US Steel forges ahead on news of $14.1 billion acquisition

Key Points

• Nippon Steel offered $14.1 billion or $55 per share for U.S. Steel, topping a $33 per share made by Cleveland-Cliffs.
• The broader steel industry showed a 4% increase the week of December 18, with Nucor, Cleveland Cliffs and Arcelor Mittal joining U.S. Steel as gainers.
• Responding to its failed acquisition attempt, Cleveland-Cliffs said it would redirect funds toward stock buybacks.

United States Steel NYSE: X was once a more important American company than it is today, having been a Dow component until 1990. But it's back in the headlines after Japan's Nippon Steel Corp. OTCMKTS: NPSCY said it would acquire the company for $14.1 billion.

That beat out an earlier bid from Cleveland-Cliffs Inc. NYSE: CLF, which offered about $33 a share for the company in August. Nippon Steel's $55 per share offer represents a premium of about 40% over US Steel's December 15 closing price. 

US Steel has run up sharply since Cleveland-Cliffs' offer and is up 93.13% in 2023. 

Shares closed at $48.38 on December 19 after gapping 26% higher in the prior session on news of the Nippon Steel offer. That's consistent with a company being acquired; the stock frequently gaps significantly higher, then trades in a sideways pattern just shy of the offer price. 

That means the stock is unbuyable at this point, as there's essentially no further upside.

Steelmakers up 4% for the week

As a group, steel producers are up more than 4% for the week of December 18, in heavy turnover, while the SPDR S&P 500 ETF Trust NYSEARCA: SPY is showing low volume, typical at year's end. 

Of course, US Steel is driving volume in the steel industry, but other firms, such as Cleveland Cliffs, Nucor Corp. NYSE: NUE and Arcelor Mittal S.A. NYSE: MT, have also risen in robust trade. In a somewhat unusual action, even Nippon Steel has posted heavy-volume upside action since the acquisition announcement.

Often, when a company says it's acquiring another, its stock declines while the target company's rises. The acquiring company's stock price typically declines because it's paying a premium above where the target company's stock is currently trading. 

One thing that's happening that's somewhat atypical: A glance at the Cleveland-Cliffs chart shows you that the stock has been rising despite missing out on the U.S. Steel purchase.

Cleveland-Cliffs up on buyback news

That's because the company said it would put the money previously earmarked for the acquisition toward stock buybacks. 

Wall Street rewards plans for stock buybacks, as they tend to push share prices higher over time, rather than in one big move. 

U.S. Steel was once upon a time the largest American company, but it's no longer even part of the S&P 500, having been booted out of the index in 2014 as market capitalization continued to fall. 

With a market cap of $44.04 billion, Nucor NYSE: NUE is the largest U.S. steelmaker. It's among the largest components of the Materials Select Sector SPDR Fund NYSEARCA: XLB.

Basic materials stocks are generally not among the market's most exciting, especially when compared to fast-growth technology stocks of innovative companies.

Materials sector up on November, December strength

However, in 2023, materials stocks as a whole are showing a gain of more than 10%, with Nucor among stocks advancing more than 30%. The XLB ETF's dividend yield is 2.06%, meaning it has some defensive qualities. The sector's November and December upside trade are responsible for the positive return this year. 

In a statement announcing the deal, Nippon Steel and U.S. Steel both emphasized the expansion of Nippon's global footprint.

"The transaction builds on our presence in the United States and we are committed to honoring all of U. S. Steel's existing union contracts," said Nippon president Eiji Hashimoto. 

Politically sensitive industry

However, union concerns could be a sticking point in getting the deal done. 

Steelmaking, and manufacturing in general, are politically sensitive. 

Presidents have often helped the industry with trade protections and subsidies. National security and protection from unfair foreign competition are often cited as reasons for the industry's special treatment, although some analysts say there's no basis for those claims. 

Three U.S. senators have spoken out against the iconic U.S. Steel being acquired by a foreign company.

In addition, the United Steelworkers Union is encouraging regulators to put the deal under a microscope, citing concerns over union contracts.