This is the tale of one of the most consequential proposed U.S.-international deals in recent history. Although both Presidential candidates were opposed to it on the campaign trail, its supporters hope that the rhetoric will cool now that the election is over, and the deal will receive final U.S. regulatory approval by year-end.
The $64,000 question: Should we approve the acquisition of U.S. Steel by Japan’s Nippon Steel?
Here’s the backstory: In December 2023, Nippon announced an acquisition of U.S. Steel (Pittsburgh, PA) for $55 per share (a 40% premium to the stock’s value), or for nearly $15 billion. The latter was put in play when Cleveland-Cliffs (Cleveland, OH) made a hostile $8 billion offer for it earlier that summer. Consolidation is probably necessary in this industry worldwide because steelmaking is mature and has in fact been steadily declining for years. This industry isn’t in freefall, but it’s slowly bleeding.
Of course, Nippon’s offer was far superior to Cleveland-Cliffs’ insulting deal. Therefore, relatively quickly, the Nippon-U.S. Steel transaction was blessed by everyone including the shareholders of both companies, international regulators, and even by the labor arbitrators mutually selected to moderate disputes with the United Steelworkers union representing its workers. But this merger became a scorching hot potato (I’m not spelling it like Dan Quayle) during both candidates’ run for the presidency.
The Biden administration came out against it almost as soon as it was announced. Trump harpooned it too and has vowed to kill it “immediately” when he takes office in late January. Bottom line: To get this deal done – it’s officially being reviewed by our Committee on Foreign Investment in the U.S. (CFIUS) and this agency is expected to decide its fate by Christmas – proponents of the Nippon-U.S. Steel transaction must convince the recalcitrant (but probably less so than Trump and Co.) Biden-Harris axis to push regulators to approve the deal so that it can close as planned before 2024 ends.
Good luck with that. But make no mistake about it, I support the merger, and here’s my case for it:
First, although the industry is screaming for consolidation, merging U.S. Steel with this American rival would be a disaster. Not only was Cleveland-Cliffs’ offer woefully (-48%) below that from Nippon, but I also don’t think that Cleveland-Cliffs could pull off a deal at almost any price. Although that company is no longer close to bankruptcy since it probably has been saved by CEO Lourenco Goncalves since he took the helm in 2014, Cleveland-Cliffs is a bad house even in this bad neighborhood.
I’ve reviewed their financials. They’re not doomed but they’re still a zombie company. It may be difficult for them to fund the planned capital expenditures for themselves and for the Canadian company Stelco that they recently acquired. Therefore, Cleveland-Cliffs really isn’t a feasible Plan B to acquire U.S. Steel. Should we be willing to take a big step backward for all concerned, including tens of thousands of American employees, just to do a bad domestic merger? Of course not.
Now here’s the fundamental case for selling U.S. Steel to Nippon. Please take your emotions out of it and hear me out. Although the projections offered by merging companies can be too optimistic and often are published with aggressive revenue and cost “synergies” to prove that together one plus one really equals three, these firms still claim that their deal will have a $1 billion positive economic impact on Pennsylvania, create 5,000 manufacturing jobs, and generate $40 million in state and local taxes. But I need specifics.
What drives this flowery forecast? Nippon has committed to upgrade U.S. Steel facilities in Mon (Monongahela) Valley, Pennsylvania and in Gary, Indiana. All in, Nippon has pledged $2.7 billion to U.S. Steel’s operations and to jobs to support them. Furthermore, this career technology stock analyst will tell you that innovation is everything. I believe that in any industry around the world the top dog is typically the company that best levers technology, and particularly in steelmaking if the latest and greatest efficiencies translate to money saved and made, and it may even be necessary to guarantee the firms’ survival. Glady, Nippon will transfer its technology to U.S. Steel. Elsewhere, particularly from China, our innovations have been stolen.
In 2022, the Biden administration pushed through Congress the CHIPS and Science Act to reshore semiconductor manufacturing through $53 billion in grants and workforce support. Through the U.S. Steel-Nippon merger, the combined companies will immediately boost global steel capacity from 65 to 85 million metric tons per year with 100 million metric tons in sight. At least for we residential and commercial consumers, that could be deflationary when one of our greatest fears in the U.S. is inflation.
On the other hand, the combined U.S. Steel and Cleveland-Cliffs would control essentially 100% of America’s iron ore deposits and up to 80% of the steel sold to our automobile manufacturers. Were this mega-supplier Ford’s only steel source, who do you think would get the better of that negotiation? This domestic combination could be inflationary. It’s Economics 101. Demand chases scant supply and prices soar. This may be good for the oligopolists but bad for us customers.
Too often, particularly during the heat of a political campaign, inflammatory rhetoric can miss the forest for the trees. To the uninformed, the proposed Nippon-U.S. Steel merger looks like an attack by a foreign usurper, whether the Japanese are our allies or not.
U.S. Steel has been an American icon since Andrew Carnegie (a Scottish immigrant) founded it in 1901 by combining his steel company with two others. Wouldn’t selling to the Japanese be sacrilegious? Not if you want to give U.S. Steel and all its constituents a fighting chance. For all the reasons cited above, and to encourage and not repel direct foreign investment in our country, let’s hope that this deal is approved by CFIUS by Christmas, so Trump doesn’t trump it when he’s inaugurated. It’ll mean a lot for this country.