Wachtell Lipton: Perseverance, Politics and Pennsylvania: Lessons from the U. S. Steel Saga

 

Eighteen months after signing, the highly publicized U. S. Steel – Nippon Steel deal reached a successful conclusion, closing on June 18 and proving that cross-border transactions continue to be not only viable, but also in many cases the most attractive option. The blockbuster deal faced an unprecedented combination of challenges from many quarters, including the political environment, a competitor and failed suitor bent on scuttling the deal, hostility from senior union leadership, and an activist attack. In a challenging M&A environment, the parties proved that strategic and financial logic, when supported by careful planning and a strong commitment to the transaction, can overcome any number of challenges, both domestic and foreign.  Some useful lessons:

A transaction may face strong opposition, despite being a win for all key stakeholders:  The U. S. Steel – Nippon Steel combination will deliver resources, advanced technology and durable, well-paying domestic jobs, allowing U. S. Steel to grow and prosper.  Stockholders also benefited from one of the highest deal premia ever paid in an industrial transaction, a reflection of the successful turnaround recently executed by the U. S. Steel Board and management.  None of this was enough to insulate the transaction from becoming a political football, drawing opposition from state and federal elected officials and candidates from both political parties. 

Trust your judgment and focus on the long-term:  The U. S. Steel Board and management team never wavered from their focus on delivering the transaction.  The chattering classes said the transaction was dead.  The Board was neither deterred nor distracted, pursuing a mix of strategies, including litigation, active public messaging and continued outreach to key constituencies.  Others do not have all the facts a well-informed board and management team will have, and directors and management should not let outside judgments replace their own, well-informed view.  Focus on the long game.    

Regulatory contract terms matter, but strategic alignment and deal logic dominate:  Transacting parties need to be prepared for regulatory scrutiny, even if the risk is considered low.  In the current global environment, politics or other exogenous factors can easily come into play, often in unexpected ways.  Not all partners will be as fully committed as U. S. Steel and Nippon Steel, especially when deals take longer than expected.  Contractual efforts commitments by parties and outside dates will be critical when deals are tested, and must be considered with respect to foreign direct investment clearances, including our own CFIUS regime, in addition to antitrust requirements.  When unexpected barriers appear, the strength of the strategic and financial logic of the deal are paramount.  Such developments require innovative (“unprecedented”) solutions, often not capable of being addressed in advance in deal documentation nor anticipated at signing—strategic alignment and industrial logic may be determinative.

Flexibility and innovation are key:  The tremendous flexibility and creativity exhibited by U. S. Steel and Nippon Steel were critical in reaching a positive resolution with the government, including a mid-process pivot to work with a new presidential administration.  In addition to a national security agreement, the transaction resulted in a first-of-its-kind “golden share,” with highly customized, specific rights issued to the U.S. government.  

The Administration wanted a strong mechanism to complement commitments being made in the national security agreement also being agreed by the parties as part of the CFIUS process, and to reinforce the continued American character of U. S. Steel.  The golden share provides the government with the right to appoint one director, and affords the President or his designee consent rights over specified matters, including reducing the capital commitments made by Nippon Steel, changing U. S. Steel’s name or headquarters, transferring jobs abroad, and certain decisions involving closing or idling of facilities, trade and labor matters and sourcing outside the United States. These rights are in addition to a commitment to a board of directors comprised of a majority of U.S. citizens.  Nippon Steel and U. S. Steel were comfortable granting the golden share and these consent rights as they align with their go-forward plans and strategy.  Accordingly, the golden share became a “win-win” that facilitated the path to closing when more traditional mechanisms had failed to do so. 

Communications and transparency matter:  U. S. Steel approached its internal and external communications transparently and candidly.  Employee communication was essential, but shareholders, customers, business partners and politicians were all critical constituencies that made a difference in the outcome.  A well-designed, clear, cogent messaging campaign, through both traditional and innovative media, achieved the necessary goal of cutting through the widespread misinformation about the transaction, speaking with one voice and gaining the enthusiastic support of much of the rank-and-file union membership, who became effective advocates for the combination.

Hard deals can produce outstanding results:  The current deal environment is described as “challenged,” or worse, by many pundits.  The U. S. Steel – Nippon Steel transaction proves once again that difficult transactions will succeed with the right partners, appropriate contractual protections and careful management of the interim period and drive to close.