Japanese companies seeking acquisitions in the U.S. are facing a new reality: higher termination fees to protect against regulatory and political disruptions. The shift comes after Nippon Steel’s $14.9 billion bid for U.S. Steel was blocked by the Biden administration on national security grounds.
Long seen as reliable buyers, Japanese firms have traditionally negotiated lower or even nonexistent reverse break-up fees in mergers and acquisitions (M&A). However, with rising protectionism and heightened scrutiny from U.S. regulators, sellers are demanding stronger financial guarantees in case deals fall through.
Nippon Steel’s bid for U.S. Steel was set to be Japan’s largest acquisition in the U.S. industrial sector. But the deal hit a wall when the Biden administration opposed it, citing national security risks. Nippon Steel is now contesting the decision, but if it fails, it must pay U.S. Steel a $565 million break-up fee.
The penalty is meant to cover U.S. Steel’s costs from the failed transaction. Though the fee is just 3.8% of the deal’s enterprise value, it highlights a growing concern for Japanese acquirers—how to navigate an increasingly unpredictable U.S. regulatory landscape without incurring massive financial losses.
According to U.S. law firm Skadden, the Nippon Steel case will likely set a precedent. “For a while, you will see more reverse termination fees,” said Skadden partner Kenton King. “Not at crazy levels like 10%, but at manageable levels that aren’t too scary.”
Reverse break-up fees, which compensate the target company if the buyer fails to complete the deal, were once rare in transactions involving Japanese companies.
Managing Director Tosh Kojima at DC Advisory, the international investment banking arm of Daiwa Securities, noted that such provisions were “extremely rare” in Japanese M&A deals. “They are occasionally seen these days, but the vast majority of Japanese boards typically do not approve them,” Kojima said. “Culturally, it still doesn’t fly.”
Yet, data suggests a shift is underway. Median reverse break-up fees worldwide have ranged from 4% to 5% of a deal’s enterprise value in the past two years. Japanese firms, however, typically negotiate lower fees.
A study by investment bank Houlihan Lokey found that over 60% of large deals involving public U.S. companies in 2023 included a reverse break-up provision, up from 57% in 2022.
One example is Mizuho Financial Group’s $587 million acquisition of M&A advisory firm Greenhill & Co. in 2023. The agreement included a $38.5 million termination fee—6.6% of the deal’s enterprise value.
“As a seller, when you see deals like Nippon Steel’s being blocked, you’re going to be even more insistent on a break fee,” said Nick Wall, a partner at law firm A&O Shearman in Tokyo. “If buyers can’t get their boards to agree to that risk, the deals may fall through.”
Despite these challenges, Japanese companies remain aggressive buyers in the U.S. market. In 2023, Japanese M&A transactions in the U.S. reached $54.5 billion, a 35% increase from the previous year. The U.S. accounted for 53% of all Japanese outbound M&A deals.
The attraction is clear. Japanese firms, many of which face slowing domestic growth, see the U.S. as a critical market for expansion. The push into the U.S. is particularly strong among industries facing shrinking opportunities at home, including banking, industrials, and technology.
But as Japanese firms pursue bigger deals, they face growing scrutiny from the Committee on Foreign Investment in the United States (CFIUS), the body that reviews foreign acquisitions for national security risks.
Under President Joe Biden, the U.S. has adopted a tougher stance on foreign takeovers, particularly in industries deemed strategic, such as steel, semiconductors, and defense. The administration’s opposition to Nippon Steel’s bid was part of a broader effort to protect American industry and jobs.
But the trend is unlikely to change even if former President Donald Trump returns to the White House. Trump has consistently promoted an “America First” economic policy, which could result in even stricter CFIUS reviews.
According to Michihiro Nishi, a partner at Clifford Chance in Tokyo, Japanese buyers must prepare for increased scrutiny. “Given Trump’s focus on protecting American industry, CFIUS reviews are likely to become stricter,” Nishi said.
The challenge for Japanese acquirers is that they have long been seen as low-risk buyers in the U.S. “The Japanese companies that are serial acquirers are accustomed to a world where they don’t present any special regulatory or political risks in the U.S.,” said Noah Carr, an M&A partner at Freshfields in Tokyo.
That perception is changing. “The risk profile and track record historically put downward pressure on the break-up fee,” Carr said. “Now we’re going to see upward pressure.”
As reverse break-up fees become more common in deals involving Japanese buyers, companies may have to adjust their approach to U.S. acquisitions.
For one, Japanese firms may need to take on greater financial risk in the form of higher termination fees. But they must also adapt to the evolving regulatory landscape by engaging earlier with U.S. authorities and structuring deals to minimize political pushback.
Some companies may reconsider U.S. acquisitions altogether, opting for targets in Europe or other regions with less regulatory uncertainty. However, the U.S. remains an attractive destination due to its market size, economic growth, and access to advanced technologies.
For now, Japanese companies must weigh the benefits of U.S. expansion against the increasing costs of deal uncertainty. With break-up fees on the rise, the price of failed M&A is becoming steeper than ever.
- Japanese firms face rising reverse break-up fees in U.S. acquisitions due to heightened regulatory and political risks.
- Nippon Steel’s failed $14.9 billion bid for U.S. Steel, blocked by the Biden administration, underscores the growing challenge.
- Reverse break-up fees, once rare in Japanese deals, are now becoming standard, though they remain lower than global averages.
- U.S. regulators, particularly CFIUS, are increasing scrutiny of foreign acquisitions, a trend likely to continue under either Biden or Trump.
- Despite the risks, Japanese M&A activity in the U.S. remains strong, with $54.5 billion in deals last year.
- Japanese buyers may need to accept higher financial risk or explore alternative markets amid growing U.S. protectionism.
As Japanese firms push forward in their U.S. expansion plans, they must navigate an increasingly complex and costly deal-making environment.
