You need to understand what a "leveraged buy-out" is in order to appreciate the differences between those types of "raids" that henry6 is alluding to, and most railroad mergers which are different. Space and time preclude me from a good explanation, but here's a really simple one:
Most railroad mergers mainly involve just the shareholders of the respective railroads as principals. There are always investment banks involved, which line up ("underwrite") the issuance of the new stock and any interim or new debt financing. Important note: In these transactions, the debt is accessory to the primary transaction - usually only to consolidate/ clean-up or simplify the balance sheet or legal aspects of which one is senior, that kind of thing - the debt is not the "driver" of the transaction. Those investment banks* always get their fee, and may participate in some of the stock or debt for their own account one way or another, but that too is minor.
* - "Despite their name, investment banks regard anything over 48 hours as 'long-term'. " - Robert Townsend, former President and CEO of Avis Rent-a-Car from back in the 1960's (of the "We try harder !" advertising slogan fame), in his business book from around then entitled Up the Organization ! (which is a nice double-entendre for those of us who are left-over flower children and hippies from or remember the same era).
In a leveraged buy-out or "LBO", the acquiring entity borrows all or almost all of the money it needs to purchase the company(ies) being acquired. The acquirer then does as henry6 indicates - cuts costs and whatever else it feels it needs to do to bump up the stock price, sells the stock, reaps its profit, and then goes on its merry way (no doubt to "rinse & repeat" = do it all over again with/ to someone else). The goal and purpose is for the acquirer makes its money from the increase in the stock price, without having to come up with or invest much of its own money, as long as the interest costs on the borrowed money and other fees associated with the transaction don't eat up all the profit. Note that in this scenario, a merger may or may not be involved.
More importantly, in the LBO note the presence of a huge amount of new debt - the debt-to-equity ratio will typically be in the 80 to 90 to even the 100 % range, depending on how bold/ aggressive the acquirer is and how credit-worthy the underlying company(ies) is (are), their short-term business prospects, etc. In contrast, most recent railroad mergers did not involve any huge new debt loads, and most railroads keep their debt-to-equity ratio in the 50 % range.
It should be obvious, but just in case it isn't: "debt-to-equity ratio" is very similar to - really, the railroad equivalent of - the "loan-to-value ratio" (LTV") that most of us are familiar with from our home mortgages. Right now everyone is preety much comfortable with an 80 % LTV ratio for mortgages, if the buyer has great credit and the property appraises OK, etc. In contrast, the sub-prime mortgages and other aggressive financing often involved LTVs of 90 to 100, often with "junior" or "secondary financing" add-on or rider mortgages for that last 20 %, such as home equity loans or lines of credit, etc.** See the similarity with the LBOs in the high debt ratio ? Now compare with the debt-to-equity ratio of the usual stolid railroad: 50 %. How many of us would feel really great if we owed only 50 % of the value of our home on a mortgage to the bank ? [Disclosure: Yeah, I'm there, but it took a lot of years.]
** - In the fall of 1980, one of my professors, Prof. Walter J. Taggart, Esq. (who was the law clerk for Judge John P. Fullam when the infamous Penn Central bankruptcy landed in the Judge's courtroom on a Sunday night, and went on to become quite an expert in both banruptcy and railroads) observed of what was then known as "creative financing" - assumed and wrap-around mortgages and the like - that "Creative financing leads to . . . what ? Creative foreclosures !!!" OK, gallows humor, I suppose. But he knew, having seen it first-hand at both the railroad and professional levels with Penn Central and that late 1970's Pres. Jimmy Carter era recession, too.
To conclude: When Norfolk Southern bought its share of ConRail in 1997 or so, it issued one of the largest debt financings in the corporate world up to that time - something like $10 billion. But no one then responsibly thought that it was an LBO, or that NS was "raiding" ConRail. Some of the short-line and regional transactions - spin-offs, acquisitions, and mergers, etc. - in the last like 20 years, though, have had that flavor - my memory and knowledge of the facts is too tenuous for me to names names and point fingers here - I don't want to "tar and feather" someone or some organization unfairly. Maybe someone else can think of some good examples.
