Nippon Steel's acquisition of US Steel has caused major turmoil, involving not only the industrial sectors of both Japan and the United States, but also the political circles of both countries. The parties themselves have already reached complete agreement, and judging from the current situation, there appears to be no objection from shareholders. If approval from the US government had been granted, this deal would likely have been completed by mid-2024, including the tender offer and closing.

However, the Biden administration in the United States put a halt to this acquisition citing "national security concerns." Behind this lies the intentions of steel industry labor unions, and further behind that appears to be the maneuvering of US competitors (such as Cleveland-Cliffs) who wish to obstruct this acquisition. (Nippon Steel's chairman has personally mentioned Cliffs' interference). Meanwhile, Nippon Steel has no intention of withdrawing from this deal, and US Steel is also appealing that this acquisition is necessary for business continuity.

This case is an extremely symbolic transaction that goes beyond the framework of a simple M&A between private companies, including how the new Trump administration will approach this deal. The outcome of this case will likely have considerable impact on Japan-US relations from 2025 onwards, and by extension, on the global political economy including China. In this column, we would like to regularly monitor and analyze this ongoing deal until the case is settled.
 

■Acquisition Amount of 2.1 Trillion Yen (Enterprise Value Basis) Represents 7x EBITDA Multiple. This Appears to be a "Fair Price."

First, let us examine the appropriateness of the acquisition amount (Charts 1-4). In this acquisition, Nippon Steel aims to invest 2.12 trillion yen on an enterprise value basis including debt, and acquire 100% of US Steel's outstanding shares in cash. This represents approximately 7 times US Steel's 2023 EBITDA of 305.3 billion yen (converted at 150 yen per dollar). US Steel's market value (enterprise value basis) as of December 2023 was approximately 5 times the same EBITDA multiple, resulting in an acquisition premium of 2 points in EBITDA multiple terms, or approximately 600 billion yen (40% premium over market price). Our impression of this acquisition price is that it is "a price that exudes sincerity."

The average multiple of US-listed comparable companies as of December 2023 was approximately 7 times, and US Steel's market valuation (5 times) was lower than the competitor average (approximately 7 times) (Chart 4). However, Nippon Steel added a 40% premium to the market price at that time, presenting an acquisition amount at the level of competitor stock prices.

■US Steel's Performance is on a Downward Trend. However, Debt is Low.

As shown in Chart 1 and Chart 2 at the beginning, USS's revenue and EBITDA are both on a downward trend, at about one-third of Nippon Steel's level. On the other hand, as shown in Chart 3, while Nippon Steel carries massive interest-bearing debt of 2 trillion yen, US Steel has virtually no interest-bearing debt and can even be said to be essentially debt-free. For a typical company, this might appear to indicate high financial soundness and earn positive evaluation. However, considering that US Steel's business is in the steel industry, which is a heavy industry requiring massive equipment, it cannot be viewed in this manner. It can be easily inferred that US Steel holds virtually no assets commensurate with debt, continues production with mostly depreciated old equipment, and faces declining sales and profits.

■Red Lights are Flashing for Future Growth

From this, it can be inferred that US Steel has virtually no capability to manufacture high-quality steel materials (premium steel) necessary for rapidly growing advanced industries. (However, US Steel does have subsidiaries with advanced technology and production capabilities in electric arc furnaces). Despite strong demand for premium steel from remaining US manufacturing industries such as automotive and semiconductors, US Steel's capabilities in this area are limited. On the other hand, US Steel has been at the center of what once supported US manufacturing, and its client coverage extends across all US industries.

Considering this situation, it is easy to imagine that the intentions of Nippon Steel, which wants to access strong US customer base and electric arc furnace technology, and US Steel, which wants to survive by achieving renewed growth in the US through obtaining mass production capabilities centered on premium materials, are very strongly aligned. From an outside perspective, it is rare to see an M&A that appears this "fundamentally sound."

Given these factors, Nippon Steel's stance of attempting to execute an acquisition with a 40% premium over market price for US Steel, which was losing competitiveness with declining sales and profits, can be perceived as "sincere." This M&A can be said to be a deal that "should be completed."

■Key Figures for Deal Completion are Nippon Steel Chairman Hashimoto and Elon Musk

So, who are the key figures for making this deal happen? Our assessment is that it's Nippon Steel Chairman Hashimoto and Elon Musk.
 

