For some firms that lose an auction to acquire a company, plan B is to blow up the auction altogether, wait for chaos to ensue, and then hope that chaos results in the valuation of the company being sold falling far enough that the company can purchase it on the rebound. U.S. steelmaker Cleveland Cliffs appears to be attempting just such a strategy.
In 2023 U.S. Steel’s management effectively put the company up for sale. Numerous entities made bids, including domestic competitor Cleveland Cliffs, among others. Ultimately, the highest bid came from Japanese steel producer Nippon Steel with a bid that was ultimately nearly 60 percent higher than Cleveland Cliffs.
Shareholders overwhelmingly approved the sale to Nippon, but the sale faced a thicket of political obstacles to the sale, many of which Cleveland Cliffs abetted. For starters, the leadership of the United Steelworkers Union proved to be intractably opposed to the merger (even though its members apparently felt otherwise) and Cleveland Cliffs CEO Lourenc Goncalves appeared to have encouraged it to do so on the implicit promise that the alternative--a merger with Cleveland Cliffs--would be better for its members.
However, there is no reason to believe such a thing, or that a merger between Cleveland Cliffs and U.S. Steel would pass muster with the regulatory authorities. A combined Cleveland Cliffs--U.S. Steel would have a domestic monopoly in rolled steel, which car companies depend on for auto production. Even a more laissez-faire Federal Trade Commission than the neo-Brandeisian interventionism espoused by Lina Khan couldn’t swallow such a transaction.
It is also unclear whether Cleveland Cliffs could finance such a transaction: Unless it could exploit a monopoly over rolled steel (again, which was not going to happen) there seemed to be no plan to use the combined company to grow revenues enough to finance the acquisition costs--unless those costs were well below what Nippon Steel offered.
Nippon Steel, on the other hand, hoped to use its acquisition to increase its output in the U.S. to compete against Cleveland Cliffs more intently in supplying steel to the automotive industry.
Ultimately, the Committee on Foreign Investment in the U.S. failed to give unanimous approval of the transaction in a justification that appeared to have misconstrued the committee’s mission, and President Biden seized on it to reject the merger.
Nippon Steel has filed suit both against the government for not following the law delineating the powers of CFIUS as well as Goncalves and United Steelworkers president Dave McCall for what it alleges to be anti-competitive and racketeering activities illegally designed to prevent any party other than Cleveland Cliffs from acquiring U.S. Steel. It further alleges these actions to be part of an illegal campaign intended to allow Cleveland Cliffs to monopolize critical domestic steel markets.
It appears that Goncalves and Cleveland Cliffs may not be done with their attempts to sabotage U.S. Steel. Late last month Ancora Holdings, an activist hedge fund based in Cleveland, Ohio, announced it would initiate a proxy fight against the company and seek to replace its CEO and board of directors. It stated that should it succeed in its efforts it would not entertain any acquisition proposals.
The takeover fight is notable both because Ancora holds well under one percent of the outstanding stock of U.S. Steel--giving it very little leverage in this fight--and three of its proposed board members have ties to Cleveland Cliffs. That it insists on claiming the difference between the two companies’ bids was just $1--which ignores the sharply higher bid and investment commitment subsequently made by Nippon Steel--provides a hint as to where its allegiances are.
It is clear that a U.S. Steel--Nippon Steel combined company would reduce costs and increase domestic steel production. That the federal government would not want such a thing to occur beggars belief. And the fact that its rivals have abetted the government in its contortion of the law to stop it from happening means that it should be reversed posthaste.
