Japanese suitors are encountering increased challenges in U.S. mergers and acquisitions, as American targets are now more likely to demand substantial termination fees to safeguard against deals collapsing due to regulatory or political hurdles. This shift follows Nippon Steel’s stalled $14.9 billion bid for U.S. Steel, which has highlighted the growing risks tied to U.S. protectionism.
Japanese firms are known for their reputation for reliability, often allowing them to avoid hefty reverse break-up fees in M&A negotiations. However, the increasingly protectionist stance of the U.S., driven by national security concerns and volatile trade policies, has left such deals vulnerable to disruption, forcing Japanese companies to navigate a more complex and uncertain landscape.
According to Reuters, Nippon Steel is challenging the U.S. government’s decision, under President Joe Biden’s administration, to block its acquisition of U.S. Steel on national security grounds. If the challenge fails, Nippon Steel will be required to pay U.S. Steel $565 million, as previously agreed, to cover the costs incurred by the latter during the acquisition process.
Despite this setback, Japanese interest in U.S. investments remains strong, as the U.S. continues to be a key target market, even with the growing likelihood of interrupted deals by external factors, such as regulatory or political interventions, has led to reverse break-up fees becoming a more prominent consideration in negotiations, according to lawyers and bankers.
Comparing to most countries, the rate of closed deals by the Japanese suiters with the U.S is higher. However, U.S. boardrooms are now likely to point to the Nippon Steel deal and demand “protection” in transactions, according to U.S. law firm Skadden partner Kenton King.
“I think what’s going to happen for a while is you will see more reverse termination fees. You’ll see them at levels that aren’t crazy, not 10% levels, but manageable levels that aren’t too scary to people,” King told Reuters.
According to data from LSEG, Japanese merger-and-acquisition deals in the U.S. reached $54.5 billion last year, marking a 35% increase compared to the previous year. The data also revealed that the U.S. accounted for 53% of all overseas targets in Japanese M&A activity, underscoring its significance as the primary market for Japanese investors.
Nick Wall, from the A&O Shearman in Tokyo, opined, “As a seller, when you see deals like that (Nippon Steel’s) being blocked, you’re going to be even more insistent on a break fee and buyers taking that risk. If you can’t get your boards to agree to take on that risk, the deals may fall through.”