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Should You Invest in this Mega-Merger Between Japan and the U.S.?

With uncertainty swirling around the proposed acquisition of U.S. Steel by Nippon Steel, how can investors profit from the possible outcomes?

Sparklers and Champagne Glasses

Founded by American business leaders Andrew Carnegie, J.P. Morgan, and Charles Schwab in 1901, U.S. Steel (X) is undeniably one of America’s most iconic companies.

Naturally, the potential acquisition of U.S. Steel by Japan’s Nippon Steel has become something of a political hot potato. Not only does the proposal include a storied American company and one of its most important allies, but the firm is headquartered in the politically instrumental state of Pennsylvania.

So how should we, as investors, balance the politics of the equation with the economic value of foreign investment in the country?

And, more importantly, how can we balance it profitably?

Let’s begin with that in poker terms. America’s ace in the hole is its openness to international investment.

This is especially true at a time when America clearly needs capital investment to rebuild the sorry state of its industrial and defense base.

International direct investment has been and is important to American jobs, manufacturing, innovation, and economic growth. By investment I mean foreign direct investment (FDI) – when companies headquartered abroad build facilities, purchase equipment, hire workers and create products and services in the United States.

For the most part, America treats international companies investing and operating here on par with American companies. Therefore, America consistently leads the pack as the world’s top destination for FDI. This is important because oftentimes international investment drives exports.

These subsidiaries of international companies make a significant contribution to America’s economic growth. Roughly, 20% of the American manufacturing workforce and about half of all American manufacturing jobs created in the last five years are due to international investment.

International investment accounts for nearly 7 million high-paying jobs in America, and these subsidiaries of international companies produce 22% of total U.S. exports.

Toyota has the world’s largest manufacturing facility based in Kentucky, and BMW churns out 1,500 autos each day at its Spartanburg, South Carolina, plant in which it has invested $10 billion, employs 10,500 workers, and relies on hundreds of American auto-part suppliers. Japanese automakers make in America two of every three cars sold to Americans.

L’Oreal, headquartered in Paris, has the world’s largest cosmetics manufacturing facility in Little Rock, Arkansas, and employs 11,000 American workers with 65% of the company’s U.S. sales made in America.

You can see why America, like any country in the world, would welcome international investment and would prefer it to importing goods made elsewhere in the world.

But America is first among equals precisely because it doesn’t need the tariff stick to encourage great global companies to invest here. America offers foreign investors the trifecta of a talented and educated workforce, due process and the rule of law, and a huge consumer market.

One unfortunate side effect is that international companies play one state off another extracting costly tax concessions and this is a problem that needs to be addressed.

Now let’s turn to the pressing and sensitive issue of Chinese investment in America.

Because China is both a commercial as well as a military rival and its state-controlled and state-owned companies dominate key industries, Chinese investment in America needs to be handled a bit differently than those of a longtime ally such as France or Canada.

This is particularly important when foreign companies are considering investing in companies related to U.S. technology. These transactions require a higher level of due diligence and scrutiny.

We also need to push for American firms operating in China to be treated on an equal basis with Chinese companies. All too often, China coerces American companies to invest in joint ventures with Chinese state-owned companies rather than giving them the freedom to operate independently to protect their intellectual property and keep all their hard-earned profits.

Enough about China. Let’s get back to ally Japan and the current proposal for Japan’s Nippon Steel to acquire U.S. Steel.

The Nippon Steel deal price of $55 per share represents a giant 142% premium to U.S. Steel’s August 11 price of $20, the last trading day before rival Cleveland-Cliffs unveiled a $35-per-share, cash-and-stock bid for U.S. Steel. In part, it is a bet that U.S. Steel will benefit from the spending and tax incentives in President Joe Biden’s infrastructure bill.

Nippon Steel, the world’s 4th largest steel company will do more than just inject new capital and technology into U.S. Steel, which is currently ranked 27th in the world.

Under the agreement, U.S. Steel will retain its iconic name and Pittsburgh headquarters, and steel will remain mined, melted, and made in America.

Importantly, Nippon Steel will honor all pay and benefit agreements with the United Steelworkers.

After all, even after the buyout, U.S. Steel would keep its name and the transaction would allow the merged company to be the world’s second-largest steelmaker, after China’s Baowu Group. America’s rival China now makes 50% of the world’s steel.

So how will a decision on this proposed deal be made?

In my opinion, this deal, which is currently under review by the U.S. Treasury Department, is really in the hands of American voters.

If the Republican candidate for president wins on November 7th, the deal will fall apart, and U.S. Steel’s (X) stock price will decline. If the Democratic nominee wins, the likelihood of the deal going through is high and the stock price will move close to $55.

If you want to bet on the latter, buy the stock or a November 15th call option.

If you wish to bet on a Republican winning the White House, buy a November 15th put option.

Who says politics and investing don’t mix?

Carl Delfeld is your guide to growth trends and bull markets around the world. His Cabot Explorer will show you the vast profit potential of investing in emerging economies as well as other world stock markets.