005is given inExhibit 4.
Conclusion
Weston could not realistically hopethat all the issues before her would be resolved in time to influence VictorYossarian’s attack on management. But the attack did dictate the need for anobjective assessment of the performance of Teletech's two segments—the choiceof hurdle rates would be very important in the analysis. She did want toinstitute a pragmatic system of appropriate hurdle rates (or one rate),however, that would facilitate judgments in the changing circumstances faced byTeletech. What were the appropriate hurdle rates for the two segments? Was theProducts and Systems segment underperforming, as suggested by Yossarian? Howshould Teletech respond?
Question:
Whatdo you think were the appropriate hurdle rates of the two segments?
EXHIBIT 1: Summary of the WACC Calculation for
Teletech Corporation and Segment Worksheet
Corporate Telecommunications Services Products and Systems
MV asset
weightsBond rating
100%
A-/BBB+
75% A 25% BB
Pretax cost of debt 5.88% 5.74% 7.47%
Tax rate 40% 40% 40%
After-tax cost of debt 3.53% 3.44% 4.48%
Equity beta 1.15
Rf 4.62%
RM 10.12%
RM－Rf 5.50%
Cost of equity 10.95%
Weight of debt 22.2%
Weight of equity 77.8%
WACC 9.30%
EXHIBIT 2 Theoretical Overview of Multiple HurdleRates
[if !vml]
[endif]
To: Margaret Weston
From: Bernard Ingles
Subject: Segment cost-of-capital theory
Date: October 2005
You requested an overview
of the theories on multiple hurdle rates. Without getting into the minutiae,
the theories boil down to the following points:
[if !supportLists]1. [endif]The central idea is that
required returns should be driven by risk. This is the dominant view in the
field of investment management, and is based on a mountain of theory and
empirical research stretching over several decades. The extension of this idea
from investment management to corporate decision making is, at least in theory,
straightforward.
[if !supportLists]2. [endif]An underlying assumption is
that the firm is transparent (i.e., that investors can see through the
corporate veil and evaluate the activities going on inside). No one believes
firms are completely transparent, or that investors are perfectly informed. But
financial accounting standards have evolved toward making the firm more
transparent. And the investment community has grown tougher and sharper in its
analysis. Teletech now has 36 analysts publishing both reports and forecasts on
the firm. The reality is that for big publicly held firms, transparency is not
a bad assumption.
[if !supportLists]3. [endif]Another underlying
assumption is that the value of the whole enterprise is simply the sum of its
parts一this is the concept ofvalue additivity. We can definettpartsM
as either the business
segments (on the left-hand side of the balance sheet) or the layers of the
capital structure (on the right-hand side of the balance sheet). Market values
have to balance.
MVTeletech = (MVTelecommunications Services +MVProducts+Systems) = (MVdebt + MVequity)If those equalities did not hold, then a raider could
come along and exploit the inequality by buying or selling the whole and the
parts. This is arbitrage. By buying and selling, the actions of the raider
would drive the MVs back into balance.
[if !supportLists]4. [endif]Investment theory tells us
that the only risk that matters is non-diversifiable risk, which is measured by
beta. Beta indicates the risk that an asset will add to a portfolio. Since we
assume that an investor is diversified, we also assume she seeks a return for only
the risk that she cannot shed, which is the non-diversifiable risk. The
important point here is that the beta of a portfolio is equal to a weighted
average of the betas of the portfolio components. Extending this to the
corporate environment, the asset beta for the firm will equal a weighted
average of the components of the firm—again, the components of the firm can be
defined in terms of either the right-hand side or the left-hand side of the
balance sheet.
βTeletech Assets = (wTel.Serv. βTel.Serv. + wP+SβP+S) = (wdebt βdebt + wequity βeqity)
where:
w = Percentage weights based on market values. βTel.Serv ，βP+S = Assetbetas for business segments.
βdebt = β for thefirm's debt securities.
βequity = β offirm's common stock (given by Bloomberg, etc.)This is
a very handy way to model the risk of the firm, for it means that we can use
the capital asset pricing model to estimate the cost of capital for a segment
(i.e., using segment asset betas).
[if !supportLists]5. [endif]Given the foregoing, it
follows that the weighted average of the various costs of capital (K) for the
firm (WACC), which is the theoretically correct hurdle rate, is simply a
weighted average of segment WACCs:
WACCTeletech = (wTel.Serv. WACCTel.Serv.) +
(wP+S WACCP+S) where:
w = percentage
weights based on market values
WACCTel.Serv.= (wdebt.Tel.Serv. Kdebt.Tel.Serv.) + (wequity.Tel.Serv.Kequity.Tel.Serv.)
WACCP + S = (wdebt,P + S Kdebt,P + S) + (wequity,P + S Kequity,P + S)
6. The notion in point number
5 may not hold exactly in practice. First, most of the components in the WACC
formula are estimated with some error. Second, because of taxes, information
asymmetries, or other market imperfections, assets may not be priced strictly
in line with the model—for a company like Teletech, it is reasonable to assume
that any mispricings are just temporary. Third, the simple two-segment
characterization ignores a hidden third segment: the corporate treasury
department that hedges and aims to finance the whole corporation optimally-this
acts as a shock absorber for the financial policies of the segments. Modeling
the WACC of the corporate treasury department is quite difficult. Most
companies assume that the impact of corporate treasury is not very large, and
simply assume it away. As a first cut, we could do this too, although it is an
issue we should revisit.
