Except from Union Pacific, Volume II, 1894-1969 by Maury Klein
The welcome accorded Harriman by the other members of the Union Pacific board during the winter of 1898 was neither cordial nor enthusiastic. Some viewed him as an intruder who was beneath them in terms of wealth, position, and achievement. One doubter was James Stillman, the powerful head of National City Bank, who later became one of Harriman's closest associates. Years earlier a prominent businessman had warned Stillman to "look out for Ed Harriman. He is not so smart as some people think, and he is not a safe man to have business with." The cautious Stillman had heeded this advice. When he encountered Harriman on the Union Pacific board, he remained cool and distant but watchful, willing to revise his prejudice if the evidence warranted. This reception was hardly surprising for a brash, combative newcomer who had elbowed his way onto the board. If Harriman was bothered by the hostility, however, he gave no sign of it. Instead, he set about earning the other directors' respect with a swiftness that took their breath away. Jacob Schiff had said that if Harriman showed himself the strongest man on the executive committee, he would surely get the chairmanship he coveted. Even that shrewd banker must have been astonished at seeing Harriman installed in the post only five months after the new board took office. How did Harriman manage this feat? The standard explanation is that during those few months he impressed the other members with his energy and sagacity. No doubt he did this, but there is more to the story. Of the executive committee members appointed in December 1897, Harriman was the least known in business circles. Far from being a handicap, his relative obscurity proved a great advantage. His colleagues were all busy men preoccupied with other affairs. Winslow Pierce was a lawyer whose chief concern was acting as watchdog for the Gould interests; Otto Kahn and James Stillman were bankers who had no time or desire to take charge of a railroad. Marvin Hughitt was a railroad man but had his own company to run and could devote only limited attention to the Union Pacific. Here was a vacuum waiting to be filled, and Harriman alone had the time and willingness to do it. He still played a prominent role in the Illinois Central, but his commitments were nothing compared to those of the other members. Once he impressed them with his knowledge of railroads as well as finance, the job was his by default. It took him only a few months to demonstrate his ability and convince the others he could be trusted. The bylaws provided that Pierce as chairman of the board also served as ex-officio chairman of the executive committee. During the spring of 1898 these were amended to create a separate chairman for the executive committee. On May 23, 1898, the executive committee elected Harriman its chairman with Pierce retaining his place as chairman of the board. Jubilantly the little man settled into a drab office on the Pine Street corner of the Equitable Building at 120 Broadway. His first act was to summon the Union Pacific's secretary, Alexander Millar, and announce that he had taken charge of the company's affairs.
Yes, and U.P. was merely headquartered in New York for the first 120 years or so of its existence -- remember, the Builders were all Easterners. Then home was moved to Pennsylvania -- by Drew Lewis, to be within drunken driving distance of his farm -- and ultimately to Omaha. (I am winging recollection of my Maury Klein here.)
There is a connection between Union Pacific and New York City. Brown Brothers Harriman (the investment banking firm) is based in New York, the name gives away the connection.
Falcon48Well, based on your latest post, I guess I'm not sure what the point of your original post was.
Go back and re-read PDN's post (which is what mine was responding to) and then look again at the topic of this thread.
I understood you to be saying that SP really took over UP in the UP-SP merger. That's technically true, if you only look at the corporate form of the final merger (which is meaningless).
Meaningless... except in the sense of who owned whom. Which, again, was the actual subject of discussion... and yes, that's the 'corporate form', not what color was painted on the locomotives or the words on the paychecks. (We are not arguing about where the corporate HQ and operating officers of the merged entity wound up being, which was never in doubt...)
And yes, far be it from me to criticize your firsthand experience of the practical effect of the UP-SP merger. I restrict my observations ONLY to the matters of technical finance, and if that was not clearly expressed before, I say it now.
I think you mean "CP" rather than "CN" (probably a typo - I make plenty of these). There are several lessons, some of which have already been discussed by those who regularly comment on railroad stuff. But from my perspective, there are two big lessons:
(1) Understand who your consituencies are and try to persuade as many of them as possible up front that the merger makes sense. CP didn't do this. It seemed to assume that the only constituency that mattered was NS' shareholders. In a regulated industry such as railroading, that's not enough. You need to get shippers and communities on board. Labor too, if possible, although that can be a tougher sell. Compare this proposal with the UP-SP merger. The SP was clearly failing, preservation of the status quo was not an option and the UP was seen (more or less) as the savior. In contrast, NS clearly wasn't failing, and CP conveyed the image that its goal was to increase profits by gutting NS' infrastructure and services. Not a story that's going to give NS shippers (or anyone else) warm and fuzzy feelings about the merger.
