CSX: Clearing the runway or lacing it with landmines?

Posted by Jim Wrinn
on Thursday, February 23, 2017

In business, when it comes to takeovers, succession, and change, there is posturing, and then there is actual stance. Understanding the difference is a fine art. Thus, I am absorbing this week’s CSX news like a college student's junior’s appreciation course. How shall we interpret CSX’s top management shakeup -- CEO Michael Ward to retire without a successor -- and the railroad’s plan to layoff 1,000 management positions?

At a glance i see a picture of a company that’s either clearing the landing strip for Hunter Harrison to take over or lacing the runway with landmines.

The first perspective, and probably the leading one among observers and combatants that I talk with, is this: The CSX board is clearing the way for Harrison and activist investor group Mantle Ridge. They just need to figure out if it comes at a price and a number of board seats that the current board and the other 95.1 percent of shareholders will be able to tolerate. I can’t blame them for negotiating. While CSX claims Hunter’s deal is worth $300 million, and Mantle Ridge says $128 million, either way that’s still a bunch of money that could be going into the railroad. Either chunk of money would make a nice down payment on the Howard Street Tunnel project in Baltimore, laying more double track between Chicago and Jacksonville, or taking care of another big-ticket project to make the railroad more nimble and profitable.

The other perspective about the landmines is that CSX is launching a pre-emptive strike. Layoffs will surely save the company at least $100 million if not more in compensation and benefits. To me this screams, “We’ve no need for Mantle Ridge and Hunter Harrison to come to our rescue. We’re slimming down and building up our muscles just fine on our own.” I’m not much of a gambler, but I tend to think it’s the latter. Ward had signed on for another three years in 2016, and Harrison’s arrival was not in CSX’s plans for the future. CSX had record productivity and posted its best ever operating ratio in 2016. But it was still not enough.

If CSX is preparing to fight, I expect we’ll see more action in coming weeks. How that plays out is up to folks at 500 Water Street in Jax, but if I had to guess I think we’ll see moves to sell routes that are no longer robust, cash in surplus equipment, and come up with revenues or savings equal to or exceeding the millions that CSX says Harrison’s arrival would cost the railroad.

Perhaps soon, or hopefully no later than Memorial Day, we’ll know if all of this was just posturing or a true steel-toed boots planted in the ballast stance and whether the runway welcome committee was out or not.

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