Anyway that's this morning's reading in "Corporate Take-Over Finance 101 for Dummies and Non-Majors". Additions, corrections, differences, constructive criticisms, expansions, lonks, etc. will be welcomed for the general education and edification of us all.
- Paul North.
EDIT: P.S. - Another couple of important differences are that:
1) The LBO will typically acquire most or all of the shares of the target company(ies), both to obtain voting and Board of Directors control, and to make as much money as possible. In contrast, the railroad merger shares will still be held by pretty much the same diverse and dispersed group of shareholders as before, though no doubt there will be some minor shifting of positions, esp. among those who don't favor the transaction;
2) The LBO will usually hold most of the shares for only a short time - say, a year or two, just long enough for "pillaging" and the share price increase to hopefully take place - then sell ("flip") them to the public at large, and move on to their next conquest. In contrast, the majority of the railroad merger's shares will continue to be held as a long-term investment by the same owners as before (as above), for an average or overall much longer time - like 5 to 10 years, or longer (just to provide some example time frames).
"If it looks like a duck, walks like a duck, and quacks like a duck . . . " - that's how you tell the difference.
- PDN.
Murphy Siding I have to disagree with you. In railroads, for example, can you really say that mergers in virtually all over the past 25 or 30 years have been for a quick return on investment without putting the investors out? It seems to me, that all were driven by economics of the situation.
There's no question that most of the mergers mentioned were done to save the railroad - which is protecting long-term investment.
My perception of the get-rich-quick merger is that it's a fairly recent phenomenon. Not that it hasn't occurred in the past, or that their haven't been shyster out to get milk all they can out of such transactions since the beginning, but I do think the get-in-gut-it-get-out thing is a product of the past decade or two.
I may be wrong. Food for discussion.
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henry6 An investor climate created by investors.
An investor climate created by investors.
In the last 30 years or so, the major railroad mergers I can think of are: MWK>SOO, SOU/NW.NS, GTW>CN, WP>UP, MP>UP, MKT>UP, CNW>UP, SP>UP, IC>CN, WC>CN, DMIR>CN, DME/ICE>CP, and EJE>CN. All of these seem to be mergers of either economic neccesity, or economic oportunity. They were all made by railroad people, for railroad purposes, whether it was to broaden their marketshare, expand their territory, oroptimize their operations cost. Where do you see any of those as being investor generated for short-term investor gain?
There was of course: CR>NS / CSX, and CRIP>dirt, that may fit the description you put forth.
A side note:You might consider starting a new thread on mergers, as it's an interesting subject that would attract many responces on it's own.
Thanks to Chris / CopCarSS for my avatar.
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I have to disagree with you. In railroads, for example, can you really say that mergers in virtually all over the past 25 or 30 years have been for a quick return on investment without putting the investors out? It seems to me, that all were driven by economics of the situation.
Murphy Sidingerikem PDN, Murphy: As I mentioned earlier, Stan Johnson had brought up Anaconda Copper as one of the reasons that construction of the PCE was approved (in addition to the reasons given by Vance). Johnson undoubtedly put a lot more effort researching the PCE than Vance did (this is not intended as a criticism of Vance), so I'm not surprised that Johnson would have details not in Vance's book. Yes, that might explain the reasoning to run the line as far as Butte. That was the (reletively) easy part to build. But, it wouldn't, on it's own, seem like justification for the line extending to the coast
erikem PDN, Murphy: As I mentioned earlier, Stan Johnson had brought up Anaconda Copper as one of the reasons that construction of the PCE was approved (in addition to the reasons given by Vance). Johnson undoubtedly put a lot more effort researching the PCE than Vance did (this is not intended as a criticism of Vance), so I'm not surprised that Johnson would have details not in Vance's book.
