Mr. Squires, you have a visitor

Posted by Fred Frailey
on Tuesday, November 10, 2015

Well, here we go again. Just when I am trying to decide which root vegetables should adorn our Thanksgiving table, Hunter Harrison sneaks past all of us and steals Norfolk Southern!

Okay, he hasn’t stolen Norfolk Southern. Or even bought it or merged with it. Yet. But this is the real thing, folks. We’ve been asleep at the switch, and Mrs. Harrison’s boy Hunter, the chief executive of Canadian Pacific, showed up with roses to give young Jim Squires, the chief exec of NS. Squires is in no position to refuse them, because this time Harrison won’t just go away, a jilted suitor.

Let’s back up a minute. Precisely a year ago, Harrison approached the boss of NS competitor CSX in a friendly manner. He and Michael Ward toyed with the idea of combining to form a truly transcontinental enterprise, joining the two railroads in Chicago. As you and I would have predicted, at the first opportunity, Ward bolted. Harrison acted surprised when he spoke with analysts later. And I think he was embarrassed. He sincerely believes that to be effective, railroads need national networks. As he sees matters, the Mississippi River—the east-west railroad divide—is an artificial barrier that inhibits efficiency and leaves truckers too much traffic that ought to be on rails.

And as one of my friends noted this morning, Harrison cannot be seen to be rebuffed so easily twice. Undignified. Bloomberg News, which broke the story yesterday, said CP is already raising money to buy NS, and the New York Times this morning reported the railroad has brought in investment advisors, which I guess is saying the same thing twice. None of this occurred a year ago when CP and CSX met.

My, there must be a lot of edgy people in Omaha and Fort Worth and Kansas City and Montreal and Jacksonville this morning. It’s not enough to just say the Surface Transportation Board or the Canadian government would nix a CP-NS marriage. Maybe they would say no, but not necessarily. Harrison has said he would grant “equal access” to shippers as a condition—that is, allow other railroads to poach traffic of shippers located on its lines (if they can). CP+NS would totally upset the equilibrium that has existed in railroading since the creation of today’s railroad superpowers. Other railroads cannot just sit by and watch this happen, doing nothing.

Let me offer just one of many possibilities: One railroad in North America has unlimited resources to devote to a merger. That’s BNSF Railway. Owner Berkshire Hathaway sits on $40 billion of cash, enough to buy NS and CSX and Kansas City Southern, without having to even pull out its credit card. And Berkshire’s CEO, Warren Buffett, doesn’t give a whit whether Wall Street, that is, the investment community, thinks mergers are a wise thing just now. What I’m suggesting is that Berkshire and BNSF could decide they should own Norfolk Southern and push Canadian Pacific aside. And boy, at that, the dominoes would begin to fall.—Fred W. Frailey

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