Rejecting Nippon Steel Would Do More Harm Than Good

There's this very memorable episode of "The Office" when Michael declares bankruptcy, not realizing this won't get him out of the financial hole he's dug for himself. Later, his accountant needs to explain that simply declaring bankruptcy doesn't actually do anything.

I got flashes of this recently when I saw the news that Cleveland-based Ancora Holdings had declared not bankruptcy but war on the proposed merger between Tokyo-based Nippon Steel and Pittsburgh-based U.S. Steel.

Ancora recently acquired a stake in U.S. Steel. Under threat of a proxy fight, Ancora demands the company pursue a turnaround rather than a merger and will go the mattresses to stop a merger with any company, "domestic or foreign."

This is an interesting phrase to use. In mid-2023, Cleveland-Cliffs Steel offered to acquire U.S. Steel for $7.3 billion, an offer quickly dwarfed by Nippon Steel's $15 billion bid. The fight for the future of the company rose so high that Joe Biden and Donald Trump weighed in during the presidential election, both declaring opposition to Nippon Steel's offer.

But there are several problems with Ancora's declaration of war, which will be bad news for investors in the short term and terrible for U.S. Steel in the long term.

The Problems

Ancora insists that U.S. Steel shouldn't make this deal and that its leadership needs replacing. Since U.S. Steel named David Burritt its CEO in 2017, Ancora wrote last month in an open letter to the Board of Directors of U.S. Steel, "the Company's total shareholder returns have underperformed peers by a staggering 227.7%."

Ouch! But note the fine print: These stats are from when Burritt started in 2017 to just August 11, 2023. We all have a different approach to how we read the financial tea leaves, but none of us make buy or sell choices based on data that's 18 months out of date.

Indeed, since the bidding war for U.S. Steel started 18 months ago, U.S. Steel's value has gone up about 66% while Cleveland-Cliffs' has gone down 17%.

So that's problem one: fuzzy math. Problem two is Ancora's conflict of interest.

Cleveland-based Ancora and Cleveland-based Cleveland-Cliffs Steel seem to be close in more than just geography.

Given this, one wonders if Ancora's unexpected proxy fight is ultimately being orchestrated by Cleveland-Cliffs, like when Ancora launched another proxy fight in 2024 within the railroad company Norfolk Southern. Cleveland-Cliffs publicly backed the hedge fund's efforts.

Moreover, Ancora's list of new directors for U.S. Steel's new board includes several individuals tied to Cleveland-Cliffs:

Robert P. Fisher Jr. served on the board of directors of Cleveland-Cliffs until May 2024.

Alan Kestenbaum, proposed by Ancora as the new CEO for U.S. Steel, most recently served as the CEO of Stelco — a Canadian steelmaker that Cleveland-Cliffs acquired in 2024.

Roger K. Newport served as the CEO of AK Steel, another steelmaking company that Cleveland-Cliffs bought in 2020. He also served as the chairman for the American Iron and Steel Institute, before Cleveland-Cliffs CEO Lourenco Goncalves succeeded him.

It seems like Ancora is playing a long game to scare away the Japanese investors — and their much more lucrative offer — and then quietly to merge with Cleveland-Cliffs after the attention has died down.

Problem three is Ancora doesn't really have the leverage to go the war it declared: The ruthless hedge fund owns only 0.18% of U.S. Steel.

Conclusion

It's baffling that such furor has been raised over a deal that's so cut-and-dried: Nippon offered almost double what Cleveland-Cliffs did. There's no short-term reason for investors to accept half the money they could have.

Moreover, if they don't, the long-term consequence of rejecting Nippon's money and management will be dire. Burritt has made clear that without the Nippon deal, thousands of good-paying jobs will be jeopardized, leading to "unavoidable consequences."

This is why local leaders, unlike politicians in Washington, support the Nippon deal.

Rep. Dan Meuser, R-Penn., said rejecting the deal "sacrifices Pennsylvania's economic future for political friends, leaving thousands of families and communities uncertain about their future."

Richard Lattanzi, the Democrat mayor of Clairton, Pennsylvania, said if the deal doesn't get done, "Mon Valley is dead."

Those investors looking to make money in the short term or the long term with U.S. Steel need to reject Ancora's saber rattling. No one wants an American manufacturing giant to have to declare bankruptcy.

Jared Whitley is a longtime politico who has worked in the U.S. Congress, the White House and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. Read Jared Whitley's reports — More Here.