Proposed Norfolk Southern NS Canadian Pacific CP Acq/Merger

Yes, NS is in trouble. The Ackman/EHH run on NS has put a spotlight on the lousy management plaguing NS at all levels. I reiterate if it was a private company they could do whatever they please however it is a public company and the shareholders are getting wind of this state of affairs and will eventually demand changes. Most of NS's trouble has its root in the Southern Railway mentality succinctly summed up by Brotherhood of Locomotive Engineers Union President John Sytsma when he condemned the SR Brosnan administration as," Wanting to sit on the porch of their plantation drinking mint julips while the BLE members labored in the fields picking cotton." The N&W was a fairly reasonable outfit to get along with but when it was taken over by the Southern the fire them all mentality came along with the merger.
This mentality has rotted the NS to it's core as there is a total war going on instigated by all levels of management against the rank and file. Predictably the rank and file fight back by doing as little work as possible and getting even every chance they get. When initiative is pounded out of an organization it is doomed.
This is the internal state of affairs as a militaristic management prefers to fight tooth and nail with its employees rather than run trains.

Regarding everybody else making a run on NS again EHH opines," Well the other roads are talking out of both sides of the mouth. On the one hand they oppose all mergers including our merger with NS but if we are successful they want to merge up with someone as quick as they can so now mergers are good."

Zeke wrote:Regarding everybody else making a run on NS again EHH opines," Well the other roads are talking out of both sides of the mouth. On the one hand they oppose all mergers including our merger with NS but if we are successful they want to merge up with someone as quick as they can so now mergers are good."

The other railroads are looking at regulators that will not allow their mergers. Should regulators make the mistake of allowing a CP-NS merger that opens the door for similar mergers with their railroads. EEH is apparently missing the "if" in other railroad's complaints. "If CP is allowed to merge then we should be allowed to merge."

It is like your parents telling you that you cannot drive to school because you are too young. When your parents allow your younger brother or sister to drive to school it opens the door for you to make your plea again. If your parents will allow your siblings to drive why not you? If the regulators will allow NS to merge with CP why not with UP or another large railroad?

EHH might be talking about other railroads talking out the sides of their mouths, but he is talking out of his ass. CP+NS would create a system that dwarfs every other railroad and puts them at a huge disadvantage; they'd have to merge in order to stay competitive. They oppose mergers because they have to take a huge risk with mating up with another railroad and merging... investors don't like risk. Which is admittedly why Ackman/EHH are after a merger, because the only thing they do is cut things to the bone and streamline; after you've already cut everything you can and no more efficiency gains are to be had from an existing railroad, the only choice is to buy another and then take advantage of the scale of economy by streamlining again.

Which is why while I definitely can't refute a lot of what you're saying, Zeke, EHH isn't going to be making many friends with the unions, either. It might make relations between NS and its labor a little better by dropping the hostile relationship present between the two currently, but the labor that's left within CP and its subsidiaries certainly are no fans of EHH; I doubt in the long run that NS labor would be particularly happy with an EHH administration either.

Anywho, here's a fairly lengthy news article from the Financial Post:

Hunter Harrison is the key to Canadian Pacific Railway’s merger plan — and its potential flaw
Canadian Pacific Railway Ltd.’s takeover bid for Norfolk Southern Corp. rests on the assumption that CEO Hunter Harrison is a railroading Midas who turns everything he touches into gold. But as the ancient myth moralizes, this blessing can quickly turn into a curse.

All Harrison has to do, the theory goes, is take over the corner office at NS and the operating improvements will begin to show immediately. He’s done it before at CP, Canadian National Railway Co. and Illinois Central Corp. This is why CP wants to install the veteran railroader at NS before the merger even closes, putting chief operating officer Keith Creel, a long-time Harrison protégé, in charge of CP.
...
The STB is independent from Congress, but it’s still a political body that might not love Harrison’s reputation of ruthless efficiency, said Tony Hatch, principal at New York-based railway consulting firm ABH Consulting. “They’re a political body and he’s an outsized character, so somewhere in the back of their minds it’s not just a CEO but that CEO,” Hatch said.
...
CP has repeatedly pointed to CNs acquisition of Illinois Central in 1998 as setting the precedent for what it’s trying to do now. At the time, Harrison was CEO of Illinois Central and became chief operating officer at CN before the deal closed, while Illinois Central was held in a voting trust.

However, there are three distinct differences between that deal and what CP is proposing to do with NS, said Frank Wilner, former chief of staff at the STB and author of Railroad Mergers: History, Analysis, Insight.

