OPINION: RAIL MERGERS ARE STILL WITH US
WASHINGTON -- Reply and rebuttal comments have been filed in the Surface Transportation Board's exercise to develop new major railroad merger rules and policy, and the final rules won't be official until June, but the subject of rail mergers is still with us, writes Lawrence Kaufman in a Journal of Commerce Online editorial.
Those who generally oppose rail mergers had hoped the new rules would make it extremely difficult if not impossible for carriers to combine, but that isn't likely to be the case. On the contrary, based just on the STB's initial draft, it appears that none of the mergers of the last decade would have been blocked had the new rules been in effect.
STB Chairman Linda J. Morgan has indicated that she expects the urge to merge to continue. In fact, the stated reason for the current proceeding is to update 20-year-old rules to reflect current realities.
So far, it appears the only way the new rules will keep any mergers from being filed promptly once they are final is concern over uncharted minefields. There is enough vagueness and uncertainty in the draft that carriers may be reluctant to be the first to wander in dangerous terrain. How is a merging combination to anticipate possible anti-competitive and downstream issues, for example? How is a merging combination to advise the regulator on how to fix those problems?
So, as a practical effect, the merger moratorium may extend beyond next June simply because carriers may prefer to be the second out of the starter's block, letting someone else navigate the minefields first.
Which brings us to a couple of specific merger scenarios.
First, the idea that the Burlington Northern Santa Fe and Canadian National railroads might renew their deal probably is dead for a long time, if not forever. The merger was a splendid idea when proposed on Dec. 20, 1999. It was end-to-end, had virtually no anti-competitive aspects and involved the two most efficient carriers in the industry.
It was so good, in fact, that it scared the hell out of the other major railroads, which still were smarting over the operational and financial problems created by their own recent mergers. The moratorium that BNSF and CN triggered, most now agree, protected other major railroads more than it protected shippers or the public.
Generally, there is a narrow window of opportunity in which mergers can be negotiated and carried out. For BNSF and CN, that window now has closed. Rob Krebs was BNSF's chairman and chief executive when the deal was announced. He was quite willing to retire after having created the first true transcontinental railroad - CN already stretched from the Atlantic to the Pacific in Canada - and triggering the final consolidation of the railroad industry.
Matt Rose, at 41, now is BNSF president and chief executive. He's a lot less likely to negotiate his own retirement. The timing also will be wrong as long as the forceful Paul M. Tellier, CN's president and chief executive, is around and Canadian law requires that headquarters be in Canada, a majority of directors be Canadian and no more than 15% of CN be controlled by one owner.
There is more likelihood that in a few years we'll see BNSF and Norfolk Southern head for the merger altar. Culturally and strategically, the two companies are a good fit. Rose came to BNSF from NS, as did Pete Rickershauser, BNSF's vice president of business development and a member of Rose's leadership team, following a stop at the former Southern Pacific.
NS, once the poster child for proud, efficient management that never missed analyst expectations, has fallen on hard times. Its acquisition of 58% of Conrail in 1999 came as its business was undergoing fundamental change. The result is that NS isn't making the kind of money it used to, and the burden of paying for the Conrail purchase weighs heavily on management.
In addition, as NS wrestles with its future, it increasingly appears that there is no obvious, ready successor to David Goode, its chairman, president and chief executive. That could make a sale to BNSF just a bit easier because many a railroad merger has failed in the past because two chief executives couldn't agree on who would be out of a job.
By waiting a few years, NS could pay off some of its debt, making it a more attractive merger partner. Also, Goode is coming up on his 60th birthday, so there is no rush for him.
Where does that leave CN? One reason the BNSF deal was so attractive was that as the U.S. railroad industry consolidates to two nationwide systems, CN runs the risk of becoming marginalized. Its existing U.S. operations aren't enough to make it a major North American rail power.
There are rumbles throughout Wall Street and the industry that CN soon may acquire Wisconsin Central. WC effectively put itself on the block when it retained Goldman, Sachs & Co. to help it "maximize shareholder value." A sale becomes more likely as the takeover fight between co-founders and former associates Ed Burkhardt and Tom Power becomes nastier.
For CN, Wisconsin Central preserves its route from the Canadian West into Chicago. It represents a relatively low-cost way to determine if it ever can be treated fairly by the STB and it doesn't have the downstream effects - imagined or real - that other mergers might.
A combined CN-WC also would be a good fit with the eventual BNSF-NS combination,
which reduces the Canadian fear of being left out of industry consolidation.
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January 12, 2001
© 2001 Brotherhood of Locomotive Engineers