Three theories about why CP wants NS

In the February issue of Trains magazine, which has been in subscriber hands for better than a week now and is available to newsstand buyers now, I wrote an editorial in opposition to Canadian Pacific’s proposed takeover of Norfolk Southern. My reasoning is that there is little business incentive to combining tese two railroads. They do a slim amount of business together and the cultures are dissimilar. I’ll let you read the editorial on page 4 and decide if I got it right or not.

 But something is still nagging me about this whole thing: Why would CP go after NS in the first place? I could understand NS or CSX merging with BNSF Railway or Union Pacific or even Kanas City Southern. They run trains back and forth across the U.S., exchanging them at places like New Orleans, Memphis, Kansas City, St. Louis, and Chicago all the time. But CP? The two railroads barely touch. After talking to friends, both in the industry and observers, I have three theories as to why CP wants NS.

 1. CP CEO Hunter Harrison’s ego. This deal isn’t about the money. It’s about validating Harrison and his way of doing things. Harrison is a hands on CEO who calls his dispatcher on a Saturday night tells him he wants to run the railroad. He writes books about how to railroad and distributes them to the troops. When he sees track or power that aren’t being used, he scraps them. Some people call that being in touch. Others call it meddling. Whatever it is, it’s not so much about business relationships or evident efficiencies – it’s about Harrison’s leadership, his vision, and his being able to see things that other mortals don’t. People believe in this. A few years ago a friend of mine told me he was on his way to Calgary to work for the greatest living railroader of our age, Harrison. This ego theory is one I can believe. What I don’t believe is that it is that there are no other railroad CEOs without vision, leadership, or the ability to run a company in a way that builds business and controls costs. As an industry friend of mine asked recently, “If Hunter’s way is so great, then why isn’t every other railroad doing things his way?”

 2. Buoy the stock price. Now, I don’t know how much of this theory I believe, but some people do. They think Harrison’s boss, Bill Ackman at the Pershing Square investment group, is trying to boost CP’s sagging stock price. The duo has gone in, done what they can to make CP more profitable, but now they’re out of tricks and have to go on to the next outfit that’s rich with assets ripe for the stripping for short-term gains. In general, the stock market didn’t fare well in 2015, and it’s already off to a rocky start in 2016. Railroads got hit hard as an industry last year. After climbing steadily over the previous four years to a high of more than $200 per share, CP’s stock dropped throughout 2015 to just over $100 to begin 2016. NS saw a more sawtooth increase from 2012 to 2015 but ended up at more than $116 per share until dropping to $78 in early 2016. I’m not sure that I believe in stock price manipulation, but it is in intriguing theory.

 3. Trigger the merger avalanche. In this view, Harrison and Ackman are two intrepid prospectors who see consolidations as valuable and inevitable so they’re tossing dynamite charges against a hillside in hopes that rocks will fly and some gold will fall their way. In other words, their CP+NS proposal gets NS talking to BNSF or KCS or UP and soon, CSX is doing the same, and at some point, somebody calls up Calgary or Montreal and CP and CN get swept into the deluge. Suddenly, instead of seven railroads, you have two or maybe three mega railroad systems across North America. Do I buy it? Yes, I do. I think there’s a desire in Hunter Harrison to make something big happen. And nothing is bigger than the final solution, right?