(2) Respect the regulatory process. Yes, I know that many of those on this forum (including me) may not think very highly of the STB regulatory scheme. But STB regulation is a reality that must be dealt with. You don't play games with STB or any other regulatory agency. You treat them with respect, and you respect their processes and policies. The voting trust arrangement CP proposed was an insult to STB. STB would never would have approved it in the absence of overwhelming shipper support (which clearly wasn't there). The DOJ opposition made it obvious that STB wouldn't approve the trust but, frankly, that was pretty clear before DOJ weighed in. Remember the aborted SF-SP merger? They didn't respect the ICC's stated policies either. Those who don't respect history are doomed to repeat it.
My guess is that CP thought it could get NS shareholders to force NS management to agree to a merger before they had to get any affirmative STB regulatory action, and that this would solve their regulatory problems. If so, this was a serious blunder, and the people who made this judgment were, frankly, naive and should be held accountable for it.
But, as I said in my earlier post of today, I'm simply an ignorant ex railroader who happens to have been involved in railroad mergers. What do I know?
One opinion - I think because of the need to show improved competition as part of the merger rules, it will take a team of one Western US road and one Canadian road to acquire an Eastern road.
For example, one scenario - BNSF and CP go in to buy NS. CP gets ownership of the former Nickel Plate and Southern Tier to NY/NJ and Conrail Shared Assets, 50% ownership of CNO&TP to New Orleans and Mobile, trackage rights from Chattanooga to Atlanta, trackage rights for CBR on the former Pennsylvania from Cleveland to Philadelphia and Delaware, and trackage rights for containers on the former N&W from Bellevue to Norfolk. BNSF gets the rest.
There is increased competition in the former NS territory.
Others will come up with varying options and why not? In this forum we get to gamble with house money.
What lessons from CP's failure to merge/absorb NS should apply to any future merger attempts? (typo corrected)
Railroaders require Financiers to provide the physical plant - Financiers don't understand the art of railroading, and railroaders don't understand the art if intricate financial dealings - that is why we have a tax code that everyone thinks they understand and in reality NO ONE does - not even those that pile more and more pages on the tax codes every year.
Money and it's 'control' can be moved quicker than a magicians slight of hand.
Never too old to have a happy childhood!
Well, based on your latest post, I guess I'm not sure what the point of your original post was. I understood you to be saying that SP really took over UP in the UP-SP merger. That's technically true, if you only look at the corporate form of the final merger (which is meaningless). But that has nothing to do with the reality of who was gobbling up whom. The reality was that UP took over SP lock stock and barrel, not only in operations but in everything else that mattered. I also don't understand your reference to UP and New York.
But I guess I'm just a tired old railroader who is too ignorant to understand the implications of a railroad merger in which I was personally involved for years. I therefore withdraw from the field in favor of those who have less experience than I have, but who obviously have infinitely greater knowledge of these matters.
Falcon48 SP didn't absorb UP. You're confusing the structure of the UP-SP merger with the financial realities of the transaction.
I'm confusing nothing. This discussion is about the corporations and their structure, not the railroad operations (where it's perfectly clear who the dominant railroads were, and who exercised effective control of the merged operations).
Next you'll be telling me that UP couldn't possibly have had anything to do with New York since none of its operations (except, arguably, some run-through Pullmans) can within hundreds of miles of the place.
RME I am not so sure this applies to 'prepared' quick-buck artists - at least in the modern era of railways. The history regarding SP in the SFSP era, especially regarding the Reichmans and Phil Anschutz, is illustrative of what happens when the financial manipulations are successful. Many on this list may not appreciate that Central Pacific absorbed SP, and Rio Grande absorbed SP, and SP absorbed UP, with a name change of the surviving entity almost immediately in each instance. I'm sure there are many other examples Mr. North, in particular, can describe -- the Reading Combine being a particularly fascinating one because it was so dramatic in its rise and fall, and the whole van Sweringen story still being a bit confused in how it was bankrolled and why it was allowed to come apart. But the idea of 'biggest of the big leagues' ... even in the years when railroading was presumed to be moribund and ultimately obsolescent, and the 'money' was in things like mineral rights, communications subsidiaries, and financial-services "divisions" like the investment wing of IC ... still applies, even when railroads are far from the 'biggest' entities in play in finance.
