It should come as no surprise to anyone who has been paying attention that President Joe Biden issued an order prohibiting the acquisition of Pittsburgh-based U.S. Steel Corporation by Tokyo-based Nippon Steel Corporation. The corporate offices of both companies have “condemned” Mr. Biden’s decision. President-elect Trump has indicated that he would treat the transaction with similar scrutiny as well. The saga of this once-great steel giant can be traced through the twentieth century. The U.S. government, on multiple occasions, extended a life preserver to this iconic brand, which is synonymous with the American industrial revolution itself.
Yet by 2023, more than a century after it was founded, U.S. Steel sought to be acquired by another firm to save itself. Potential offers from other domestic steel companies were not as attractive, and potential antitrust issues were raised after extensive past consolidation in the industry. Enter Nippon, hailed by proponents of the deal as a savior that poses no national security threat because it is from Japan, an American ally. Nonetheless, Mr. Biden’s order explicitly details the perceived national security concerns raised by the merger.
The financial reality remains, however, and U.S. Steel needs a solution. That white knight could come in the form of American private equity (PE), the competencies of which include takeover and turnaround. Certainly, the magnitude and complexity of such a proposal should not be underestimated. However, if carefully crafted, a PE transaction could achieve the outcomes of both keeping the company operating and maintaining domestic control, the desired goal of U.S. officials.
The proposition poses the question of why a PE firm would be financially motivated to engage in such a transaction. Tax benefits and policy measures have both been deployed previously to shore up American steel firms. In 1981, President Ronald Reagan reduced the business tax burden on U.S. Steel, enabling it to recover capital investment costs in a faster time frame. He also instituted a government policy on steel, providing a limited solution for the industry, which included surge protection and identification of unfair foreign trade practices. Critics argued that U.S. Steel executives used cost savings for measures other than the viability of steel production.
Turning to the present situation, tax benefits would incentivize investment by a domestic PE firm or a group of them. They are more than capable of paying the quoted $14.9 billion (cash and debt) cost. The incoming Trump administration could work with Congress to develop a strategic investment credit. Similar to tax credits given to other industries to modernize production, these credits would motivate acquisition and subsequent transformation. In order for steel production to become viable and sustainable in the long term, a greater leap into the digital age will be required. A potential PE firm acquisition should not be viewed simply as a crutch to get to the next crisis of finance for U.S. Steel. It would have to be a restructuring of the operation done in conjunction with the workers who are the backbone of the industry. It could then be presented as a going private alternative to the shareholders for consideration.
Financial firms have made profits all over the world. A U.S. Steel turnaround would be an opportunity to return goodwill to the domestic workforce while also making a return on investment. Incoming Trump administration officials have extensive experience in PE. They could usher in a new era for domestic steel. Every single industry is on the precipice of existential change pending the imminent integration of technologies like artificial intelligence and quantum computing. As steel develops a new incoming workforce, domestic technology training and capacity need to be part of the incipient strategy.
Only a bold approach can keep U.S. Steel under U.S. oversight. The resources of PE firms were not a comprehensive option in the 1980s or 1990s when steel continued to seek government solutions. Now, however, the U.S. private sector has the resources to solve an immediate predicament and can be motivated to find a longer-term pathway. Nippon is a globally trusted name and the fourth-largest producer of steel in the world. It will survive a potential break-up of this transaction. If U.S. Steel can be transformed into an updated, future entity, it can work with partners around the world like Nippon to mount a strong competitive advantage against the threat of Chinese state-owned steel.
Manisha Singh is Principal at Sunstone Strategy Group and former Assistant Secretary for Economic and Business Affairs at the U.S. Department of State.
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