(Bloomberg) -- Nippon Steel Corp.’s shares fell on news it plans a $14.1 billion purchase of United States Steel Corp., pointing to risks that Japan’s old economy companies face in trying to lift their market value via mergers and acquisitions.

The blowout price tag that Nippon Steel proposed to buy the iconic American company was nearly double an earlier offer from a US rival. While the deal will give the Japanese firm a foothold in the US market, equity investors appeared unimpressed: its shares lost 2.5% since the deal was first reported late Monday, even as the broader Topix index rose 0.4% during the period. 

Although the Tokyo-based company has said it will finance the deal with debt, investors fretted that Nippon Steel may need to tap the equity market eventually to avoid credit downgrades, possibly eroding the value of existing stocks.

It’s not uncommon globally for big acquisitions to drag down the buyer’s share price on concern it paid too much or taken on excessive debt. In Japan though, companies are facing strong pressure to bolster shareholder value, and one way to do that is to buy a firm that will help boost its profits.

In fact, M&A deals by Japanese companies have been climbing this year as a share market surging to three-decade highs fuels more investments. Transactions involving Japanese firms are up 15.5% this year to $200.1 billion, at a time when globally, M&A activity is down about 24% to $2.7 trillion, according to Bloomberg-compiled data.   

Investors may have good reason to be nervous about the steelmaker deal given how some Japanese firms have squandered large sums of money on foreign purchases in the past.

“From a management perspective, it’s the right strategy to go where gross domestic product growth is high because if you’re in Japan, the falling population is a problem,” said Masayuki Murata, general manager of balanced portfolio at Sumitomo Life Insurance Co. “But for the stock market, dilution is a worry.”

The risks can been in Japan Post Holdings Co. booking a ¥67.4 billion ($470 million) loss when it sold a part of Toll Holdings Ltd.’s operations, six years after it bought the Australian logistic company for A$6.49 billion ($4.38 billion).

Shiseido Co. sold BareMinerals and two other brands for $700 million in 2021, 11 years after the cosmetics company bought the operator of the brand, Bare Escentuals, for about $1.7 billion to expand outside a shrinking domestic market. 

There have been more successful overseas M&As too. Recruit Holdings Co.’s acquisition of US job search firm Indeed Inc. in 2012 has been a major factor in boosting the Japanese firm’s bottom line. Hitachi Ltd. , meanwhile, is seen as a role model for how a traditional Japanese company can change by increasing its overseas presence via M&A.

Shareholder Value 

The Tokyo Stock Exchange has been pushing companies to try to at least lift their share price above their book value per share. In the Topix 100 index, which covers large-capitalization firms, the number of those whose price-to-book ratio trades below 1 fell to 26 from 38 at the end of last year.  

The problem is that many of those that remain below 1 are in old economy industries including steelmakers, materials, energy and finance firms, said Fumio Matsumoto, chief strategist at Okasan Securities Co. Nippon Steel is one of those, with a PBR of 0.64. 

“Many Japanese companies have failed in the US manufacturing sector,” he said. Nippon Steel’s “deal looks a bit risky. The price tag is quite high. You have to deal with strong unions and outdated facilities.”

“These companies need to change the fact that they have no growth prospects,” said Matsumoto. “If they want to change, they will need a lot of heavy-lifting now.”

--With assistance from Ben Scent.

(Adds M&A data in fifth paragraph.)

©2023 Bloomberg L.P.