I am not so sure this applies to 'prepared' quick-buck artists - at least in the modern era of railways. The history regarding SP in the SFSP era, especially regarding the Reichmans and Phil Anschutz, is illustrative of what happens when the financial manipulations are successful. Many on this list may not appreciate that Central Pacific absorbed SP, and Rio Grande absorbed SP, and SP absorbed UP, with a name change of the surviving entity almost immediately in each instance. I'm sure there are many other examples Mr. North, in particular, can describe -- the Reading Combine being a particularly fascinating one because it was so dramatic in its rise and fall, and the whole van Sweringen story still being a bit confused in how it was bankrolled and why it was allowed to come apart.
But the idea of 'biggest of the big leagues' ... even in the years when railroading was presumed to be moribund and ultimately obsolescent, and the 'money' was in things like mineral rights, communications subsidiaries, and financial-services "divisions" like the investment wing of IC ... still applies, even when railroads are far from the 'biggest' entities in play in finance.
I'm not as familiar with the formal structure of the Central Pacific-Southern Pacific merger, but SP was clearly the dominant party in that merger, and controlled CP for years before the formal merger. You are correct, however, that DRGW was the dominant party in the DRGW-SP acquisition.
A non-railroad example of this was the late 19th century utility merger between Sam Insull's Chicago Edison Company, one of the largest and most successful utilities of its day, and Commonwealth Electric, a Chicago area "utility" with no operations and no operating assets - essentially, just a corporate shell. But Commonwealth did have a 50 year franchise (the result of Chicago political maneuverings which aren't relevant to the present discussion), which was much longer than Edison's franchise. So, the merger was structured so that Commonwealth was the surviving corporation and Chicago Edison was merged into it (creating today's Commonwealth Edison company). None of this had anything do do with the issue of who had actually gobbled up whom.
Kinda like a wolf who gobbles up a mouse and then takes the name of the mouse.
Well EHH moneyman in Ackman just got a bigger headache than NS telling him no for months on end. Try a Congressional Supena for Fraud with his involement in the Valenant Pharmcuitcals mess. He was on the Board of Directors that approved everything. He might end up doing a Perp walk according to a friend in Washington. Something about Insider Trading as he Dumped his stocks before the bad news hit.
Paul_D_North_JrUnprepared quick-buck artists enter at their own risk - much like wading into an alligator-infested swamp - and no one should be surprised at the predictable, similar result.
RMEArticle in Railway Age regarding the aftermath. Here's something for the graffiti-is-always-evil folks:
Here's something for the graffiti-is-always-evil folks:
Also the Railway Age article. I've often thought that the railroad industry corporate activity and finance is the biggest of the big leagues, going all the way back to J. Edgar Thomson of the PRR, E. H. Harriman, Commodore Vanderbilt, Jim Hill, J. P. Morgan, and many others, including those mentioned in the article. The industry may look stodgy and sometimes there are big blunders - i.e., Penn Central, one of the biggest - but big is one of its defining characteristics. So is sophisticated, complicated, nuanced - and cut-throat. Unprepared quick-buck artists enter at their own risk - much like wading into an alligator-infested swamp - and no one should be surprised at the predictable, similar result.
I'll have to find the Dilbert Rasputin vs. Wally cartoon which ends with: "He never had a chance."
EDIT: Here it is: http://theolddub.com/dilberts/Rasputin.htm
- Paul North.
kgbw49 It seems to me, given where KCS goes - Dallas, Houston, New Orleans and the chemical coasts of Louisiana and Texas, plus Mexico - that the only way a merger of KCS makes sense is if one of the two eastern roads, who serve approximately 2/3 of the population of the US, figured out that there was enough of their own traffic to Dallas, Houston and Mexico that they could keep captive on what would be their own railroad, and drive up density that way, and likewise direct haul out of Mexico on single line service to everything east of the Mississippi.
It seems to me, given where KCS goes - Dallas, Houston, New Orleans and the chemical coasts of Louisiana and Texas, plus Mexico - that the only way a merger of KCS makes sense is if one of the two eastern roads, who serve approximately 2/3 of the population of the US, figured out that there was enough of their own traffic to Dallas, Houston and Mexico that they could keep captive on what would be their own railroad, and drive up density that way, and likewise direct haul out of Mexico on single line service to everything east of the Mississippi.
I wonder to what extent NS already realizes this benefit via the Meridian Speedway, and if the speedway might not whet their appetite for more?