First, CN’s acquisition of Illinois Central occurred before the STB implemented stringent new merger rules in 2001. Second, Illinois Central was a much smaller railroad than NS. And third, the target sent its CEO to the acquirer, not the other way around.
...
A move like that would be unprecedented, said Scott Rostan, a former investment banker who worked on Norfolk Southern’s hostile takeover of Conrail in the 1990s.

“I personally can’t think of another situation where the CEO of the acquirer came in as the CEO of the target under the trust structure,” said Rostan, who is now head of corporate training firm Training The Street. “That does seem to raise eyebrows and a potential conflict of interest, but I’m sure (Harrison) has some very smart legal advisers who are researching that issue right now.”

CP is eager to install its miracle worker at NS as soon as possible because it believes more than 70 per cent of the US$1.8 billion in annual cost savings it has identified will come from his operational improvements.

The upshot of this is that Harrison can realize significant upside for shareholders of the combined company while it’s held in trust. ... The downside is that the plan is almost entirely dependent on the work of one man.

If the company is relying on Harrison’s prowess to add value to NS, it can’t wait too long to put him in charge. Harrison is 71 years old and was forced to take time off earlier this year after surgery on his legs led to medical complications, including pneumonia.
...
“That’s the big linchpin: if something happens to Hunter the day after this thing’s signed, there’s an issue there,” said Jeff Young, co-CEO and chief investment officer at NexGen Financial, which holds CP shares. “So there’s a tremendous amount of key-man risk, full stop.”

But Wilner questioned whether Harrison is really the “indispensable man” his advocates make him out to be.

“That’s really what Ackman is trying to sell to shareholders: this is a ‘god from the machine’ and if we can only get this voting trust he’s going to turn Norfolk Southern into gold,” he said. “The whole case they’re making is contingent on one man.”

He added that Harrison undoubtedly proved himself during his time at Illinois Central, CN (where he eventually became CEO) and CP, but NS is a different beast with a much more complicated network and an intense focus on personal relationships that might result in a lot of push back from employees.
...
But his legacy is also controversial. Since he joined CP, the company has shed nearly 6,000 jobs and he’s not popular among shippers, some of whom feel that service has deteriorated under his leadership.

“To make an omelette you’ve got to break a few eggs, and there might be a few broken eggs out there who might be willing to weigh in on this,” Hatch said.

“There could be certain communities, certain labour groups, certain shippers groups … everybody gets a say, that’s the downside, that’s part of the risk.”

Thank you Financial Post for answering my earlier inquiry :

Hunter is an American, he is a free agent, and if Hunter sold his stock in CP and gave up his pension at CP, any railroad in North America or frankly Australia could hire Hunter,” Bill Ackman, a director at CP and head of Pershing Square Holdings Ltd., said on a conference call this week.

The New York Times today has an article on railroad mergers which obviously focuses of CP-NS. However, the reporter does not rule out a consolidation of Kansas City Southern with someone:

http://www.nytimes.com/2015/12/21/busin ... rgers.html" onclick="window.open(this.href);return false;

Fair Use (referencing KCS):

And Kansas City Southern, a Midwestern railroad operator, could loom as a potential target for railroad companies. With a market value of about $8 billion, it is attractive because it is exempt from the 2001 rules, making it a potentially easier target.

Kansas City Southern has interviewed external and internal candidates who could take over for David L. Starling, its 66-year-old chief executive, who may decide to retire next year, people briefed on the interviews said.

The company is leaning toward choosing Patrick J. Ottensmeyer, its current president, as the successor, these people said, but they said that decision could change. They asked not to be named because the process was private.

While it is unclear whether Mr. Ottensmeyer or any other successor would be open to a takeover, a change in management could motivate potential acquirers to enter the fray.

For this reason reported in The Times, it would appear that KCS is the most "mergable" property out there. As I've noted that CP-KCS/USA would give CP parity with the CN in that both Canadians would have a "T" route structure and could handle Canadian agricultural and petroleum products on their own rails to Gulf ports.

Now what could be problematic is KCS 50% ownership and operational control of the former NdeM. The Mexican government has accepted the US investment and control of their roads (UP has same over the FCM lines). Would the government accept Canadian control of the NdeM? Or might BNSF seek to replace KCS as the half owner and operator in order to maintain parity?

I still hold that this is Round 1 of consolidations that will pair CP-KCS, BNSF-CSX, UP-NS (or v.v.). All are "end to end" which, unlike the last round of parallel mergers, means that each road could operate independently until an orderly combination of the various activities, such as labor agreements, could be accomplished. Existing competitive access for shippers would be unaffected. We would not be looking at the severe operational disruptions that arose with the parallel mergers where, conceivably, there were crew members on the same train subject to different labor agreements, and operating practices on one road were in definite conflict with the other (Red Team Green Team; SP-UP kind of stuff).

