Nippon-US Steel Merger Announced but Faces Heavy Opposition
On Dec. 18, the Japanese manufacturer Nippon Steel made a $13.4 billion offer to purchase Pittsburgh-based U.S. Steel. Nippon Steel claimed that the deal would lead to substantial synergies attributed to sharing technologies and increased expansion opportunities. Yet, soon after the deal was announced, it met strong resistance from powerful political and economic forces. President Joe Biden said that the deal deserves “serious scrutiny” due to worries about national security and the U.S. supply chain. Several other political leaders also stated their opposition to the deal. Among them was Senator JD Vance, who announced that he would oppose it in a public statement and Rep. Frank Mrvan who described Nippon Steel as untrustworthy and exploitative.
Nippon Steel’s offer was $55 a share, representing a premium of nearly 40%, as of the trading day prior to the merger announcement when U.S. Steel closed at $39.33. Immediately after the announcement U.S. Steel’s stock price rose to $49, representing a substantial premium over the price pre-announcement, but still not quite as high as the offer by Nippon, showing that investors have concerns about the deal going through, or expect it to take a long time to be completed.
This concern is not unbased, as almost all mergers valued at over $101 million are reviewed by the FTC and the Department of Justice. Generally, this review is to avoid companies gaining a monopolistic advantage and being able to exploit consumers. Often, large companies have to fight against the FTC in extended court battles to be able to complete their intended mergers. A recent example is the merger of Microsoft and the video game developer Activision Blizzard. This merger, which was valued at $67.9 billion, ended up taking 636 days to complete, after Microsoft, which owns Xbox and Xbox Game Studios and develops video games such as the Halo and Age of Empires franchises, was sued by many international agencies claiming that it would have an unfair monopolistic advantage. This was because it may be able to make popular Activision games, such as Call of Duty and World of Warcraft, exclusive to the Xbox platform. The cases ended with Microsoft negotiating numerous constraints upon themselves, which are meant to keep them from having too much power in the gaming industry.
While the Microsoft Activision Blizzard merger was completed in the end, there are numerous other mergers that the FTC successfully blocked, among them the proposed $40 billion merger of Nvidia and Arm, which was initially announced in 2020, and Penguin Random House’s $2.2 billion dollar attempted purchase of Simon and Schuster, which was originally announced in 2020. Arm later went public via IPO in September of 2023 at a market cap of around $52 billion and Simon and Schuster was bought by private equity giant KKR & Co for $1.6 billion. The two aforementioned canceled mergers were terminated due to concerns of a monopoly and this will be a concern for Nippon’s merger with U.S. Steel.
Another concern might be the aforementioned national security risks that several politicians have mentioned. Then Singapore-based Broadcom’s $117 billion proposed merger of Qualcomm was blocked by former President Donald Trump over concerns that the acquisition would help Chinese manufactures gain an upper hand over U.S. manufactures and overtake American mobile technology. Broadcom has since switched its domicile to San Jose, California.
Foreign entities looking to acquire a U.S. company must also get approved by the Committee on Foreign Investment in the United States (CFIUS). This step is in addition to a review by the FTC and Department of Justice and provides an additional barrier that Nippon will potentially have to overcome. CFIUS often cites national security as a reason to be worried about takeovers by companies with strong connections to China, but Japan is a U.S. ally. U.S. Steel even made a statement saying that it welcomes and looks forward to a CFIUS review. As such, several have claimed that any attempts by the Biden administration to block the merger are based more on political motivation than sound economic ones. Wilbur Ross, U.S. secretary of commerce during the Trump administration, described the people arguing against the deal as xenophobic and hypocritical.
There are strong political incentives for the Biden administration to oppose the merger. U.S. Steel is based in Pittsburgh, and Pennsylvania is a swing state in which U.S. Steel employs many people. The steel union, which is considered one of the most powerful in the U.S., has come out against the deal, complaining that they were left in the dark regarding the merger and are concerned about Nippon honoring their existing agreements with U.S. Steel. David McCall, the president of the United Steelworkers International Union said in an interview that he had many concerns, including pension plans and retiree health care, as well as being concerned that Nippon would close some of US Steel’s plants. While Nippon has promised to honor the union contracts, they only run through 2026. As such, it is a strong probability that the Biden administration might want to block the deal to avoid alienating the union members and many people who work in the steel industry in Pennsylvania.
It remains to be seen if this merger will go through, as there are many factors that could lead to it being terminated. Concerns that the merger will be monopolistic and concerns over national security are the two major ones, both of which are increased when politics get involved. It should be noted that the 2024 presidential election is rapidly approaching, and this could be a factor in the political consideration. The imposing election might prompt President Biden to act faster and block the deal in an attempt to gain votes in Pennsylvania, or the merger might be dragged on past the election, as they do often stretch out for over a year, at which point we will be far from the next election cycle and it is likely the merger can be judged absent of any political motives.
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Photo Caption: The U.S. Steel logo
Photo Credit: Adam Jones / Wikimedia Commons
