Norfolk Southern's woeful counterattack

Posted by Fred Frailey
on Friday, December 4, 2015

Edited 12:14 p.m. Dec. 4

Give Jim Squires a “B” and a pat on the back for trying hard. He is freshly minted as chief executive of Norfolk Southern, and I wouldn’t wish for anyone in such circumstances to be under the pressure he’s had to withstand. Today NS formally rejected Canadian Pacific’s offer to buy the Norfolk-based railroad. Squires had to defend that decision in a public presentation and then under questioning from plainly skeptical securities analysts. He gave it his best shot. It was clearly not good enough.

You can download the slides and read the transcript of the event at I want to briefly give you my impressions.

First, he hammered again and again at a few key points: The offer itself is “grossly inadequate.” A merger would face “substantial regulatory risks” that are “highly unlikely” to be overcome. Even if successful, a merged railroad would find 60 percent of its carload business “poachable” by competitors while driving away existing service-sensitive customers. And NS has its own plan to increase revenues and lower costs.

That was pretty much it. Squires took no questions from reporters, only securities analysts. But as the Wall Streeters tossed out questions, you could almost see their upraised eyebrows and hear their derision.

They challenged each of those key points. Okay, said one, if the offer is inadequate, are you open to another? Doesn’t matter, Squires replied, the regulatory risks remain virtually insurmountable. Then how about an offer from BNSF Railway or Union Pacific? He refused to answer that one. Has he spoken with Surface Transportation Board members? No, said Squires, just “regulatory experts and former commissioners,” and they agree with him. Isn’t his whole plan going forward predicated on coal business stabilizing and intermodal business growing briskly, and what if those things don’t happen? We’re busy on other ways to reduce costs, he replied. One analyst said NS has “an offer to get a proven management team” from CP but unfortunately did not ask Squires why he thinks his team is superior. Too bad; I would have liked to hear his reply.

I don’t think the reactions of securities analysts will be favorable. But what was the guy to do? Squires is playing the cards he was dealt as best he can. Alas, the cards he holds undermine his case that NS has a better plan going forward. He can wish all he wants, but the coal business is still in decline and intermodal traffic is now heading down, too, rather than up. Sorry, those are the inconvenient facts.

So now the ball is back in Canadian Pacific’s court. As analyst Anthony Hatch is fond of saying, never underestimate Hunter Harrison. He’ll pounce right back, like a hungry wolf. And so far, he remains the only suitor. Word is going around that UP CEO Lance Fritz visited all three STB commissioners Wednesday to deliver that railroad’s opposition to any merger, so UP won’t intervene. BNSF? Reached by Business News Network yesterday, here’s what Executive Chairman Matt Rose had to say: “A new transcontinental merger could have the ultimate effect of restructuring the industry, and BNSF will participate in the process if the proposal receives official consideration.” What does that means? If CP+NS goes to the STB, we'll be there, too, with our own proposed merger. That's how I read it.—Fred W. Frailey

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