(Bloomberg) -- Nippon Steel Corp.’s $14.1 billion takeover of United States Steel Corp. was on the verge of collapse on Thursday with US President Joe Biden preparing to block the deal, a move that will leave the Japanese giant hunting for alternative growth options and Tokyo officials examining the diplomatic implications for the two allies.
The outgoing American leader is slated to block the takeover as soon as the Committee on Foreign Investment formally recommends it be scuppered, according to people familiar with the matter. Biden’s announcement could come as soon as this week, they said.
Both companies have suggested they could challenge the decision. US Steel has already warned that a collapse could put thousands of jobs at risk, while Nippon Steel has made extensive concessions over recent weeks, including a fresh $1.3 billion investment commitment.
But neither the steelmakers nor the Japanese government are likely to have much recourse in changing minds in Washington, or success in reversing a decision that is likely to strain relations, just as the two sides seek to restrict China’s access to cutting-edge technology and call for cooperation to curb Beijing’s ambitions in the South China Sea.
“There have been cases in the past where Chinese companies have challenged orders, but in reality the law says that they are not subject to judicial review,” said Rikako Watai, a professor at Keio University Law School. “Once an order is actually issued, it’s very difficult to overturn it.”
The two sides could still come back and refile a redrafted version of their agreement to CFIUS, potentially after the November election. But the prospect of defeat is already likely to prompt Nippon Steel to consider alternative investments to offset a less attractive Japanese market and press toward its annual production target of 100 million tons, advancing its strategy in India and Southeast Asia.
“Even if US Steel acquisition were to fall through, it may not lead to Nippon Steel completely redrawing its business strategy. The direction won’t change,” said Hiroyuki Suzuki, an analyst at Tachibana Securities.
The failure of the deal will also come with diplomatic consequences. Since the takeover bid was announced in December, the Japanese government has refrained from commenting substantively on the deal, portraying it as simply a business matter between the two steelmakers.
But what began as a friendly acquisition proposal has unraveled as the presidential election campaign heated up, with Democratic nominee Kamala Harris declaring US Steel should remain domestically owned, portraying her party as a defender of American companies. Republican candidate and former president Donald Trump has also criticized the takeover.
“This is a demonstration of short-term political thinking only caring about how to win Pennsylvania in November” in the upcoming presidential election, said William Chou, the deputy director of Hudson Institute’s Japan Chair.
Outgoing Japanese Prime Minister Fumio Kishida is expected to visit the US later this month for the United Nations General Assembly, with a possibility of a bilateral meeting with President Biden, according to reports.
“I think they’re looking for labor union votes ahead of the US presidential race,” said Japan’s Digital Transformation Minister Kono Taro, a candidate in an election later this month to decide Japan’s leader. “But I hope the US won’t distort the markets for reasons like this.”
Japanese Chief Cabinet Secretary Yoshimasa Hayashi declined to comment on the reports on Thursday, but did say that cooperation on economic security was “key for both countries.”
A rejection of the deal could damp Japanese companies’ appetite to consider investing in the US, said Akira Igata, a lecturer at the University of Tokyo who specializes in economic security.
“The damage has been done, Other close allies and partners of the US are closely watching this unfold,” he said. “This also raises a larger question about how the national security exceptions are invoked in investment screening. No one believes that there is a legitimate national security concern in blocking this transaction.”
--With assistance from Alastair Gale, Yuki Hagiwara and Yui Hasebe.
(Updates with comments from academic in the last two paragraphs)
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