Was It bad real estate deals that killed Penn Central?

[bumunderbridge]

There is new acedotal infomation out that much of what is going on today happened back in  the early 1970s where railroads were getting into shady real estate deals and not paying attention to the railroad. That the merger of Pennsy  and New York Central was about making a killing on the real estate holding of the combined company and to heck with the railroad.  What happened in reality is that the Gov got Conrail and Carl Linder got the real estate

[narig01]

Carl Lindner? He bought low & is trying to sell high.  Capitalism at its best/worst.

The thing that killed PC was all the places were they were hauling a couple of cars from interchange to receiver that they only received a pittance of the line haul charges and no switching charges, coupled with a 5 man crew to deliver car.  

         Basically PC got $100 for a car that was costing them $150 to deliver.  In numerous places PC share of the last 30 - 50 miles, and  all the switching. 

      Structurally when you have this going on without enough profitable freight to offset you are going to have problems.  In addition you had senior management that was unwilling to acknowledge the fact that they were losing lots and lots of money. The thing that was keeping PC going was the fact that management was borrowing lots and lots of money to keep things going.

   Combine it all , in this case, and you have a train wreck.

     If you want a later example I would cite Worldcom.  The company was buying all the fiber optic lines it could and building more at the same time these lines had more and more capacity. (digital signal compression). Top it off with a CEO who didn't understand what was happening to the value of these lines and a CFO(finance) who had a patsy and a friendly auditor  (Arthur Anderson & Co).

   These were both massive accounting frauds. (I did not look up but wasn't Anderson PC's Auditor?)

Rgds IGN

[henry6]

Of course there was no one thing that caused the PC collapse, but so many contributing factors.  Real estate greed had a part, but so was the internal conflicts from the top down which were personal and personell,  juristictional, parochial, legal, petty, important., and in many cases poorly rationalized,  There are several good books documenting the rise and fall of PC and you'll find the real estate angel was only a small part of its downfall. In PC's defense, it was a time all American businesses were looking a invetments outside their own property to shore themselves up, and real estate was a major investment.

[garyla]

bumunderbridge

There is new acedotal infomation out that much of what is going on today happened back in  the early 1970s where railroads were getting into shady real estate deals and not paying attention to the railroad. That the merger of Pennsy  and New York Central was about making a killing on the real estate holding of the combined company and to heck with the railroad.  What happened in reality is that the Gov got Conrail and Carl Linder got the real estate

For the most part, what killed PC was the same miserable regulatory environment which also happened to sink New Haven, Jersey Central, Reading, Erie-Lackawanna, Rock Island, Milwaukee, etc., all within a few years.  There were other problems at PC but those were only minor contributing factors.  The main difference was that PC was much bigger than these others, and made a much bigger splash when it went under. 

Real estate?  PC, especially thanks to predecessor New York Central, was a land-wealthy though still hemorrhaging company.  Relieved of the railroad, which the government had regulated into the toilet and then took for a song, the PC bankruptcy estate was really worth something.  NYC had owned something on the order of 29 (!) acres of Manhattan.

When the bankruptcy was settled, PC debtholders were made nearly whole by the liquidation of some valuable assets, but I don't recall anything being freebied to Carl Linder.  If Linder bought at 1976 going-market prices, and made out later, good for him. 

[AltonFan]

One of the reasons that PC was involved in real estate (along with a lot of other stuff) was because the company's railroad business was becoming less and less profitable.  And it didn't help things that the PC inherited holdings in other railroads from predecessor Pennsylvania Railroad.

(Irony:  the CEO of PC during its collapse was Stuart Saunders, who had run the successful Norfolk & Western.  PRR owned a substantial share of N&W.)

The PC corporation survived the bankruptcy of its railroad, and exists today as an insurance company.  Their real estate division recently got in trouble for attempting to sell real estate which it did not own.

The books you need to look for are The Wreck of the Penn Central, based on articles written by newpaper reporters who covered the debacle, and No Way to Run a Railroad, mostly the memoirs of the PC's Chief Financial Officer.  This book was used as a textbook in business schools.

[henry6]

But railroads weren't the only businesses getting involved in real estate at that time.  It was a time of many businesses gettting involved in "holding companies" whose whole aim was to "diversify" in as many directions and businesses as possible.  Supermarkets, railroads, financial institutions, whatever.  The idea was to hedge your bets so that if things went sour in one sector, things should be good in another.  But it wasn't just railroads.

[AltonFan]

This thread inspired me to dig out my copy of No Way to Run a Railroad.  The author, Stephen Salsbury, says at the outset that diversification did not kill the PC.  So far, he says that neither PRR or NYC had much financial wiggle room, and any major financial setback or blunder would have sent them into bankruptcy.  He does opine that the lines operated very differently, and the merger might have succeeded, if the board of directors had operated the lines separately until those differences had been worked out.  Salsbury also blames "institutional rigidity."

Now George Drury in The Historical Guide to North American Railroads claimed that the NYC under Perlman was the more modern and progressive line, while PRR was a bastion of traditionalism.  Salsbury seems to be claiming the opposite, or at least presents David Bevan, PC's Chief Financial Officer, as a would-be modernizer, whose warnings went unheeded as events led to the merger and its failure.

