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Arcelor: Undervaluation - Threat or Opportunity?

Published 31 Jan 2009
Reference 5476
Region Europe
Summary

Arcelor believes its shares are undervalued and has to decide whether to buy back stock via a repurchase tender offer or via an open market repurchase. Before doing so, it has to value the company to get an estimate of the fair value of the company. It has also to decide whether it can afford the buyback: is the increase in leverage a move to a better capital structure?

Teaching objectives

The purpose of the case is to make students familiar with buyback methods and with the dilemma that a firm faces when choosing between a tender offer and an open market repurchase: buying in the open market is cheaper, but a tender offer will increase stock prices more in the short run, which may be important if the firm wants to get a better price in a hostile takeover bid. The case asks students to value Arcelor as well as analyse the implications for optimal capital structure.

Keywords
  • Share Buyback
  • Repurchase Tender Offer
  • Open Market Repurchase
  • Signaling
  • Company Valuation
  • Optimal Capital Structure
  • RD0109
  • AR0809
  • AR2009