Japanese Firms Cautious After U.S. Blocks Nippon Steel’s Deal

By Kane Wu, Yantoultra Ngui and Miho Uranaka
HONG KONG/TOKYO (Reuters)
Japanese firms are set to scrutinize overseas deals more closely following U.S. resistance to Nippon Steel’s proposed $15 billion purchase of U.S. Steel, according to advisors.

One potential successor for the next Japanese premier expressed that any U.S. move to block Nippon Steel would be “very unsettling” and could damage trust between the allies. Recently, reports suggested that the White House is nearing a decision to prevent the U.S. Steel deal on national security grounds.

Both buyers and sellers of assets are already dedicating more time to analyzing political trends and assessing whether targeted industries might provoke state intervention, a Tokyo-based banker mentioned.

Japan, being one of Washington’s closest allies, has enjoyed a smooth relationship with U.S. regulators recently, as companies have been evaluating foreign assets due to the weakening yen and stagnant domestic economy.

However, the U.S. Committee on Foreign Investment (CFIUS) indicated that the proposed deal presents national security threats by impairing the steel supply essential for critical U.S. projects. CFIUS has intensified its scrutiny following a surge in acquisitions by Chinese companies about ten years ago.

The Nippon Steel deal’s complexity is further heightened by the U.S. presidential election, with many lawmakers expressing opposition. However, it is believed that this apprehension may ease after the elections, with market pressure likely influencing the winning candidate to accept such deals.

Despite the potential fallout from the Nippon Steel situation, Japanese companies remain concerned. Should the deal fail, it could result in increased break-up fees and a more cautious approach from buyers.

Outbound mergers and acquisitions (M&A) from Japan to the U.S. have surged nearly 160% to $32.1 billion this year, accounting for 71.4% of Japan’s total outbound M&A value, up from 38.7% the previous year, according to Dealogic data.

Japan witnessed a 45% rise in outbound acquisition deal value last year to $65.8 billion, as companies sought alternative revenue streams to mitigate the effects of a deflationary domestic economy. The Nippon Steel’s attempted acquisition of U.S. Steel could have been Japan’s third-largest purchase of a U.S. firm in a decade, following $21 billion for Speedway in 2020 and $16 billion for Beam in 2014.

Euan Rellie, managing partner at BDA Partners, argued that blocking cross-border M&A would result in “bad economics and bad policy,” predicting a “tidal wave” of Asian clients targeting U.S. and European assets.