Conclusions
[if !supportLists]• [endif]In theory, the corporate
WACC for Teletech is appropriate only for evaluating an asset having the same risk as
the whole company. It is not appropriate for assets having different risks than
the whole company.
[if !supportLists]• [endif]Segment WACCs are computed
similarly to corporate WACCs.
[if !supportLists]• [endif]In concept, the corporate
WACC is a weighted average of the segment WACCs. In practice, the weighted
average concept may not hold, due to imperfections in the market and/or
estimation errors.
[if !supportLists]• [endif]If we start computing
segment WACCs, we must use the cost of debt, cost of equity, and the weights appropriate to that segment We
need a lot of information to do this correctly, or else we really need to
stretch to make assumptions.
EXHIBIT 4:Debt-Capital-Market
Conditions, October 2005
CorporateBond Yield U. S. Treasury Securities
Industrials
AAA 5.44% 3-month 3.56%
AA 5.51% 6-month 3.99%
5.74% 2-year 4.23%
3-year 4.23%
BBB 6.23% 5-year 4.25%
BB 7.47% 10-year 4.39%
B 8.00% 30-year 4.62%
Phones
A 6.17% BBB6.28%
Utilities
A 5.69% BBB6.09%
Source of data: Bloomberg LP.[if !vml]
[endif]
EXHIBIT 3:Samples of Comparable
Firms
2004 Equity Bond Book Val. Price to Mkt. Val. Mkt. Val. Price/
Reven
Company Name Beta Rating
ues
Debt/Total Capital Book Debt/Cap. Debt/Equity Earnings
Teletech
Corporation $16,000 1.15 A—/BBB+
40% 3.0 22% 78% 12.9
Telecommunications
Services Industry
Alttel Corp. 8,246 1.00
A 44.7 2.4 23.2% 30.1% 15.4
AT&T Corp. 30,537 1.10 BB+ 67.5 2.0 36.6% 57.7% (2.4)
BellSouth Corp. 20,350 1.00 A 53.9 2.1 22.9% 29.7% 167
Centurytel Corp. 2,411 1.05 BBB+ 48.7 1.3 37.0% 58.8% 13.3
Citizens Communications Co. 2,193 1.00 BB+ 75.9 3.5 47.7% 91.1% 65.0
IDT Corp. 2,216 1.05 NA 4.6 1.2 2.1% 2.1% (19.3)
SBC Communications Inc. 40,787 1.05 A 43.7 1.9 20.0% 25.0% 19.6
Sprint Corp. 27,428
1.15 A- 58.0 2.4 30.3% 43.4% (43.1)
Verizon
CoGommunications Inc.
71,283
1.00 A+ 40.0 2.6 24.1% 31.8% 12.5
Average 1.04 48.55
2.15 27.1% 41.1% 8.65
Telecommunications
Equipme
Avaya Inc. 4,057
nt Industry
1.35
BB 54.5 3.5 4.4% 4.6% 18.3
Belden CDT Inc. 966 1.45 NA 23.6 1.2 17.5% 21.3% 38.7
Commscope Inc. 1,153 1.10 BB 41.6 2.0 22.4% 28.9% 10.3
Corning Inc. 3,854 1.45 BBB- 44.4 5.4 11.8% 13.4% (11.1)
Harris Corp. 2,519 1.05 BBB- 24.5 2.7 10.7% 11.9% 21.9
Lucent Technologies Inc. 9,045 1.75 B 129.0 (26.0) 30.1% 43.0% 6.0
Nortel Networks Corp. 9,828 1.75 NA 45.7 3.0 20.7% 26.0% (51.8)
Plantronics Inc. 560 1.20 NA 0.7 4.2 0.2% 0.2% 17.0
Scientific-Atlanta Inc. 1,708 1.45 NA 0.5 2.6 0.1% 0.1% 20.7
Average 1.339 40.5
(0.15) 13.1% 16.6% 7.77
Computer
and Network Equipment Industry
EMC Corp. 8,229 1.55 BBB
1.1 2.9 0.4% 0.4% 34.3
Gateway Inc. 3,650 1.35 NA 64.2 5.5 11.8% 13.4% (4.2)
Hewlett-Packard Corp. 79,905 1.45 A- 16.9 1.7 7.8% 8.5% 18.5
Int’l. Business Machines Corp. 96,293 1.10 A+ 51.4 4.1 8.4% 9.1% 15.2
Lexmark Infl. Inc. 5,314 1.15 NA 6.8 4.2 1.4% 1.4% 15.5
NCR Corp. 5,984 1.20 NA 12.8 3.3 4.5% 4.8% 21.1
Seagate Technology 6,224 1.20 NA 28.6 4.4 10.0% 11.1% 25.0
Storage Technology Corp. 2,224 1.15 NA 0.9 2.4 0.3% 0.3% 18.2
Western Digital Corp. 3,047 1.80 NA 12.6 4.8 2.9% 3.0% 16.7
Average 1.33 21.7 3.7 5.3% 5.8% 17.81
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[if !supportFootnotes]
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[if !supportFootnotes][1][endif]Return on capital was calculated as the ratio of net operatingprofits after tax (NOPAT) to capital.
