West Teleservice IPO

After a cautious analysis of the teleservice market and the players in the space, we selected the following business as similar to West Teleservice: SITEL Corporation, APAC Teleservices and Precision Response Corporation. West Teleservice is an integrated teleservice company whose business model is based upon recurring large volume application with focus on state of art innovation, quality of service, long term business relationships and a management with high level of competence. We likewise took a look at other measurements such as size of revenue and revenue forecast, functional margins and net margins as indications of equivalent companies in the industry.

A detailed analysis of this is captured in Appendix 1. West Teleservice is seeking to provide 5.7 M shares, which is equivalent to 13% of total shares outstanding (the co-founders desire to keep 87% of the company). The very first technique we took in valuing West Teleservice was taking the multiples approach. We then computed the average of three multiples for the comparables in the market:

Cost/ Sales

5.9
Price/ Operating Profit

45
Rate/ Revenues

82

Using the 3 multiples above, we created valuations of $44/share, $49/share and $53/share for West Teleservice. Compared to the S&P suggestion of $21.5/ share, this appeared to be much greater examination. Based upon this analysis nevertheless, Ms. Little would likely suggest a valuation of $44/share. We then proceeded to worth West Teleservice using the DCF approach. In utilizing the approach, there were a few basics about the teleservice market that entered play. One being that scalability was offered by technology financial investments or human resource investment, given that workstations, personnel and ports require to be included for both individual and automatic services.

We kept the sales projection based on 2 years of historical data. However, we also retained the same net margin over future years. We then conducted an analysis based on multiple scenarios. Scenario 1: In scenario 1, we kept the % of market captured by West Teleservice a constant at 5%. In this scenario along with all the assumptions noted in Appendix 3, we came to a valuation at $15 per share. We noted that this was less than the valuation by S&P. This was our baseline model. Scenario 2: Next we played with the spreadsheet to find what % of the outsourced teleservice market does West Teleservice need to capture in order to reach a valuation close to $42 per share. By doing sensitivity analysis, we concluded that the % of the oursourced teleservice market that West Teleservice could capture and the % of net income reinvested in the company impacted cash flow. A year over year of moderate increase in the overall outsourced market and a slightly decreased % of sales reinvested into the company yielded a valuation close to $42.

We then analyzed the industry to see in what ways WestTeleservice could realistically increase its cash flow to asset from the baseline scenario (scenario 1). a) Given the projected growth of overall outsourced teleservice market year over year, the increase in market capture from 5% to 9% over a six years period is a realistic target for West Teleservice. b) Given advances in technology and scale economies involved it is realistic to assume that investment in PPE as a % of total sales could slightly decrease over time. One important point to note is that every teleservice firm in the industry is seeking the exact same competitive advantage. The scalability of the industry is going to be driven primarily by technology innovation (i.e. cost per automation port may go down) and addition of workstations (i.e. human resources). In order to continuously take advantage of technology innovations, the company needs to continue to invest in technology.

To drive labor cost down, it could outsource call centers to countries where labor is cheaper. If West Teleservice was to take advantage of technology innovation, other players in the industry benefit from the exact same innovation, which means as operating cost is reduced, so would projected revenue in the competitive environment. In order to increase the valuation of company by either providing additional value which would increase willingness to pay or by driving down costs, West Teleservice should be able to tap into its resources and capabilities in ways no other company in the space could imitate rapidly. We therefore conclude that to value the company at $42/share, management needs to believe that its expertise in the space and relationship with corporate customers would enable them to grab a bigger piece of the outsourced teleservice pie than the historical 5%. Given the projected growth of the overall outsourced teleservice market, this is not unrealistic for a sound company like West Teleservice. There are many uncertainties in the industry given the number of entrants. The upside potential for those companies that survive is high, but so is risk. The company should pursue equity investment.