Nippon Steel’s US Setback: A Wake-Up Call for Japan Inc’s Foreign Ventures

By Kane Wu, Yantoultra Ngui and Miho Uranaka

HONG KONG/TOKYO – Japanese companies are expected to take a closer look at overseas acquisitions following U.S. resistance to Nippon Steel’s $15 billion bid for U.S. Steel, according to industry advisors.

One prominent political figure, considered a frontrunner for the next Japanese prime minister, expressed to reporters that a U.S. move to block the deal would be "very unsettling" and could undermine trust between the two allies.

Reports indicate that the White House is on the verge of announcing that President Joe Biden plans to block the acquisition on national security grounds.

Advisors noted that both asset buyers and sellers are already taking additional time to analyze political trends and assess whether targeted industries might raise concerns of governmental intervention. A banker based in Tokyo mentioned that Japan, as one of Washington’s closest allies, had previously experienced minimal issues with U.S. regulators. Japanese firms have been exploring overseas assets due to a decline in the yen’s value and a stagnant domestic economy.

However, last week, the Committee on Foreign Investment in the United States (CFIUS) informed Nippon Steel and U.S. Steel that their proposed merger could pose national security risks by jeopardizing the steel supply necessary for essential U.S. projects.

In the aftermath of a surge in acquisitions by Chinese companies in the U.S. approximately a decade ago, CFIUS has heightened its scrutiny of foreign investments.

Advisors opined that the situation regarding the Nippon Steel deal is further complicated by the impending U.S. presidential election, as many lawmakers from both parties have expressed opposition to the acquisition. They noted that this resistance might diminish after the elections in November.

Euan Rellie, the New York-based co-founder and managing partner of an investment advisory firm, remarked that regardless of the election outcome, there would be pressure from financial markets to approve such deals.

Despite this, a senior mergers and acquisitions banker in Tokyo, who wished to remain anonymous due to the sensitive nature of the discussion, indicated that Japanese companies are likely to be "really, really concerned and shaken up" by the ongoing Nippon Steel situation. Should the deal fail, there could be increased break-up fees, prompting buyers to exercise greater caution.

Data shows that outbound mergers and acquisitions (M&A) from Japan to the U.S. have surged nearly 160% this year, amounting to $32.1 billion, which represents 71.4% of Japan’s total outbound M&A value—compared to 38.7% the previous year.

A senior partner at a prominent law firm emphasized that the CFIUS decision in this case should not alter the ongoing policy trend favoring "friend-shoring" or Japan’s vital role as a key ally in the CFIUS review process.

Last year, Japan witnessed a 45% increase in outbound acquisition deal value, reaching $65.8 billion, as companies sought to diversify their revenue streams amid a deflationary domestic economy.

Nippon Steel’s proposed takeover of U.S. Steel would rank as the third-largest acquisition of a U.S. firm by Japanese corporations over the last decade, following the $21 billion acquisition of Speedway in 2020 and the $16 billion purchase of Beam in 2014.

Rellie remarked that blocking cross-border M&A would be "bad economics and bad policy," predicting a "tidal wave" of Asian clients seeking to invest in U.S. and European assets.