Cross-border mergers and acquisitions (M&As) are a crucial strategy for companies aiming for sustainable growth in diverse global markets. This approach allows firms to acquire cutting-edge technologies, expand their market presence, and optimize costs. However, a recent surge in investments from China and other emerging countries has raised alarms about the risks of leaking confidential information and technologies, as well as the dominance of key infrastructure, which pose threats to national security in various countries.
The Committee on Foreign Investment in the United States (CFIUS) plays a critical role in safeguarding national security. CFIUS oversees foreign investments to prevent the transfer of critical technologies, infrastructure, and information to foreign entities. Recently, however, there have been concerns regarding the political utilization of CFIUS reviews of cross-border transactions in the United States. The recent case involving Nippon Steel Corporation’s attempt to acquire United States Steel Corporation highlighted concerns over CFIUS being used for political purposes. Denying an acquisition on political grounds undermines the integrity of the process and creates uncertainty for future cross-border deals, which may potentially discourage foreign investment, particularly in key industries.
To understand the context of CFIUS, we should look back at its recent developments. In 2018, President Trump signed the Foreign Investment Risk Review Modernization Act (FIRRMA). This act aimed to (1) strengthen and broaden the scope of investments requiring CFIUS review and (2) enhance the efficiency, effectiveness, and transparency of the review process, thereby codifying previous CFIUS operations. Following a CFIUS review, if a deal poses a potential threat to national security, the President has the authority to cancel the transaction or impose conditions to mitigate the risks. But not all foreign investment deals require CFIUS review; only three categories necessitate scrutiny: (1) investments that result in foreign control of a US business (covered control transactions), (2) certain investments in US businesses dealing with critical technologies (covered investments), and (3) investments in specific real estate transactions (covered real estate transactions). While not all transactions will be reviewed by CFIUS, those where parties submit for review, or where CFIUS independently determines that a review is necessary, will undergo review.
A key deal that highlighted the political implication of current cross-border transactions is the acquisition of US Steel by Nippon Steel. Nippon Steel, the world’s fourth-largest steel producer, is renowned for its advanced manufacturing processes. On December 18th, 2023, Nippon Steel proposed an acquisition of US Steel with an all-cash transaction at $55.00 per share, representing an equity value of approximately $14.1 billion, in addition to the assumption of debt, resulting in a total enterprise value of $14.9 billion. Established in 1901, US Steel has been one of the most prominent steel makers, holding the second largest production volume in the US and playing a significant role during the Second World War. However, since the 1970s, the company has faced increasing competition from cheaper steel imports, resulting in a decline in competitiveness and recent financial struggles. As a result, US Steel has been actively marketed for sale, prompting Nippon Steel’s acquisition proposal. Yet, the United Steelworkers (USW), a union representing workers in the steel industry, has expressed concerns about the acquisition of a US company by a foreign entity. This issue was closely intertwined with the political landscape of the 2024 presidential election, further complicating the global deal. Notably, President Biden, former President Trump, and Vice President Kamala Harris had all publicly opposed the acquisition, arguing that US Steel should remain under American ownership. This position held particular significance in key swing states like Pennsylvania, where US Steel is headquartered. It was also significant in other Midwestern steel producing states like Ohio. The USW, which represents approximately half of US Steel’s employees, was poised to play a pivotal role in these battleground states during the 2024 election, making their support highly sought after by both presidential candidates.
While many arguments suggest that the Nippon Steel deal poses national security risks, a closer examination reveals that these risks are unlikely to materialize. First, there are concerns regarding Nippon Steel’s operations in China, particularly its past partnership with Baoshan Iron & Steel, a state-owned firm linked to the Chinese Communist Party. However, it is essential to note that Nippon Steel exited this partnership in August 2024 and has been progressively reducing its scale of business in China since 2021, resulting in a minimal market share in the region. Consequently, it can be inferred that the connection between Nippon Steel and the Chinese Communist Party is becoming increasingly insignificant. Second, there are worries about potential job and production relocations outside of the United States following the acquisition, which could impact economic security and industrial capabilities. However, Nippon Steel has made commitments to not lay off employees or close plants as a result of the transaction. Additionally, it has also pledged to invest $1.3 billion to upgrade the Mon Valley Works facilities in Pennsylvania and $300 million to improve a blast furnace at Gary Works in Indiana. Finally, it is worth noting that Japan is one of the United States’ closest allies and an economically robust nation. Critics of the potential risks associated with the deal, such as Edward Alden, a Senior Fellow at the Council on Foreign Relations, contend that acquiring a US company by a close ally does not inherently pose clear security threats.
If the acquisition of US Steel by Nippon Steel ultimately fails, the repercussions could be significant. US Steel has struggled with declining performances, experiencing decreases in revenue, EBITDA, and net income since 2021, with an EBITDA growth rate of –49.41% and a net income growth rate of –64.54% in 2023. If the deal collapses, it could lead to three major consequences: (1) There may be potential plant closures at Mon Valley Works in Pennsylvania and the mill in Indiana, which would affect employees in those locations; (2) US Steel’s corporate headquarters might be relocated out of Pennsylvania, imposing considerable burdens on current employees; and (3) there could be a continued shift in production to lower-cost sites, such as US Steel’s Arkansas factory.
Estimated Impacts in the Event of Acquisition Failure:
- The closure of the two plants will potentially impact 7,300 employees, representing 52% of the total workforce of US Steel’s US operations.
- The closure is expected to affect 53% of US Steel’s production volume (based on production capacity), resulting in an estimated $9 billion decrease in net sales by US Steel.
- US Steel’s Pennsylvania headquarters currently employs approximately 800 individuals, who may be affected by the relocation.
- The anticipated decline in sales is projected to account for about 5% of the entire steel and iron industry in the US, potentially leading to a deterioration in the sector’s competitiveness.
In conclusion, if CFIUS is employed for political purposes, the failure of the US Steel acquisition by Nippon Steel would have detrimental effects on US Steel and the entire steel industry in the United States, potentially undermining the industry’s competitiveness. While CFIUS has extended the review process until after the presidential election, it is vital that political considerations do not overshadow sound economic rationales. Denying this acquisition lacks justification, as both companies and their countries stand to gain from the deal.