Rob Krebs on mergers, then and now

If ever there was a passionate advocate for a national, coast-to-coast U.S. railroad, it would be Robert Krebs. In the January 2001 issue of Trains, I wrote this upon his retirement as chief executive of Burlington Northern Santa Fe: “This he believes: Without a national reach, no railroad will ever realize its full potential, and the industry will remain an unattractive alternative to most shippers. Short of that ideal, no railroad will hold its own destiny in its hands.” The previous July, his railroad and Canadian National had terminated an announced merger due to implacable opposition from other railroads, the Surface Transportation Board (it imposed a moratorium on mergers), and even BNSF’s biggest shipper.

Only now, close to 14 years later, is a merger among Class I railroads back in the news. Canadian Pacific Railway and CSX Transportation last month acknowledged they had discussed a merger, but CSX wasn’t interested in proceeding further. In my opinion, we have not seen the last of this.

I wondered whether Krebs had altered his opinion of railroad mergers, and how he views the scene today. We spoke by phone, he from his home in Lake Forest, Ill.

Rob, thinking back to 2000, when BNSF and CN sought to merge, what most of all distinguished it to you?

To me the number one thing was that this is a network business, and the bigger the network the more valuable you are. The perfect world for me would be merger with an eastern carrier. But I couldn’t talk Norfolk Southern into doing a deal. It was probably my biggest disappointment. We could have made it happen while Union Pacific was getting its purchase of Southern Pacific approved. We would have had the first true transcontinental  railroad. By the time we got there with Canadian National, NS and CSX had poisoned the well with Conrail and UP had fallen apart so badly that nobody would approve a merger. But I tried with CN because it would be a bigger network with parts in the U.S. that made sense. Plus, at a big company you don’t need two of everything. We anticipated a couple billion dollars of free cash flow every year. It would have been an incredible company. But it came at the wrong time and we couldn’t get it done. We got outplayed politically by people who had screwed up the industry and then said there should not be another merger.

And that raises the question: What kept the BNSF-CN merger from happening? Opposition from other railroads?

Yes, from UP especially. But CSX too, with John Snow. We got outplayed in Washington. It’s that simple. Once the STB put the moratorium on, we couldn’t get it overturned—we took it to the U.S. Circuit Court of Appeals. With all the delay and uncertainty, Paul Tellier and I agreed to hell with it, we were done. The ironic thing, considering what is going on today, is that Hunter Harrison would have run the merged railroad, and I was looking forward to seeing him do it. The two reasons for that merger still exist: the value of a larger network and the synergies that come about when you put two big companies together.

CP + CSX bears many similarities to BNSF + CN. Based on what you’ve read, might it also make sense?

Yes, it would make sense. It would also make sense if I woke up tomorrow morning and read that Berkshire Hathaway bought NS. I’d cry Halleluiah! Then you have the problem: Can it get approved. I’ve been retired 12-13 years, and all I know is what I read. I know there are complaints about rates. I spent my whole life cutting off people, and Matt Rose spent his entire life raising prices. Between the two of us, the company [BNSF Railway] is now doing very well. Unfortunately, it has more business than it can handle, but they’ll work their way through it. So CP and CSX makes sense. It doesn’t seem right to me, since this is end to end, if all you worry about is size. With CN, I was willing to live with some open access, which they already have in Canada, to get the merger approved.

Today, it is possible to have a national railroad, coast to coast, that is too big to manage well?

I don’t think so. You have fixed tracks and everything in place. If you know what you’re doing you can certainly manage a big railroad. A computer was made for railroads. That wouldn’t be a problem. The thought of becoming too big to manage has never entered my mind. You still have to have good management.

Why does implementation of a merger always seem to turn into crash-and-burn?

I would take exception to that. BNSF didn’t crash. Our service was still 80% on time with intermodal traffic. That was the irony. I produced this book which I sent to Linda Morgan [then chair of the STB] that detailed every promise we ever made in terms of safety and service and cost efficiency and how we far exceeded every promise we made when BN and Santa Fe merged. We just got blamed for the sins of these other perpetrators. This doesn’t mean we weren’t going through hell putting our railroads together. Our two computer systems couldn’t speak to each other so we did entered a lot of data manually until we put in an entirely new computer system.

So today, is it time to try again? Does CP + CSX appeal to you as a good place to start?

I guess I’m a skeptic. I don’t know politically if it can be approved. You have the STB, obviously. I will say it’s worth a try. It’s worth a try especially if you’re willing to open up access, as Hunter has said he would do. If you know you’re good, that you’re going to be the best, why should you care if the other guy has access to your customer? The best man wins. Opposition of other railroads would be just as strong today as in 2000. But once the shippers get the idea they can get open access, then those other railroads become enemies of the shippers. That’s probably the key.

Couldn’t investor and CP shareholder Bill Ackman achieve the same end result for shareholders by winning a proxy battle for control of the CSX board and just hiring Hunter to run the company?

It seems to me there are laws that prohibit de facto mergers. But that is certainly one way to go about it. If you could do it, that might be a first step. So it’s not a bad idea, if it’s possible.

What advice do you have for a Class I railroad executive contemplating a merger?

You have to build support for it, and you start with the shippers. Mergers make sense in the long run for customers. But the specter that big is bad and the history of past mergers that weren’t well implemented are things you have to get past. And the way to do that is to provide something for the shippers. If you can get shippers to at least be neutral, then you can get the politicians to be neutral. Our biggest customer, UPS, wrote the Surface Transportation Board saying the merger should never happen. That was a killer. We had just delivered, between Thanksgiving and Christmas, 142,000 trailers without a miss, and that was the thanks we got.

I have to ask: Do you miss the railroad life?

No. Not a bit. I walked away in 2001 and thought I’d done my job. I put together a company that was running well and found a man to replace me who is running it better.