Advice for the NEXT rail merger

I’ve been working on a book, a tiny piece of which involves examining the failed attempt by Burlington Northern Santa Fe and Canadian National railways to merge. That was in 1999-2000. And the more I lift the dead leaves off that failed enterprise, the more startled I became.

The parallels between Canadian Pacific+Norfolk Southern in 2015-2016 and BNSF+CN in 1999-2000 are striking. Granted, BNSF+CN was a friendly affair between those two railroads, whereas CP+NS is quite the opposite. But Rob Krebs, the CEO of BNSF then, recalls waking up one morning soon after the announcement and seeing the full page ad in the Wall Street Journal opposing the merger. It was signed by Dick Davidson (Union Pacific), David Goode (NS) and John Snow (CSX Transportation) -- the three railroad CEOs who had 1) all recently done big mergers of their own, and 2) in each case royally screwed them up, giving mergers a bad name. Davidson, bless him, was cheekiest of all, inasmuch as UP was pieced together over 15 years by a whole series of acquisitions (Missouri Pacific, Western Pacific, Katy, Chicago & North Western, Southern Pacific) and then wanted the process to stop because UP was where it wanted to be: on top of the heap.

So Krebs and Paul Tellier of Canadian National quite literally could find no friend. Opposing railroads lobbied the shippers so effectively that even United Parcel Service, BNSF's biggest and happiest customer, came out publicly in opposition. Sixteen years later, that slap still burns Krebs. Bud Shuster, father of Bill Shuster who held the U.S. House of Representatives transportation committee chairmanship  that Bill now has, avoided Krebs and when finally cornered in Arizona told Krebs it was a bad idea and to go away--Union Pacific had gotten to him first. Just this week Bill Shuster publicly condemned Canadian Pacific’s plan to merge with Norfolk Southern.

What I see is CP+NS playing out much the same way as BNSF+CN, in which railroads other than Canadian Pacific successfully attack it politically. It worked before -- oh boy, did it! – and it appears to be working again. The final parallel, if it occurs, would be the Surface Transportation Board’s refusing  to entertain a trusteeship for CP, just as the STB in 1999 declared a merger moratorium (causing BNSF+CN to back out of their merger plan) and then rewrote the merger rules to make mergers next to impossible. A source of mine who knew Linda Morgan, then the chair of STB, quite well says she was offended that neither Krebs or Tellier gave her a heads up. On such small things do big decisions revolve.

The lesson I draw from this is that Krebs then and Hunter Harrison of CP now were politically naive and totally taken by surprise by the quite effective political attacks waged by other railroads. Both men are the defining railroad CEOs of their eras. But alas, they were politically tone deaf (believe me, those customer letters opposing the two combinations were not unsolicited). The merits of the merger in 1999 never got considered, just as those of CP+NS probably will not be. This isn’t how policy should be made, but so be it.

So here is my advice: The next railroads to try to merge are forewarned and had better have a political plan in place before they go public with their wedding plans. In other words, recognize beforehand the now-tried-and-true game plan that other railroads will use and have in place a strategy to neutralize it before it blooms. This implies a lot of behind-the-scenes activity and expensive dinners in the quiet corners of Washington restaurants. But this is how policy is crafted, and a Class I railroad merger today is as much about politics as it is business sense.—Fred W. Frailey