If it did indeed cause an issue, could not CP/KCS spin off the NdeM stake to an entity which would issue shares to existing KCS shareholders as a condition of the merger? Not really sure why the Mexican government would like a Canadian involvement less than an American one though.

Wall Street Journal columnist Holman Jenkins opined Saturday regarding CP-NS:

http://www.wsj.com/articles/ackman-and- ... 1451684061" onclick="window.open(this.href);return false;

Fair Use:

No wonder Norfolk Southern this week rejected Canadian Pacific’s third, sweeter offer. Regulatory risk is still the reason cited.

Not that a merger would lack for industrial or economic appeal. A quarter of the nation’s rail freight passes through the perpetual snarl of Chicago, where six railroads meet and incentive alignment would be a challenge even if all six were run by saints. Many medium hauls today don’t take place because carriers can’t agree on a division of the revenue. A merged east-west line would have incentive to take on such traffic. What’s more, a portion of the merged line’s freight could skip Chicago altogether, traveling via Canada and the eastern U.S. through the CP’s Buffalo and Albany gateways.

Solutions are needed. New railroads aren’t being built. Freight traffic can only continue to grow. Plus the industry’s slow-boiling congestion problem is further complicated by new mandates imposing slower speeds on its accident-prone oil-by-rail trains.

I'm uncertain where Mr. Jenkins is "coming from". Yes, there is the "snipe" that any Journal columnist will take regarding "the ways of Washington", but if he holds that NS-CP would increase competition, by offering a trans Canada routing for traffic that otherwise would travel Transcontinental (US), to me it would only stifle it.

Presently, at any US traffic source, there exists a rail duopoly. "Surf Board" assured that after the last round of mergers (and a triopoly at certain sources when the KCS and both Canadians are factored). But that duopoly could be hindered if any significant volume is routed through Canada and away from UP and/or BNSF, as well as the Port of LA/LB. I could foresee that Yäger and Bill motivated by their greed, routing all possible E-W traffic through Canada to Vancouver. This would simply overload both the road and the Port with congestion. Give Westward line hauls to his "buddies" at CN for handling through Prince Rupert? wouldn't place my bet on that one. Eastward traffic? safe bet CN would just hold that themselves.

Now so far as Mr. Jenkins' thoughts on Chicago, both Canadians have their own "runarounds" with their ownership/control of the J and the Harbor (why those two were not included in Shared Assets last time around escapes me, but that water will not flow "up the dam"). Until CREATE becomes action and not a bunch of "a $thou a word" consultants feeding at the trough, existing Ol Man River gateways such as Kansas City, Memphis, St Louis can be developed - even if the inevitable NS-UP CSX-BNSF or v.v. does not come to pass anytime soon.

Yäger and Bill, if you are seeking to expand your US operations, best target is KCS.

That news clip about avoiding Chicago parrots my comments on the first page of this discussion. I like the idea of CP doing an end run by buying a big eastern. This is the area with the largest population density. My opinion is due to my vested interest in CP's success.

I respectfully disagree with Mr. Norman's view that CP lines west would be over saturated. It could happen, but the shipper also has the ability to contract with whom ever it chooses. There will still be customers using Long Beach, just as BNSF still ships plenty of containers to the PNW. Would a customer in Massachusetts, who is shipping to California get screwed for not giving the big boys maximum line haul? How about shipping that route Guilford, CSX, IAIS, UP, vs. a straight CSX-UP? I know that this might be slower just due to more interchanges. Rate wise, would it compare? If the charges were the same, this makes it possible for any shipper choice to be made.

I think that if CPNS becomes a reality, it may force a three way. How about BNSF, CN, and NS? This might be how it goes. This is the only way I can see it all ending, with two North American systems. Just for the record, BN-CN was proposed, and would have created the same imbalance. They could have long hauled everything to Buffalo, or Montreal. This would have been detrimental to CSX and NS in the same way NS CP would be to BN and UP.

Once a company is seen as "in play", the momentum is hard to stop. The target just becomes so much carrion, like Conrail being picked over after becoming a target. STB will just have to slice and dice it and potentially create another shared assets holding company.

But I don't think we'll end up with two; I think we'll end up with three: BNSF, UP, and CP, with NS, KSC, and CSX being divided. Maybe we'll season the stew with some P&W.

Jeff Smith wrote:But I don't think we'll end up with two; I think we'll end up with three: BNSF, UP, and CP, with NS, KSC, and CSX being divided.

How do you think NS, KSC, and CSX will be divided? How do you envision which western system will end up with what part of each of the three systems that are to be broken up?

