The Canadian Pacific derailment

Hunter Harrison and Keith Creel got a lot of attention this week during Canadian Pacific’s quarterly call with analysts. The upshot is a speculation that Calgary-based CP may be backing away from its proposal to buy Virginia-based Norfolk Southern. That may well be the case. I have never felt confident that the U.S. Surface Transportation Board will approve this merger (or any other one involving the Big Six railroads).

It’s fair to say that nobody running a Class I railroad wants a merger among them other than Hunter Harrison. On the one hand, a lot of really savvy railroad people I talk to believe that national networks are coming. If FedEx and UPS can run a duopoly in package service (with the USPS a distant third) and not screw things up every day, then why cannot railroads? On the other hand, my sources are fearful of the agonizing process of getting such mergers approved and then melding together two (or three) businesses, each with its distinct corporate culture and information system. Harrison chose NS to be his bride not because of the great synergies they would create but because NS was the weaker and more vulnerable of the two big eastern railroads. I would have done the same thing.

But wise as he is in asset utilization, Harrison was politically naive and let Canadian Pacific be cluster bombed in Washington, D.C. As best I can tell, CP has no full time lobbyist in Washington—just a couple of lawyers who work on retainer. NS has a well respected Washington office, and its people orchestrated the tidal wave of criticism directed at CP. Even the STB chairman got into the act, as did Federal Railroad Administration boss Sarah Feinberg, who ought to know better than to insert herself in this fight.

So Harrison, the chief executive of CP, and president Creel came to the call-in with analysts somewhat battered and bruised, Harrison saying “the deck is stacked” against the Canadian company. “If this is a political contest and we’re going to forget about the process that was designed, and we’re going to let the legislative branch take over, the rules are all changed, and what is right for our shareholders...changed,” he continued. Maybe, instead of buying NS, he added, CP should buy back more of its own shares.

Myself, I think this corporate war is about to turn in a different direction. If Norfolk Southern holds its annual meeting in mid May, as it customarily does, nominations for directors are due three months in advance, meaning mid February. My hunch is that CP actually will back off or disconnect from this merger, at least for the moment. The new strategy: CP or its Wall Street allies will nominate directors favorable to CP’s cause—or at the very least, favorable to having Harrison depart Calgary to run Norfolk Southern, with or without a merger. And if an insurgent list of directors is put forth, odds are quite high that these men and women will prevail, as occurred at CSX with The Children's Investment Fund in 2008 and at CP with Bill Ackman's Pershing Square Capital Management in 2012. Let me state this another way: A merger of CP + NS is unlikely. The arrival of Hunter Harrison in Norfolk is likely.

We’ll know whether such a vote will occur within three weeks. Coming next from Fred: Would E. Hunter Harrison really fall on his face running Norfolk Southern?—Fred W. Frailey