PDN, Murphy:
As I mentioned earlier, Stan Johnson had brought up Anaconda Copper as one of the reasons that construction of the PCE was approved (in addition to the reasons given by Vance). Johnson undoubtedly put a lot more effort researching the PCE than Vance did (this is not intended as a criticism of Vance), so I'm not surprised that Johnson would have details not in Vance's book.
Note the emphasis on "one" in "one of the reasons". I'm guessing that the PSE/PCE was built as a result of all three scenario's that RWM postulated.
Yes, tree pretty well says it. A merger is of course for the money. But, mergers in virtually all businesses over the past 25 or 30 years have been for a quick return on investment without putting the investors out. The acquired became collateral for boosting stock values or value of the company as a whole so that stock or resale value was enhanced and therefore the investors could borrow against their newly acquired collateral to pruchase more collateral.. That's why there is an immediate cutting of costs rather than bolstering of a company's postion or ability to manufacature more or better products. By defnition there never really was an investment in these cases, just a bunch of mergers and acquisitions. Railroads, financial institutions (banks, insurnace companies, etc.), broadcastiang and print media, computers, and general manufacturing businesses have all been victims of these so called investing situations..
Murphy Siding Of course they were mergers based on money. What other reason would there be?
The "bad" merger results in a relatively quick profit for the investors who can then move on to another target. It wasn't a merger, but methinks that was pretty much the perception with the CSX/TCI affair.
The "good" merger builds a solid foundation that will continue to provide profits in the long term.
henry6 These were investment mergers based on money rather than thought out, planned operational mergers.
These were investment mergers based on money rather than thought out, planned operational mergers.
Paul_D_North_Jr MP173 [snip] Not to hijack the thread...but why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC? ed garyla's reply (above) sums up a lot of the conventional wisdom on this, and I don't have a huge amount to offer in addition, though I will submit the following for consideration: Configuration: BN & ATSF was essentially an end-to-end merger, as was CN & IC, and then CN & WC. UP & C&NW was also, but UP & SP had a lot of overlap and divestiture and grants of rights, mainly to the then-also-new BNSF and also to KCS. ConRail to NS & CSX was much different - a "split the baby" kind of thing. For all of the time that the latter had to plan, it should have gone off much better. Financial Condition: The railroad being acquired was pretty good shape physically & financially in the case of ATSF, IC, WC, and ConRail, but not so much with C&NW, and not at all for SP. Corporate Culture: Supposedly UP really threw its weight around in the SP merger with the take-over of the SP's facilities and people, and did not consider anything that the SP people had to say or tell them. I can't think of a worse business to do that in than railroading - it's way too easy then to just keep your head down, say nothing more than the required minimum, do exactly what you are told, and no more or no less - and stand back and watch the resulting non-operation self-destruct (melt-down) all over the territory. At least in military combat situations, the primal need for physical survival will usually overcome the natural human impulse to just let some arrogant jerk - at whatever level - get what's coming to him. Out on the railroad, aside from rules violations, there's no such self-preservation imperative to offset that urge for psychological revenge. Network Operational Planning: Others who are more knowledgable will have better and more accurate comments on this, but here goes. I believe that both BN & CN were using fairly high-level computer-driven planning and studies, often through outside consultants - Multi-Modal and ALK (?) come to mind - before or during those mergers. In contrast, I don't believe that UP, SP, NS, CR, or CSX had gotten into any of that very deeply at the time. Since then, NS has; I'm not sure about the others. This is a case where "failing to plan is planning to fail"; if you don't at least look at the situation, how can you possible know how it's going to turn out ? Also, I recall that some of these mergers were rushed and implemented far more quickly than others, most likely without adequate thought and consideration given to all of the far-ranging effects elsewhere on the systems. Largely as a result of this, for any such mega-mergers the Surface Transportation Board adopted rules and now requires - among many other things - very extensive and detailed network operations planning, submissions, documentation, and analysis, of "before - during - after" scenarios and how to mitigate any adverse impacts or effects that may develop. Again, there are others here more qualified than me who can expand on this if they wish. - Paul North.
