Nippon Steel’s bid to buy U.S. Steel shouldn’t be a big story, but it is. Donald Trump and Kamala Harris, who don’t agree on much, loudly insist the deal must not go through. Emphatically taking the opposite side, editorialists on the right (e.g. the Wall Street Journal) and on the left (e.g. the Washington Post) endorse the deal. President Biden, who was widely expected to announce he would block the takeover, has instead lowered the political temperature and says he’ll postpone a decision until after the election.
The reasons for this melee are instructive for business leaders in any business. The lessons are partly about politics—those are the hot, headline-making lessons—but the most valuable lessons span decades and show how great companies can crumble, bringing employees, investors, and communities down with them.
The central fact is that U.S. Steel needs help fast. Last year revenue fell 14% and profits fell 65%. CEO David Burritt says if Nippon Steel doesn’t come to the rescue, he will have to close U.S. Steel’s storied Mon Valley Works, which employ more than 3,000 workers, and would probably move headquarters from Pittsburgh to a site near a mill in Arkansas.
For a high-profile controversy, this one is pathetically small. Lay off 3,000 employees? Intel, which is also in trouble, recently announced it would lay off 15,000 employees, but no presidential candidates weighed in. Since January 2023, ExxonMobil has bought a company for $60 billion, Chevron has bought one for $53 billion, and Pfizer has bought one for $43 billion, and few people could name any of the acquired companies. Yet Nippon’s proposal to buy U.S. Steel for just $14 billion has ignited a political firestorm.
Here’s why:
· It’s in Pennsylvania in a presidential election year. The state has more electoral votes than any other battleground state, and many Pennsylvanians proudly see steel as central to the state’s identity—just ask the maniacal fans of the Pittsburgh Steelers. It’s highly plausible that the winner in Pennsylvania will be the next president.
· A union plays a big role. The United Steelworkers union vehemently opposes the deal, fearing that Nippon might not honor the union’s contract with U.S. Steel and might shut down some U.S. production, importing steel from Nippon’s operations in low-cost countries, such as India. Biden’s administration is the most pro-union administration in several decades, and Trump is working hard to attract union members, so Harris and Trump must stoutly support the union’s position.
· The companies’ names evoke nations. “Nippon Steel bids to take over U.S. Steel” sounds painfully like “Japan bids to take over the U.S.” If Trump didn’t oppose that deal, his foundational battle cry—America First—would lose all credibility. Harris would similarly sound traitorous for endorsing the deal. But if Luxembourg’s ArcelorMittal (which is bigger than Nippon Steel) wanted to buy America’s Cleveland-Cliffs (which is bigger than U.S. Steel), would anyone notice?
In understanding this ruckus, those three factors are what lawyers call the proximate cause. The deeper cause goes back over a century. When J.P. Morgan merged several firms to create U.S. Steel in 1901, it was a wonder, the world’s most valuable company. In the first Fortune 500, published in 1955, U.S. Steel ranked No. 3 by revenue, after General Motors and Standard Oil of New Jersey. Now U.S. Steel is No. 227 and falling fast, having dropped 41 places in just the past year.
The problem is the insidious working of what Harvard Business School professor Clay Christensen famously called the innovator’s dilemma. In the 1960s, upstart competitors started using new technology to make low-profit commodity types of steel, and U.S. Steel’s managers were happy to let them have that crummy business. Without those low-margin products, U.S. Steel’s profit margins increased. The managers thought they were mighty smart, and Wall Street agreed. But they were really digging the company’s grave. By the 1990s, those upstart companies had gradually figured out how to make high-quality, high-profit products at low cost, and the big incumbents could never catch up.
Since then, U.S. Steel has been trudging through a long, excruciating demise. It is America’s fourth-largest steelmaker by revenue; the largest steelmaker is one of those upstarts, Nucor, which has a market value four times greater than U.S. Steel’s.
Everyone except its competitors would like this once great American titan to survive, but its long-suffering investors don’t see that happening. They push the stock up when news suggests Nippon Steel’s bid might succeed. Blocking it would only drag out the inevitable. Politicians use the company’s pain for their own purposes, but they aren’t helping U.S. Steel’s investors, suppliers, employees, and communities.
