The Merger of Nippon Steel Corporation with Sumitomo Metal Industries

The Japan Fair Trade Commission (JFTC) passed a judgment on December 14 on the planned merger between the two leading Japanese steel companies Nippon Steel Corporation and Sumitomo Metal Industries, accepting that the merger does not violate antitrust law, subject to issue resolving measures offered by the companies.

Recent years have seen the integration of steel corporations on a global scale, including the 2006 acquisition of Arcelor in Luxembourg by Mittal Steel Company of the Netherlands and the 2007 acquisition of British steelmaker Corus by Tata Steel of India. If this latest merger plan goes through, the Nippon Steel-Sumitomo Metal amalgam will become the second largest producer of crude steel in the world behind AcelorMittal.

The European Commission sanctioned Mittal Steel's takeover of Arcelor provided that the company sold and transferred its production facilities. Although the 1968 Nippon Steel merger was judged to be in violation of antitrust law by limiting competition for railroad track rails and other items, it was allowed to go ahead on condition that the company took measures including selling and transferring its production facilities and providing technologies to its rivals.

Let's take a closer look at the issues of antitrust law surrounding the new merger.

Regulating mergers by antitrust laws

Antitrust law forbids a merger if there is a risk of substantial restriction of competition in a given field of trade. The scope of such a "given field of trade" (in other words, a market) is demarcated by commodity or region. In regard to this new merger, the commodity markets predominantly reviewed have been non-oriented electrical steel plates, high pressure gas pipe engineering, steel sheet piles, spiral welded steel pipes, hot-rolled steel sheets, and H section steel. The market is then demarcated geographically. A risk of substantial restriction of competition in a demarcated market means that a particular business or group of businesses has the market power to determine prices, quantities, and so on, things that are normally determined by the market itself. Whether or not a company will have such market power after the merger is assessed by considering its market share in the demarcated market as well as its ranking, degree of market concentration, and the status of its rivals. There have been many recent cases of mergers that created a large market share and yet were adjudged not to have a restricting effect on competition due to the existence of powerful rivals, import pressure, price bargaining power of consumers, and pressure from adjacent markets.

Judgments by the Japan Fair Trade Commission

The issues surrounding the new merger are: (1) the geographical scale of the market and whether it will be demarcated along national borders into a market like, for example, East Asia; (2) how the efficiency resulting from the merger should be considered; and (3) the kind of issue resolving measures that should be a condition of the acceptance of the merger if it will substantially restrict competition.

The industry circles argue that the geographical scope of a market should be assessed by industry in line with market globalization. In this merger case, too, the companies concerned maintained that the geographical scope of the non-oriented electric steel plate market should be East Asia. The JFTC, however, has demarcated the geographical scope to "all Japan" rather than extending it beyond national borders, for the reason that Japanese users would not switch to overseas manufacturers even if prices rose by 5-10%.

Regarding the regulation of mergers, it is pointed out that the efficiency brought about by a merger should be aggressively evaluated and judged. It could be argued, for example, that even with restricted competition, mergers strengthen companies' ability to compete in global markets if they can achieve cost reductions, which ultimately benefits the national economy. Although a lot of attention was paid this time to whether the JFTC would take into account efficiency improvements resulting from the merger, they did not mention this point but made their assessment of whether or not there was market power based on the other above circumstances and factors.

As for issue resolving measures, there have been quite a lot of cases to date of mergers, and even megamergers, both domestic and international, being accepted subject to issue resolving measures offered by the companies. The stance of the JFTC is that issue resolving measures should in principle be structural measures such as the transfer of business. Such measures mean the selling and transfer of production facilities and the licensing of technology to rival companies, as done at the time of Nippon Steel's previous merger. Measures taken during Mittal Steel's takeover of Arcelor also included selling and transferring production facilities. It is uncertain whether the companies concerned in this new merger have offered to take such measures. In conclusion, the JFTC decided that because of actions and measures such as ceding the takeover rights to the firm on a cost basis, there would be no restrictive effect on competition. Such actions and measures need to be monitored to see whether competition is maintained by the measures taken.