First, what kind of executive is Chairman Hashimoto? Based on publicly available information and past interview articles, Chairman Hashimoto gives the impression of being like a samurai warrior within the super-elite group that is Nippon Steel.

Nippon Steel, which symbolizes "steel is the nation," is a company that represents Japanese manufacturing itself, with its predecessor being Yawata Steel Works (semi-governmental, semi-private) established in Kitakyushu in 1901. Tracing the history of Yawata Steel Works further back, its origins can be traced to the Shuseikan project of the former Satsuma Domain (Kagoshima) ruled by the Shimazu family. The Shimazu family's Satsuma Domain was early to study Western technology and worked on manufacturing Japan's first reverberatory furnace. Such technological accumulation eventually led to the establishment of Yawata Steel Works. Nippon Steel, which can be said to represent the history of modern Japan itself, has always been led by super-elites representing their era. Incidentally, Nippon Steel Chairman Hashimoto is from Kumamoto. While not from Kagoshima, many Kumamoto samurai were involved in the establishment and development of the Shuseikan project.

Almost all past presidents of Nippon Steel have been University of Tokyo graduates. Also, the career paths they followed after joining the company seem to have been mainly in human resources and planning divisions. In such a company, Mr. Hashimoto is a Hitotsubashi University graduate who built his career in the overseas business division, which was once considered a side stream. According to Wikipedia, his direct communication with superiors was found troublesome, leading to his transfer to the overseas business division. While Nippon Steel has a strong image as a bureaucratic, elite organization, when Mr. Hashimoto assumed the presidency in 2019, he implemented aggressive measures one after another. He did not hesitate to litigate with Toyota over patents for premium steel sheets for EVs, and in 2021, he made Usiminas in Brazil a subsidiary. This Usiminas project is said to have been led by Mr. Hashimoto (partially divested in 2023).

The persistence in this US Steel acquisition and the strong will to confront the US government are likely largely due to Mr. Hashimoto's leadership. The fact that Nippon Steel, which appeared to have fallen into typical large corporation syndrome, has been revived under the leadership of a "fighting executive" with an "entrepreneurial" spirit (not just "corporate" spirit) provides very important insights for Japanese large corporations. Mr. Hashimoto is undoubtedly the key figure on the Nippon Steel side for closing this deal.

■Elon Musk Can Understand the Significance of This Acquisition

So, who is the key figure for this deal on the US side? While this is complete speculation and prediction, we believe it could be Elon Musk. It goes without saying that this case has already become a political matter. However, President-elect Trump is not a manufacturing industry expert. He is a businessman who succeeded by buying and selling real estate, assets that never increase in quantity. This seems to be based on a "zero-sum game" mentality (you can't win without taking something from someone).

However, Elon Musk is a manufacturing industry executive who holds the world's highest value in automotive and rockets. He would understand better than anyone the technology and production capabilities that Nippon Steel possesses, and the value this acquisition would bring to US manufacturing. At least at present, Trump's trust in Musk is absolute, and if Musk were to make such a recommendation, Trump might agree. The most important person Nippon Steel should target appears to be Elon Musk.

■US Steel's Ticker Symbol is "X"

And this is somewhat of a digression, but this acquisition may have particular meaning for Elon Musk himself. This is because, coincidentally, US Steel's stock ticker symbol is "X". As evidenced by his immediate change of the acquired Twitter's name and service name to "X", Musk's feelings toward this name are extraordinary. According to Walter Isaacson's biography of Musk, the company that became the predecessor to Square that Musk founded in 1999 was X.com.

While X.com was renamed to Square, he had originally wanted to turn X.com into a super app service centered on payments. Years later, when he acquired Twitter, despite needing to implement drastic cost cuts immediately, he promptly executed the costly name change, reflecting his extraordinary attachment to "X". Elon Musk wants to turn the acquired X into a super app service this time.

Also, his space business company is Space"X". And the name of his beloved son, whom he now takes everywhere, is "X Æ A-12". (This is his official name, though the pronunciation is unclear). "X", meaning the unknown, can be said to be an icon itself reflecting Musk's future-oriented mindset and spirit of exploration.

If this deal is completed, US Steel would go private, making the ticker code "X" available. While I lack knowledge about how US ticker symbols are determined, and whether they can be designated or reserved just because they become available, at least if X aims for future listing, whether ticker symbol "X" becomes available would hold considerable meaning for Musk.