The Strange (and Revealing) Steel Deal
Like so much these days – too much – the acquisition deal between U.S. Steel and Nippon Steel has gone to the courts. President Joe Biden has blocked what many of the parties involved have described as a “friendly” takeover. The president contends that the acquisition puts national security at risk, a dubious claim given that his chief advisors – the secretaries of Defense, State, and Treasury – seem to share none of his security concerns. Now both Nippon Steel and U.S. Steel are suing to block the president’s block, claiming in essence that Biden has conspired with United Steel Workers (USW) president David McCall and Cleveland Cliffs chief executive Lourenco Goncalves to subvert the approval process and unfairly kill the deal. Some of these goings-on are straightforward. Much is strange.
The straightforward bits lie with the deal itself. U.S. Steel has long needed help. It has been struggling for years and has suffered nine quarters of falling profits. It has neither the capital nor the credit to finance the investments in modernization it needs to stay competitive. The Cleveland Cliffs steel company made a bid to acquire U.S. Steel in 2023, but Nippon offered a much more attractive $14.1 billion for the firm and all but sealed the acquisition toward the end of last year.
Aside from offering an attractive price for shareholders, Nippon addressed union concerns by offering job guarantees and pledging to abide by all existing contracts. As a special appeal to the union rank and file, Nippon also offered a $5,000 bonus to employees. To quell any concerns in Washington about foreign ownership, Nippon further promised to strengthen both the company and the industry with a $2.7 billion investment in modernization. By giving Washington greater-than-typical access to board and a veto on any decision to cut back on production capacity, the company all but guaranteed that it would sustain current production levels, at the very least.
Not surprisingly, the proposed arrangement has wide appeal. Shareholders like the price. U.S. Steel CEO David Burritt has endorsed the deal enthusiastically. Much of the rank-and-file union members in the company’s employ liked both the bonus and the job security that they did not enjoy in a company that seemed otherwise heading toward bankruptcy. In Japan, Prime Minister Shigeru Ishiba and Trade and Industry Minister Yoii Muto supported the deal. Twenty mayors and community leaders in Pennsylvania and Indiana wrote to President Biden late in December to encourage him to approve the acquisition.
Reasoning behind the objections is a bit murkier. President-elect Donald Trump has always opposed the acquisition, in part as a reflection of his bias toward economic nationalism but mostly because he sees the deal as unnecessary; he claims that proposed tariffs will protect U.S. Steel, among others, and presumably give it the cash flow to make its own investments in modernization. Given Nippon’s pledges on job guarantees and existing contracts, it’s hard to understand USW president McCall’s strenuous objections; perhaps they are motivated by a concern that, over time, Nippon will bargain harder with the union than U.S. Steel could, or, more likely, that it will shift the locus of operations away from union-dominated facilities.
Motivations at Cleveland Cliffs likely draw on several considerations. Another bid is impossible now. Today, Cleveland Cliffs has a lower market capitalization than U.S. Steel. Jonah does not swallow the whale. But surely, Cleveland Cliffs CEO Goncalves has no interest in Nippon creating a well-capitalized and thoroughly modernized domestic competition. Goncalves no doubt also reasons that in the absence of the Nippon deal, U.S. Steel might well go bankrupt, allowing his firm to buy up the pieces it wants at bargain prices. With the old U.S. Steel facilities in hand, Cleveland Cliffs would control 100% of domestic U.S. blast furnace production, 100% of the domestic steel used in electric vehicle motors, and between 65% and 90% of the domestic steel used in all vehicles. And it would have all this behind the new shield of President Trump’s tariff wall.
President Biden’s decision is more mysterious. Of course, there is his well-established loyalty to union power. That might make him side with USW president McCall despite the enthusiasm for the deal shown by some union rank and file. Otherwise, his claims of national security are a bit of a red herring. His statement nixing the deal mentioned “foreign control” and “supply chain” concerns, but Nippon’s pledge not to cut production without Washington’s approval removes any concern that the foreign ownership could starve this country of vital steel products. Otherwise, the company’s commitment to invest in modernization actually promises to boost domestic steel production capacities and efficiencies. After all, it is not as if the company could take the facilities from Pennsylvania and Indiana and carry them across the ocean. Indeed, in a national emergency, Washington could dictate how the facilities are used, no matter what the management in Tokyo wanted.
Since it is a fool’s game to handicap any legal proceeding, the fates of all these players remain uncertain. What is clear is that a blocked deal will likely create something close to a domestic steel monopoly in the United States. Then the next legal proceeding will emerge from the antitrust agencies in Washington. Steelworkers might lose jobs – but the lawyers will get lots of billable hours.
