RAILROAD NEWS AND COMMENTARY FROM WASHINGTON BY WES VERNON A Hostile Takeover of Norfolk Southern?
AS WE WERE PREPARING THIS STORY, Joseph Boardman was announcing that he would step down in September as President of Am- trak. He leaves behind a legacy of activism and controversy. As his day-to-day approach evolved, we at this column were satisfied to let his record speak for itself. Many results of his legacy could unfold in future years, and there will be ample time for consensus judgment. There is a school of thought that says
almost no one running Amtrak is bound to emerge a “hero” because of the awkward and desperate circumstances under which it was created back in 1971. Every CEO of the passenger railroad has made the effort to please the passengers, Congress, DOT, the states, the unions, the taxpayers, and the regulators. That’s a pretty impressive list of stakeholders.
Norfolk Southern-Canadian Pacifi c The Norfolk Southern board’s decision to
reject the merger proposal as advanced by Ca- nadian Pacific came as no shock. There were (some not-for-quote) reactions before NS is- sued its rebuke December 4. Obviously there is a corporate culture clash here. Both companies are viewed as satisfacto-
rily run operations, with managements that are well-respected. But the two industrial gi- ants on the rails are believed to apply differ- ent interpretations to the term “no way to run a railroad,” or — more positively — how best to achieve bottom-line goals. What might have been: The idea of (at
last) having a truly transcontinental rail- road in North America was and remains as intriguing as it was when Union Pacific and then-Central Pacific connected the nation when they hooked up — to boisterous cele- bration — in 1869 in the (then near-desert) surroundings of Northern Utah. From the east, the first half of that historic 19th centu- ry operation (under UP) was constructed from Council Bluffs, Iowa (actually far inward from the east coast). From there, the tracks were built to Utah where it met the other half of the venture from the west. Under the Central Pacific banner, that second half of the railroad started from the west at Sacramento, Calif., to the Utah meet. At Council Bluffs, the 1869 original UP trackage blended in with Amer- ica’s already-established eastern rail system to reach the Atlantic Ocean. The point here is that in the early 21st cen-
tury a truly “transcontinental” railroad theo- retically would be possible with a Canadian Pacific/Norfolk Southern collaboration. It could go end-to-end — say, from CP’s Prince Rupert on the west coast to NS’s home base at Norfolk on the eastern end. Again, the 21st Century: “Grossly inade-
quate” was the unanimous verdict of the NS top panel in turning its back on the Canadian railroad’s bid to what would be a takeover of the U.S. line. That is the very basic concern of NS: it’s shareholders, in their view, would get the short end of the stick. Just for starters: Norfolk’s list of indict- ments against a pairing with its neighbor to
the north included that NS’ worth is “sub- stantially undervalued” and NS currently is implementing “revenue growth initiatives” that are working. So, it appears NS is argu- ing, why should the railroad stop (or delay) a successful strategy just because another rail- road wants a piece of our action? Add to that a belief that regulators are unlikely to smile be- nignly on Canadian Pacific’s short-term, cut- to-the-bone strategy that would cause Norfolk Southern to lose substantial revenues from its on service-sensitive customer base. Just the beginning: Space precludes our
going into detail here about Norfolk’s volumi- nous rejection of the CP advance. But here are some elements of them — there was lit- tle holding back or concession on the order of “even if you’re mistaken, you’re well-mean- ing.” For example, again from the NS board: “Canadian Pacific’s indication of interest is opportunistically timed to take advantage of a Norfolk Southern market valuation that has been adversely affected by the commodity price environment, does not fully reflect infra- structure investments Norfolk Southern has made, and does not incorporate the upside from further improvements anticipated to result from the initiatives that the company [NS] is implementing.” Also, “Canadian Pacif- ic’s synergy targets are overstated and imply limited significant reduction in investment to maintain service.” (This again is a reference to CP CEO E. Hunter Harrison’s “cut-to-the- bone” strategy.) Herewith a dictionary definition of “syn-
ergy”: “the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.” As of this writing there appears to be no sign of synergy between NS and CP. The comeback: There are several reasons
to believe this may be only the beginning of an outright proxy fight. Hunter Harrison does not give up easily, and as a matter of fact, as we go to press, CP has submitted a “scaled down” offer which James Squires of NS has all but summarily rejected, deeming it “a re- duced proposal compared with the first one’s value. Meanwhile, whatever is in store for the immediate future, there is the question of the possible potential that this conflict — if it lasts long enough will affect others in the railroad industry. But no sooner than. . . So it seems a ping-
pong game of “make an offer/slap it down” is going on where both companies have their heels firmly dug in and seemingly giving no quarter on anything essential. One of the arguments used by NS is that the merger as proposed is unlikely to receive the approval of the Surface Transportation Board. Lend- ing some credibility to that argument was a bi-partisan “white paper” released under the signatures of former board members Charles Nottingham (R) and Francis Mulvey (D) which concludes, “The STB’s approval process can last between 19 and 22 months. Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and based on an untested public interest stan-
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