Nippon Steel’s US bet could be ‘catalyst’ unleashing Japan M&A wave

Ten hours after stunning markets with the biggest acquisition in the company’s history, the president of Nippon Steel Eiji Hashimoto had a second surprise: Japan’s biggest steelmaker was still open to “any other good opportunity that comes up”.

His comments on Tuesday followed the announcement of Nippon’s all-cash $14.9bn takeover bid for US Steel, a deal that would make the combined group the world’s third-biggest steel producer.

The deal marks Japan’s largest overseas acquisition this year and signals that the country’s cash-rich corporations are returning to global markets as some of the world’s hungriest strategic buyers, said M&A bankers and lawyers in Japan.

Japanese companies from across different industries have been cautiously planning multibillion-dollar acquisitions as companies seek growth outside of the shrinking domestic market, said three Tokyo-based M&A bankers.

Ken Lebrun, a Tokyo-based M&A partner at Davis Polk & Wardwell, said there were increasing signs that 2024 would bring a long-awaited rebound in Japanese outbound dealmaking after a lull during the pandemic, with interest rates outside Japan beginning their expected decline.

“Nippon Steel’s ambitious acquisition of US Steel may act as a catalyst to encourage other Japanese companies to finally act on their long-term strategic plans to grow overseas,” said Lebrun.

Nippon Steel’s shares closed down 2.8 per cent on Tuesday, as investors assessed the strategic value of the acquisition. Nippon Steel’s offer, a bet on a surge in US manufacturing driven by subsidies, was nearly double the offer from Cleveland-Cliffs in August.

The deal, which needs to be approved by US regulators, is facing opposition from senators and the United Steelworkers, a 1mn-strong union.

On Tuesday, three Republican senators sent a letter to Treasury secretary Janet Yellen asking for the Committee on Foreign Investment in the US, which vets international takeovers, to launch a review of the deal. 

“[Cfius] can and should block the acquisition of US Steel by NSC, a company whose allegiances clearly lie with a foreign state and whose record in the United States is deeply flawed,” wrote JD Vance of Ohio, Josh Hawley of Missouri and Marco Rubio of Florida.

Democratic senators also sent a letter on Tuesday to the Nippon Steel president, complaining that the United Steelworkers union had not been consulted or notified before the agreement was announced,

Japanese companies are under increasing pressure to secure growth overseas through acquisitions because of the contracting domestic market and louder calls from shareholders to deploy capital more effectively. 

Strategic buyers looking for targets in the US enjoy an advantage, said another Tokyo-based lawyer. Chinese companies are not competing for as many American companies, as a result of rising geopolitical tension between Beijing and Washington. Meanwhile, higher US interest rates are causing private equity firms to pull back on deals until the financing environment improves.

Another head of M&A at a global investment bank said the Nippon Steel deal “would inspire other Japanese companies to act”. But he noted that while companies had appetite for outbound acquisitions, several transactions fell through earlier this year as company boards were unwilling to take risks amid the uncertain global macro environment. 

Nippon Steel’s purchase had also taken place against a dramatically changing domestic dealmaking environment, said M&A advisers. Shareholders are pushing for Japanese companies to consider the sale of non-core businesses and domestic consolidation in order to unlock value and become more competitive.

The value of Japanese companies making deals in their home market rose to the highest level since 2005, according to data provider Recof, hitting ¥7.7tn in 2023. That figure was boosted by a sudden flurry of management buyouts and unsolicited takeover bids in December, including the proposed management buyout of publisher Benesse and the unsolicited bid by Dai-ichi Life for the corporate benefits provider Benefit One.

The June revision of Japan’s fair takeover guidelines helped drive the sudden jump in dealmaking, said bankers. In the revision, the Ministry of Economy, Trade and Industry (Meti) called on companies to set up special committees to fully examine incoming bids rather than the historic pattern of senior management rejecting them.

“The market and bankers have begun to focus more on domestic consolidation and domestic transactions and that has been driven in part by new Meti takeover guidelines, rising levels of activism and a weaker yen,” said Koichiro Doi, head of M&A and investment banking at JPMorgan Japan.

While bankers and private equity executives have predicted that management buyouts could become one the country’s biggest drivers of deals in the coming years, there is a growing expectation that Japan might finally start to see elevated levels of unsolicited bids and even hostile takeovers as the longstanding taboo against the practice is lifted by shareholder pressure.

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Japanese companies faced with unsolicited approaches put “too much importance on harmony, which could undermine the international competitiveness of corporate Japan”, said Kensaku Bessho, head of investment banking at Mitsubishi UFJ Morgan Stanley Securities. “The guidelines from METI have tried to find a balance and eliminate the more extreme negative actions.”

Japanese companies do not necessarily perceive a weak yen, which has fallen more than 20 per cent since early 2022, to be a barrier for acquisitions.

“The yen is having an impact, but it is going two ways. There are companies who will think about outbound deals and, in yen terms, will decide everything looks very expensive,” said Nick Wall, an M&A partner at Allen & Overy in Tokyo.

“But on the flip side, some companies are looking at [the weak yen] and deciding that they really need a non-yen revenue stream and can get that via acquisition.”