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One of America's fastest growing private companies, according to Inc. magazine's 1995 list, became a publicly traded company this summer. Telegroup, a long distance phone company, is one of Fairfield's largest employers. Its Initial Public Offering (IPO) sold 4.5 million shares to institutions and individuals at $10 per share, raising approximately $40 million and sending public confirmation to its founders, Fred Gratzon and Cliff Rees, that they are on the right track.
"It's really exhilarating to watch the whole process, and so far the stock has been growing in value," says Gratzon, who completed an extensive "roadshow" earlier this summer, one of the steps a company needs to take before it goes public. Representatives from Telegroup met with institutional money managers to tell the story of their company.
Several factors are considered in determining the company's worth. One factor is how quickly the company has grown and is expected to grow further both in revenues (total sales) and in profits. Justifying its impressive growth ranking, Telegroup's revenues have grown an average of 95 percent each year over the last three years. These figures are available from the company's prospectus, available from the company, or its Internet website, http://www.telegroup.com.
Another factor that determines a company's worth is the perceived strength of the "sector" the company is in. Telegroup falls mainly into the telecommunications sector. Steve Guich, a stock trader from California, points out that telecommunications is a major growth market. "A broadening and diversification of the worldwide communication network through technological innovation and competition will probably keep the growth of this sector at the front of the market," he says.
Earlier this summer, Gratzon and his associates met with 75 different well-known "funds" or money mangers in North America and Europe, some of which manage over $100 billion in assets. People invest in shares of mutual funds, which in turn are used to invest in the stocks of companies. "It's kind of mind boggling when you think about it," says Gratzon. "Cumulatively, these funds add up to about two to three trillion dollars." Although Gratzon's team didn't meet with the top controllers of all that money, they did speak to telecom analysts and portfolio managers, hoping to create interest in their business plans. "One company manages $150 billion, and another $800 billion," he says. "In one day you can cover funds worth over $900 billion!"
Here's how one investor sees it: "Telegroup's growth and abilities are impressive, but their biggest weak link is that they are in the process of completely changing their business model," says Guich, "including the way that they've made their money in the past five to eight years." He attributes Telegroup's international success as partly responsible for the deregulation in the telecommunications market.
"Telecommunications is an explosive field right now," says Guich. He sees the future of telecom in general to be in continuing buildout of both the number and kinds of "pipes" or communication channels. These range from copper pairs, to wireless, to cellular and their digital counterparts, to HFC or hybrid fiber-coax, to FTTC (fiber-optic), to the web. The pipes' size will increase for greater bandwidth to carry increasingly "data-rich" content, such as full-motion video and huge databases.
John Petit, a private investor, sees it like this: "I would defer to two of the three analysts in the deal, Smith Barney Inc. and Alex. Brown & Sons, Inc." Smith Barney's anticipated eighteen-month Telegroup price is targeted at $22 per share, valuing it at one and one-half times future revenues, and Alex. Brown, using a third-quarter 1998 valuation of one times revenue, is targeted at around $13-14 per share.
"My way of looking at it," says Petit, "is to split the difference. Perhaps Smith Barney is a little too enthusiastic because they are the lead manager on the deal, and perhaps Alex. Brown is a bit conservative." If things are on target and the company continues to increase revenues each quarter the way the analysts expect, then Petit is hoping for something in the $18 range.
Recently reporting another quarter of record revenues, Telegroup is continuing its extraordinary growth with its 1997 second-quarter results of $80 million, and $154 million for the second half of 1997. These revenues maintained Telegroup's high double-digit growth by coming in 70 percent above their 1996 comparable quarter revenues.
"The wild card is perhaps the company does better than we think," says Petit. A growing company is not expected to earn money for a while, but according to Petit, as long as revenues increase they could turn profitable in 1998 or 1999.
Vincent Garone, Telegroup's Investors Relations Manager, explains that Telegroup expected a loss of profits during their growing out period, but they expect a gain in profits in the next few years.
"I would like to see what Cowen & Company, the third underwriter, has to say," says Petit. Analysts agree that Telegroup's IPO got off to a slow start, especially since many people aren't around in the summer, but with enough exposure, things could pick up.
Telegroup's stock is traded on the NASDAQ market under the ticker symbol "TGRP," and recently traded as high as 133Ž4, representing an approximate 35 percent gain from their offering price of $10 per share. "Basically, I'm enthusiastic," says Petit, "and I think the future is bright."