But looking north-south again: Did the Illinois Central turn out to be a significant benefit to CN? Why was getting to the Gulf so important to CN a generation ago but is of so little apparent interest to CP today, when the region is even more dynamic?
Article in Railway Age regarding the aftermath.
Kansas City Southern's market cap as of close today was about $10.24 billion.
In 2015, they had $2.419 billion in revenue and turned a net profit after taxes of $485 million, bringing 20.04% of revenue to the bottom line on a 66.4 Operating Ratio for the year.
Long term debt was a little over $2 billion at December 31, 2015.
Balance sheet equity at year end 2015 stood at $4.225 billion, so the simple return on balance sheet equity was 11.48%.
Of course, that is not market value.
To offer investors a 40% premium on $10.24 billion in market capitalization would take an offer of about $14.3 billion.
$14.3 billion is about 6 times annual gross revenues.
Assuming they continue to turn $485 million annually in net income, that is a simple return of about 3.4% on the $14.3 billion investment.
Granted, there might be some synergies - a larger railroad might not need as many locomotives, etc.
But for a larger railroad to make a move, they would have to figure out some sort of "traffic multiplier" from the combination to get the revenues and net income from the KCS property up significantly.
Would that be enough to double traffic density on KCS? Could they keep enough traffic from Mexico on their lines to make it pay? Based on the fact that no other Class I has made a move to acquire KCS even though the old "pro-merger" STB rules would apply, I am guessing their traffic analysts have looked at it and concluded that at an approximately $10 billion market capitalization figure, the numbers don't add up.
Time will tell, I suppose.
KCS doesn't offer enough physical plant or profit to recover the investment unless it comes cheap. It's not worth anything like NS or CSX.
CPRcst CP has looked at KCS before, I was at an employee town hall where then CEO Rob Ritchie said it was very attractive, CP gave it a hard look, but it was just too expensive.
CP has looked at KCS before, I was at an employee town hall where then CEO Rob Ritchie said it was very attractive, CP gave it a hard look, but it was just too expensive.
Rob Ritchie was last CEO of CO in 2006. I wonder if the equation has changed over 10 years? Time will tell, I guess.
tree68 kgbw49 Any ideas why that would be bad business? Given the usual MO of folks like Ackman, I would opine it's because they can't turn a quick buck on it. "Long term investment" isn't in their vocabulary.
kgbw49 Any ideas why that would be bad business?
Given the usual MO of folks like Ackman, I would opine it's because they can't turn a quick buck on it.
"Long term investment" isn't in their vocabulary.
UlrichFinally, they came to their senses. Just run the damn railroad and forget about building empires of dubious value. NS and CP can work together without a merger.
kgbw49Any ideas why that would be bad business?
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
Okay, so if you are EHH and want to grow the business, why wouldn't you want to haul export grain from the Upper Midwest to export ports on the Gulf - New Orleans, Mobile, Houston? Why wouldn't you want to haul auto parts from Ontario to factories in Mexico? Why wouldn't you want to haul frac sand from Western Wisconsin to Texas? Why wouldn't you want to haul finished autos and consumer goods for Ontario, Quebec, and for the New England states, New York, New Jersey and Philly as far as Buffalo on a single carrier haul from Mexico? I know he said for some reason he does not like the Mexico play. KCS is at about $9.6 billion market cap so it would probably take at least a 30% premium to acquire, or $12.5 billion. Is there not enough business there? Is KCS too highly leveraged? Any ideas why that would be bad business?
blue streak 1 CP calls off merger attempt ? We may need to be careful in that we hHave no idea what EHH might have in mind ?
CP calls off merger attempt ? We may need to be careful in that we hHave no idea what EHH might have in mind ?
Without Ackman's money it makes no difference what EHH has in mind - he won't have the funds to do it. Without Ackman's money EHH would still be in retirement.
zugmann Don't forget about that RRsRGr8 guy (or whatever his name is).
Don't forget about that RRsRGr8 guy (or whatever his name is).
I think his real name must be Eugene
Greetings from Alberta
-an Articulate Malcontent
Buslistthere won't be any. What will poor Fred write about now. Seems like he and Hunter were the only 2 folks in favor.
Don't forget about that RRsRGr8 guy (or whatever his name is). Although I have suspicions he was just a paid troll.
The opinions expressed here represent my own and not those of my employer, any other railroad, company, or person.
Our community is FREE to join. To participate you must either login or register for an account.