A dark day is looming.
Some time in the coming week, US President Joe Biden will reject a $14.9 billion takeover of US Steel by Nippon Steel on unconscionably shaky grounds.
It will mark the end of the era of American free-market capitalism that has brought so much prosperity to the United States and the world. It’s a decision that only makes sense through the lens of crony-capitalism at best and corruption at worst. It’s a hint at what’s to come (and how to invest) in the coming era.
To recap: US Steel has been on life support for decades. It was once a great American company but is now a $7 billion market cap minnow that’s likely worth half of that once the M&A premium falls apart.
In a miraculous bit of deal-making, US Steel has been able to sell itself for nearly $15 billion and wrangled all kinds of promises to maintain employment and invest $2.7 billion in rebuilding aging and uncompetitive US Steel factories in the heart of the rust belt.
This would be a huge win for the workers at the plants set to be modernized — removing the threat of closure in 2026 — and a win for the US as its steel-making capacity is rebuilt by a company that’s been able to thrive despite Chinese steel dumping globally.
The justification for killing the deal is utter non-sense. It follows some kind of bizarre logic that Japan is an enemy state or will somehow sabotage US operations despite paying a massive premium to acquire them along with enormous investments.
There is one person who wants the deal to fail: Cleveland-Cliffs CEO Lourenco Goncalves. Why? He wants a virtual monopoly on blast-furnace steel made in the USA. He doesn’t want to have to compete with an operator like Nippon Steel.
Lourenco Goncalves
In the US in the 2020s, when you can’t win, you cheat.
As the Pittsburgh Post-Gazette writes:
It’s really simple: Cleveland-Cliffs doesn’t want to have to compete with Nippon Steel.
His sentiment is understandable. Given the choice, Westinghouse would have never allowed in foreign televisions in the US in the 1980s but that was a time when American believed in capitalism. The result was one of the great industrial triumphs of all time — Americans can get 75-inch televisions for $400.
Now I get the sentiment around keeping Chinese industrial goods out of the US. You don’t want someone flooding goods into your country that destroys your industrial capacity and leaves you as a client state.
But this is just the opposite: Nippon is building capacity in the US. That’s exactly the kind of thing that Donald Trump has said he wants foreign companies to do: If you want to sell in the US, build your factory in the US.
The US wants that so badly that it’s paying a company from South Korea (Samsung) and one from Taiwan (TSMC) to build chip-making plants in the US. Yet a company from Japan that’s using its own money can’t due to national security? It’s absurd.
The Washington Post has a hint on what’s really going on:
“In several telephone calls with investors this year, Lourenco Goncalves, Cleveland-Cliffs’s CEO, “repeatedly asserted that the CFIUS process would be a sham used by the President as cover to kill the transactions. Lourenco Goncalves repeatedly has asserted that he and David McCall have been assured of this by senior Administration officials with whom they have spoken directly,” the letter said.”
Everyone who has taken a hard look at this deal is unequivocal: It should get done under the law and because it’s in the US national interest and benefits workers. Bloomberg, the NYT, the WSJ, the Pittsburgh press and 20 mayors in US Steel country have all urged approval of this deal. There is also evidence that the vast majority of steel workers support it even if United Steelworkers (and former Cleveland-Cliffs employee) McCall curiously doesn’t.
Still, the market is pricing in around a 10% chance Biden approves it.
US Steel $X weekly
This is the landscape America is operating in now. Tesla shares rallied 70% after the US election and it’s not because the new administration will have E-friendly policies (just the opposite) but because Elon and Trump have become fast friends and the market knows that legislation and political favors in the US are for sale. That’s exactly how it works in India, where the companies of those friendly with the government soar on election results.
There was hope this deal would pass after all the election rhetoric died down because there was faith that America still believed in the ideals the enriched it. But cronyism and corruption are undefeated in world history and that the Shining City on a Hill is no longer reserved for the best, but for the best-connected.