MP173 [snip] Not to hijack the thread...but why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC? ed
ed
garyla's reply (above) sums up a lot of the conventional wisdom on this, and I don't have a huge amount to offer in addition, though I will submit the following for consideration:
Configuration: BN & ATSF was essentially an end-to-end merger, as was CN & IC, and then CN & WC. UP & C&NW was also, but UP & SP had a lot of overlap and divestiture and grants of rights, mainly to the then-also-new BNSF and also to KCS. ConRail to NS & CSX was much different - a "split the baby" kind of thing. For all of the time that the latter had to plan, it should have gone off much better.
Financial Condition: The railroad being acquired was pretty good shape physically & financially in the case of ATSF, IC, WC, and ConRail, but not so much with C&NW, and not at all for SP.
Corporate Culture: Supposedly UP really threw its weight around in the SP merger with the take-over of the SP's facilities and people, and did not consider anything that the SP people had to say or tell them. I can't think of a worse business to do that in than railroading - it's way too easy then to just keep your head down, say nothing more than the required minimum, do exactly what you are told, and no more or no less - and stand back and watch the resulting non-operation self-destruct (melt-down) all over the territory. At least in military combat situations, the primal need for physical survival will usually overcome the natural human impulse to just let some arrogant jerk - at whatever level - get what's coming to him. Out on the railroad, aside from rules violations, there's no such self-preservation imperative to offset that urge for psychological revenge.
Network Operational Planning: Others who are more knowledgable will have better and more accurate comments on this, but here goes. I believe that both BN & CN were using fairly high-level computer-driven planning and studies, often through outside consultants - Multi-Modal and ALK (?) come to mind - before or during those mergers. In contrast, I don't believe that UP, SP, NS, CR, or CSX had gotten into any of that very deeply at the time. Since then, NS has; I'm not sure about the others. This is a case where "failing to plan is planning to fail"; if you don't at least look at the situation, how can you possible know how it's going to turn out ? Also, I recall that some of these mergers were rushed and implemented far more quickly than others, most likely without adequate thought and consideration given to all of the far-ranging effects elsewhere on the systems. Largely as a result of this, for any such mega-mergers the Surface Transportation Board adopted rules and now requires - among many other things - very extensive and detailed network operations planning, submissions, documentation, and analysis, of "before - during - after" scenarios and how to mitigate any adverse impacts or effects that may develop. Again, there are others here more qualified than me who can expand on this if they wish.
I'm a little late to this party!
NS did use Multi-Modal to help do the traffic flows for the merger. The big problem was that NS and CSX had absolutely no idea how the CR traffic off the shared areas would split and consequently, planned for the wrong traffic. Both their guesses were off quite a bit. For example, Conrail had two trains a day in and out of Pavonia (Camden, NJ). Both the CSX and NS plans had two trains a day out of Pavonia on split date. Then, pile on that the wrong data tape got loaded at midnight on the split date and that although the patch between the Conrail car reporting and NS systems worked OK, there were timing issues that caused cars to ping-pong back and forth on the railroad. The death spiral began and took ages to dig out of. Then, the railroad still had too much train service for the traffic base - so a second itteration of the traffic flow modelling was done and TOP was born.
There was also some cultural friction between NS and the ex-CR territory. Although NS had hired several top level operating guys, they chose to put two NS guys over the new Northern Region. These guys were not very flexible when it came to doing things the "NS way". Needless to say, there was some backlash from the CR guys at a time when NS needed their cooperation the most. (Both these guys now work at CSX!)
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
As you make my point, RWM. CSX finally got hold of the situtation when they were able to fend off off shore investment groups. Too often mergers are formed in the frame of bleeding out investments without much thought to actual operations. Investment bankers and CPA's sit there an crunch number while you crunch your you know whats trying to make it work.
henry6But, RWM, at what level are you working? Are you an investment banker or work on the financial end of deciding on the merger or are you the one who was handed the assignment to make it work?