Many analysts are excited about the future of telecommunications. Competitors have done well in the market over the past few months. "If you have a niche player like Telegroup keeping their noses to the grindstone," says Petit, "it could be a very good investment looking forward. Telegroup is a slightly overlooked gem in the industry." Price targets are subject to certain inherent risks and to the volatility of the market, so it is better to seek the advice of a financial adviser before investing in any company.
"Telegroup has a stable growth record and the employees are happy," says Dr. John Price, mathematics professor at Maharishi University of Management and investment analyst. "That says something good about the company." He points out that over 40 percent of the employees at Telegroup practice the Transcendental Meditation program, a technique that has been scientifically validated to reduce stress and enhance harmony, creativity and productivity in the work place.
For those people looking to invest in new companies, Price suggests looking at local or familiar companies. "Invest in companies that have quality management that you can trust and where you will be involved in a product or service that you feel good about." Price advises the investor to think of the company as though they are about to buy it.
Generally, companies go public when they are seeking additional funds to expand. With this IPO, Telegroup is gearing up to expand its Intelligent Global Network, a project estimated at about $58.5 million. Plans include upgrading many of their MIS functions, particularly their billing and accounting, which could cost around $15 million. Also included in the plan is retirement of all their senior subordinated notes, a particular type of debt instrument, at a cost of around $22.2 million.
Telegroup's fast-paced growth demands an increase in revenue. They originally began aggregating AT&T service in 1989 by committing to a large discount program. Instead of buying minutes, they opted for a program that would give many individual locations a better discount if they put them into a group. Then, in early 1990, they switched to reselling AT&T and, by 1992, added Sprint. In 1993 they started the callback service and last year started call-through services.
"Callback is a bit of a nuisance," says Fred. "You have to make a signal call and then hang up and get called back and then you can call out." New Telegroup switches allow them to migrate all those customers from callback to call-through service, making it much more convenient to use, and it allows them to go after a larger business. Callback was just used for small businesses and residential service, Gratzon says. But it gave them a head start. Telegroup was able to compete in countries where there was just a monopoly by exporting U.S. dial tones without having to put facilities in those countries. This head start will allow Telegroup to keep their costs down as they grow.
Nobody can deny the phenomenal growth Telegroup is experiencing. Where does some of it come from? Some analysts agree that Telegroup has an edge in the marketplace because of the high number of switches they have currently in place. A switch directs a call from one line to another, enabling a network of communications to function efficiently. Switches allow a company to significantly reduce the cost of a call and provide control over the routing of calls.
Telegroup has 15 switches functioning globally, and they anticipate another five more by the end of the year and eight more in 1998. There are four switches in New York, three in Hong Kong, two in the United Kingdom, and one each in Los Angeles, France, Japan, The Netherlands, Australia, Switzerland, Denmark, Italy, Germany, Sweden, and Switzerland, with another to be installed by the year's end.
With all these switches in place, is Telegroup ahead of the other telecommunication companies? "Globally, I don't really know what the monsters are doing," says Gratzon. For companies his size, alternative carriers, they are probably one of the largest. One great advantage? They designed their network from the ground up to be a global network as opposed to starting with a country-centric network like AT&T and reaching out with "tentacles."
"That turns out to be a really inefficient way of doing things," says Gratzon. "AT&T has a huge investment in their infrastructure. They can't tear it down and start again." The architectural design on Telegroup's network allows them infinite flexibility to continue to enhance the functionality while routing calls in the best possible way, which means customers pay less.
The callback service in other countries also provided Telegroup with a customer base to build a network around. They know where their customers are and where they call. "These two things give us an enormous advantage, whereas other companies are stuck with the 'Field of Dreams' philosophy--'Build it and they will come.' " According to Gratzon, the few who have tried to build global networks are having a problem with the second part of the formula--customers are not coming.
Telegroup has created a Field of Dreams for many people in Fairfield. The IPO has made a "good bunch of people" extremely wealthy overnight.
"There will be many engines added to our growth, so more good-paying jobs will become available," says Fred. "I think Fairfield will become a more prosperous town."
Although part of the strength of Telegroup appears to be the vision of its management, Gratzon gives most of the credit to dumb luck. Call-back was a good market-entry strategy. The future looks just as bright to Gratzon as the past. But then, he admits to being an incurable optimist. What about his five-year plan?
"To get enlightened, what's yours?"
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