I don't think that CSX will be divided. They learned a lesson trying to divide Conrail. Instead, there might be a line here or there which has to be given to the other class 1. An example would be UP giving BN rights in Louisiana and Colorado in the SP merger. Another example was a as didn't want CSX involved in the Conrail merger. They were going to give some lines to CP.

I agree that once someone is "in play" that it is hard to stop the momentum. Let's see if Hunter tries a hostile takeover. In that case, it is apparent that Warren will put a counteroffer.

If NS is successful in blocking the takeover, let's see if things just settle down. It sounds like most of the other companies will just let it go, since it will be a financial and regulatory nightmare. They only seem to want competitive systems to match only if Hunter pulls this off. Then and only then will the feeding frenzy begin.

Spike, it is an interesting play you have outlined that could develop with Yäger and Bill going for a hostile of NS, and that Warren could end up making a counter protecting his BNSF interests. This of course means that the East-West duopoly would comprise NS-BNSF, and by default, CSX-UP.

I simply do not foresee either Canadian combining with an East-West US road. I do foresee KCS-US combining with CP, for as NS-BNSF and CSX-UP (or v.v.) moves forth, KCS will have to combine with someone, and with CN (through US Sub GTC) already owning the IC, the issue of parity, namely access to the Gulf and its major ports, will be of importance. A CP/KCS may have to be afforded access to inland Ol' Man River gateways such as St. Louis and Memphis.

As I've noted earlier, I believe a CP/KCS-US combination would require KCS-M to be spun off. While the vision of a "NAFTA Road" enabling commerce to move through North America may appear enticing. CN would be quick to note that the "duopoly/parity" concept was being upset. KCS-M (49% interest in former NdeM) would go to BNSF if Warren is interested; No change to UP's like interest in the FCM; lest we forget, the FCM was once upon a time Southern Pacific owned. In order to ensure a balanced duopoly "down below" NdeM may have to concede access to FCM to some of its traffic sources, such as the industrial base at Monterrey, NL and Port of Lazaro Cardenas, Mich.

Hope somebody will go down six feet and wake me up when all this comes to pass. Maybe, just maybe, this song from my childhood will have to be revived (some of it turned out to be true - well at least for a while).

If CP were to merge with KCS, why would they be required to sell the KCSM, and more especially to the BNSF? Wouldn't the Mexican government decide any "duopoly/parity" issues with CN if there are any should CP decide to go for the KCS? Could CP argue in front of the U.S. and Canadian governments regarding obtaining access to Halifax, Prince Rupert, the EJ&E and the GTW? Can't see the KCS without KCSM as this is keeping their system competitive with UP and BNSF. Without it, the KCS would not be as valuable as it is with it.

I'll just leave this here...

First Mr. CPF, please accept my advance apology for the parsing of your material:

CPF363 wrote:If CP were to merge with KCS, why would they be required to sell the KCSM, and more especially to the BNSF?

Parity; If CP or subsidiary attained control of KCSM, CN would be quick to object to a Mexican regulatory agency - along with any other that could claim to have jurisdiction. As is, it would appear that KCSM (former NdeM) has access to more traffic sources, existing and potential than does UP investment in the FCM (Mexicano). I threw in BNSF simply because I think a US operator is key to the efficient operation of the Mexican railroads. Illustrative of such is a photo noted rail photographer Bob Schmidt once took of a communications center I think in Mexico (City), DF. Here was an "Army" of telegraphers sending and receiving messages in Morse during the 1970's. Had their not been outside intervention in the form of a US road assuming operational control, that scene could well exist today in a world of digital communications.

Wouldn't the Mexican government decide any "duopoly/parity" issues with CN if there are any should CP decide to go for the KCS?

The answer is of course yes. In view of that Mexico's Federal system of government emulates ours - well, on paper that is, their "Surf Board" regulatory agency would be required to hear objections from parties in interest.

Could CP argue in front of the U.S. and Canadian governments regarding obtaining access to Halifax, Prince Rupert, the EJ&E and the GTW?

Possibly the Class II roads operating within Maine (fixed up of course) could enable a US operator to have access to ports such as St. John and Halifax. It is indeed "think out of the box", but then, so has been CP-NS or CN-CSX. I have held that both Harbor and J should have been part of Shared Assets. It still could happen, but I think it would be "over Yäger's dead body".

Can't see the KCS without KCSM as this is keeping their system competitive with UP and BNSF. Without it, the KCS would not be as valuable as it is with it.

On this one, all I can say is point noted.

Thanks for hopefully understanding my reason for parsing; unlike all too many "parse and attack" postings, I have tried to do so here with maturity and respect.