[garyla]

AltonFan

This thread inspired me to dig out my copy of No Way to Run a Railroad.  The author, Stephen Salsbury, says at the outset that diversification did not kill the PC.  So far, he says that neither PRR or NYC had much financial wiggle room, and any major financial setback or blunder would have sent them into bankruptcy.  He does opine that the lines operated very differently, and the merger might have succeeded, if the board of directors had operated the lines separately until those differences had been worked out.  Salsbury also blames "institutional rigidity."

Now George Drury in The Historical Guide to North American Railroads claimed that the NYC under Perlman was the more modern and progressive line, while PRR was a bastion of traditionalism.  Salsbury seems to be claiming the opposite, or at least presents David Bevan, PC's Chief Financial Officer, as a would-be modernizer, whose warnings went unheeded as events led to the merger and its failure.

The PRR+NYC merger itself was a disaster, for sure.  The only other one nearly as bad (as far as I can recall) is the UP+SP marriage, which fortunately at least had one prosperous member. However, a smoothly managed merger would only have postponed the inevitable.  Before our terrible regulatory climate was going to change, it took a few disasters like the PC bankruptcy, which was going to happen with or without an orderly merger.

As for the relative quality of management at the two firms, the consensus I've seen was that, by the time of the 1968 merger, NYC had a much stronger team at the top.  Central's Al Perlman is still remembered as a legend of the railroad industry, and one hardly sees Pennsy's Stuart Saunders mentioned.  PRR, in its heyday, was a truly great institution, but had become very hidebound by the 1960s.  Meanwhile, Perlman had built a team of innovative young proteges who did a lot with little.  I have no stake in the NYC vs. PRR debate, but if I owned a railroad, I'd hire the Central guys to run it.

Maybe Perliman's biggest management mistake (ever) was sticking around and trying to salvage a hopeless situation. 

Days before the bankruptcy, Bevan was still trying to market PC debt instruments, as if a little more money, and a little more time, was going to change anything.

[henry6]

You cannot compare the PC to UP/SP merger, garyla.  The UP/SP had an operations glitch which was solvable as two differfent operating models clashed.  They learned to incorporate and accept both models so that it worked.   PC however, had corporate clashes, egos, jealousies, and insolence at the top that doomed any chance of working through the problems with the various parties.  It is interesting, though, how when CR was formed the PC contingent jelled in the fact of the other dozen railroads' people they faced!

Compare these mergers to a marriage.  The husband and his family did things one way, the wife and her family did things another way.  Now the two "things" have come together with certain tasks and philosophies to be decided upon for the new merger.  Some things are adopted from one family, some from another, some discarded entirely, some compromised into a "thing".  Most of the time, in the long run it works, sometimes it doesn't.  Once the UP operators learned they needed to know the quirks of certain SP operations and became able to give up UP's concepts and adopt or adapt to the SP's way, things worked out.  But with PC the larger family differences and jealousies could not be adapted or compromise across the board, both famileis wanted to keep their own and exclude the other, things fell apart quickly and disasterously...there was no real strong leader to deal with both families and emerge a victor.

[garyla]

henry6

You cannot compare the PC to UP/SP merger, garyla.  The UP/SP had an operations glitch which was solvable as two differfent operating models clashed.  They learned to incorporate and accept both models so that it worked.   PC however, had corporate clashes, egos, jealousies, and insolence at the top that doomed any chance of working through the problems with the various parties.  It is interesting, though, how when CR was formed the PC contingent jelled in the fact of the other dozen railroads' people they faced!

Compare these mergers to a marriage.  The husband and his family did things one way, the wife and her family did things another way.  Now the two "things" have come together with certain tasks and philosophies to be decided upon for the new merger.  Some things are adopted from one family, some from another, some discarded entirely, some compromised into a "thing".  Most of the time, in the long run it works, sometimes it doesn't.  Once the UP operators learned they needed to know the quirks of certain SP operations and became able to give up UP's concepts and adopt or adapt to the SP's way, things worked out.  But with PC the larger family differences and jealousies could not be adapted or compromise across the board, both famileis wanted to keep their own and exclude the other, things fell apart quickly and disasterously...there was no real strong leader to deal with both families and emerge a victor.

PC was indeed the ultimate example of more-or-less equals being thrown together and a disaster ensuing.  It took a huge bankruptcy (biggest in American history, to that point?) and essentially a government takeover to bring the warring parties to heel.  I didn't mean to discount what a zoo that was.

But don't underestimate the depth of arrogance which prevailed at long-prosperous UP.   Right in the wake of bungling a shoulda-been-easy hookup, UP+CNW, the same management team (claiming to be now wiser) took on a complicated one and failed spectacularly.  "Meltdown" was a term used to describe the UP+SP mess around Houston, and when eastbound trains in the California desert are dying on the law, without moving a foot since the last crew change, it's hard to overstate how screwed-up things were in ground-zero Texas.  At this point, UP should have learned its lesson by suffering a huge financial loss, terrible publicity, and a torrent of anger from its customers, yet stll it took years to replace the CEO who presided over this. 

Business schools ought to have a field day doing case studies on Uncle Pete.

PC is the #1 messed-up merger, for sure, but I can't think of a better candidate for #2 than UP+SP.