Ever feel you're being stalked?

That uncomfortable feeling must be going through the mind of Norfolk Southern chief executive Jim Squires. Until two weeks ago, the prevailing assumption had been that the stalker, Canadian Pacific, would mount a proxy contest to elect its directors to the NS board and thereby hasten a friendly merger between the two railroads.

Then CP abruptly changed direction. In an interview with me on February 3, CP chief executive Hunter Harrison raised two issues that he claimed would keep his company from proceeding with a proxy contest. Both issues seem spurious to me, and I conclude now that his intent in that interview was to signal a change in direction.

That new direction is not to give up, but to back off and see what happens. Late last week CP said it would introduce a resolution to be voted on by Norfolk Southern shareholders before the NS annual meeting this spring. That resolution would simply implore NS executives to discuss a combination with Canadian Pacific, something it has thus far refused to do.

And now Canadian Pacific will ask the U.S. Surface Transportation Board to issue a declaratory order stating that a voting trust such as CP has proposed for one of the two railroads, should a merger proceeding occur, would be acceptable within the framework of merger rules the agency has erected.

What does all this mean? It means the screws are being turned, although slowly. If the shareholder resolution is approved (which it probably will be), and NS does not engage in good faith talks with Canadian Pacific, it will be pretty damning of Norfolk Southern management in the eyes of institutional shareholders, who own a majority of the railroad’s stock. (Defeat of the resolution would pretty much mean the end of Canadian Pacific’s campaign.)

I have no idea whatever what the STB will decide regarding the declaratory order concerning a voting trust. But if it says the arrangement CP proposes passes muster, then a big uncertainty about whether the merger could win regulatory approval is removed. (And a negative determination by STB would shut down CP’s pursuit of NS.) Analysts expect the board to take at least three months to decide the matter.

Bottom line is that CP+NS is off the front burner and merely simmering on the back of the stove. Who knows what caused Harrison to step back. Maybe he wants to build a better case. Maybe the big holders of NS shares need more convincing. If this business combination ever moves forward, it may be next year at the earliest before we find out. In the meantime, Squires has a breather, a chance to move out of the stalker’s range. Let’s see how well he uses that opportunity.—Fred W. Frailey