Market Analysis

Rising Risks for Japanese M&A: Reverse Break-Up Fees Gaining Traction

Amos Simanungkalit · 11 Mar34.9K Views

Image Credit: Reuters

Japanese companies are increasingly facing higher risks of having hefty termination fees included in their merger and acquisition (M&A) deals with U.S. targets, following the failed $14.9 billion bid by Nippon Steel for U.S. Steel. While Japanese firms have long been considered reliable suitors, the growing protectionist environment in the U.S. has raised concerns about deals being blocked due to national security or shifting trade policies.

Nippon Steel’s attempt to acquire U.S. Steel was blocked by the Biden administration on security grounds, and if the company loses its legal challenge, it will have to pay U.S. Steel a $565 million break-up fee. This development is expected to increase the likelihood of reverse break-up fees in future negotiations, particularly as U.S. companies look to safeguard against deals collapsing due to regulatory or political factors.

Historically, Japanese buyers have rarely had to negotiate reverse break-up fees, but the increased uncertainty around U.S. trade policy and security concerns has shifted that dynamic. U.S. companies are now more likely to demand such fees as part of deals with Japanese suitors, according to experts. Kenton King, a partner at U.S. law firm Skadden, expects to see more reverse termination fees in deals, though at more manageable levels.

Reverse break-up fees, which are typically around 4-5% of the target company's value, have become more common in M&A deals involving Japanese firms, although they remain relatively rare compared to other international buyers. For instance, the $565 million fee for Nippon Steel’s U.S. Steel deal is about 3.8% of the target’s enterprise value.

In 2023, Japanese companies made $54.5 billion in acquisitions in the U.S., representing over half of their overseas M&A activity. As the U.S. Committee on Foreign Investment (CFIUS) reviews deals for national security risks, the inclusion of reverse break-up fees has become more common. For example, Mizuho Financial Group’s $587 million acquisition of Greenhill & Co. in 2023 included a reverse break-up fee of 6.6%.

With growing concerns over U.S. regulatory hurdles, especially under the Trump administration's protectionist stance, Japanese suitors are now under more pressure to agree to break-up fees, or risk losing out on deals altogether. The evolving landscape of U.S. M&A policy is pushing Japanese firms to accept higher risk in their negotiations.