But, RWM, at what level are you working? Are you an investment banker or work on the financial end of deciding on the merger or are you the one who was handed the assignment to make it work?
If I were an investment banker I would have my minions handle this forum while I lolled on a tropical beach with maidens.
Investment bankers don't run railroads. Railroaders run railroads. Railroads have been singularly intransigent to the hand-over of control and decision-making to Wall Street, unlike some companies and industries. Do you really think Warren Buffett would be buying billions of dollars of rail stock if it was subject to the whimsy of investment bankers?
There's a reason why railroads didn't have anguish over Sarbanes-Oxley, and are not requiring TARP funds, or any of those other embarassments.
RWM
MP173You are correct Paul. Sometimes you are too distracted by what you need to do that you cannot do what should do.Not to hijack the thread...but why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC? ed
You are correct Paul. Sometimes you are too distracted by what you need to do that you cannot do what should do.Not to hijack the thread...but why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC?
What makes you think those "trouble-free mergers" were actually trouble-free!
Two things caused the trouble. 1st, in some cases the scale of the mergers never reached a threshold where the requirements of the integration surpassed the fragility of the all the subsystems to tolerate sudden rearrangement. PRR-NYC was not one of these cases, it was a disaster! and not just red team/green team stuff either. 2nd, in some cases, the mergers were not integrations at all, but just two end-to-end systems that began borrowing things from each other, e.g., BN-ATSF and CN-IC, and there was no need to quickly integrate, and in many ways are not yet integrated to this day. BNSF for example, really runs two dispatching offices under one roof, one Santa Fe and one BN.
UP-SP had no choice but to undergo shock-treatment integration because SP was collapsing.
henry6MP173 "... why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC? ed These were investment mergers based on money rather than thought out, planned operational mergers. On paper it looked good. On a map it looked good. But the merger was decided by investment bankers for the sake of increasing the rates of return and gaining monopolisitic market share by finding ways to save money through layoffs and other cost cutting measures. These were not the guys out on the road running the operations. Following that, there was a smashing together of corporate cultures and and operating philsophies rather than acclimating and blending. The arguement can be made, too, that these were not mergers as much as takeovers similar to Penn Central and Erie Lackawanna. On the other hand, for instance, the formation of CSX as we know it was easier and smoother because the roads involved had already been "family" members or otherwise in the fold for longer periods of time before loosing thier own identities.
MP173 "... why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC? ed
"... why did certain mergers in the 90's, primarily UP/CNW, UP/SP and Conrail/NS/CSX have so much difficulty when compared to BN/ATSF and CN/IC/WC?
These were investment mergers based on money rather than thought out, planned operational mergers. On paper it looked good. On a map it looked good. But the merger was decided by investment bankers for the sake of increasing the rates of return and gaining monopolisitic market share by finding ways to save money through layoffs and other cost cutting measures. These were not the guys out on the road running the operations. Following that, there was a smashing together of corporate cultures and and operating philsophies rather than acclimating and blending. The arguement can be made, too, that these were not mergers as much as takeovers similar to Penn Central and Erie Lackawanna. On the other hand, for instance, the formation of CSX as we know it was easier and smoother because the roads involved had already been "family" members or otherwise in the fold for longer periods of time before loosing thier own identities.
The reason you advance for these mergers occurring comes as a surprise to me and all the people I know and still work with that were involved in creating and implementing them.
So sorry - I wasn't endorsing the views of that website, nor did I intend to give that impression. I was merely giving credit for my source of that collection of quotes, responding to diningcar's comments.
But I did just look at it briefly, if only to "see what I'd gotten myself into this time" (albeit inadvertently). Actually, it seems to me to be more of a "rant" promoting a form of anarchy rather than despotism.
It's also something of a truism among the American populace that "All Congress-critters are crooks" - except, of course, for the 3 that represent me (2 Senators and a Representaive).
Just a thought here on the successful and non-successful mergers. I'd credit the success of the mergers at CN-etc. and BN-SF to the quality of management at the those companies, and, in the latter case, perhaps to it being more of a merger of equals in financial strength, with quality leadership in both companies. That may be a simplistic explanation, but those companies showed that it could be done well.
By contrast, UP did NOT learn from its mistakes in the should-have-been-easy CNW merger, and, after failing to do its homework on just how desperate SP's situation was, jumped into that huge merger and proceeded to throw out the baby with the bath water. It's easy for me to sit here and be critical a decade later, but UP's merger work in the 1990s (which reeked of arrogance) looks like a textbook case of how not to do it. It should become good material for some B-school case studies.
Paul_D_North_Jr diningcar [snip] Times have changed and government now influences private and corporate investments through tax policy and because "they know better than we what is good for us". I have very little confidance in our Congress and it is not limited to the presently constituted Congress. This has been ongoing for 40 + years. It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.- Pudd'nhead Wilson's New CalendarIt is the foreign element that commits our crimes. There is no native criminal class except Congress.- More Maxims of Mark, Johnson, 1927 [emphasis added - PDN] Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.- Mark Twain, a Biography All Congresses and Parliaments have a kindly feeling for idiots, and a compassion for them, on account of personal experience and heredity.- Mark Twain's Autobiography; also in Mark Twain in Eruption From: "Freeing Yourself From Government - Mark Twain's Congress:" at: http://www.commonlawvenue.com/Misc/250-Twain'sCongress.htm - PDN.
diningcar [snip] Times have changed and government now influences private and corporate investments through tax policy and because "they know better than we what is good for us". I have very little confidance in our Congress and it is not limited to the presently constituted Congress. This has been ongoing for 40 + years.
Sounds like an endorsement of despotism over democracy to me.
MP173 [snip] Rob Krebs (BNSF) looks pretty good right now for his "if you build it they will come" attitude regarding expanding the Transcon 10 years ago. It gave BNSF a huge head start on the UP. At the time, BNSF's shareholders spoke out questioning the expansion. What did Krebs know that UP didnt? These lessons from 100 years ago are still important. ed
These lessons from 100 years ago are still important.
UP may have known it then, too (I have no inside knowledge, though). But back then UP was still dealing with the results and fallout of:
" . . . the railroad's meltdown of 1997- 98 that followed Union Pacific's $5.4 billion merger with the Southern Pacific Rail Corp. in 1996" from "Union Pacific Finally Appears to Be Out of Financial Danger", Knight Ridder/Tribune Business News, dated November 21, 1999 [emphasis added - PDN], at:
http://www.encyclopedia.com/doc/1G1-57775267.html
So even if UP saw the opportunity that could be gained by adding capacity, and even if it wanted to, it probably couldn't - it was still too busy and tied up with untangling the merger fiasco. In contrast, the BN-SF merger went much smoother - it was more of an "end-to-end" merger, anyway - and so BNSF got past that and was able to look to the future that much sooner.
It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.- Pudd'nhead Wilson's New CalendarIt is the foreign element that commits our crimes. There is no native criminal class except Congress.- More Maxims of Mark, Johnson, 1927
[emphasis added - PDN]
Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.- Mark Twain, a Biography
All Congresses and Parliaments have a kindly feeling for idiots, and a compassion for them, on account of personal experience and heredity.- Mark Twain's Autobiography; also in Mark Twain in Eruption
From: "Freeing Yourself From Government - Mark Twain's Congress:" at:
http://www.commonlawvenue.com/Misc/250-Twain'sCongress.htm
MP173 Paul:Thanks for that list of George Hilton articles. This is a fascinating thread and I appreciate everyone's input. Today we are seeing very similar instances of companies (and BOD) not correctly assessing the risk involved in major decisions. The financial industry's missteps the past 10 years are very well apparent and have affected almost all of us in a major way. No doubt there was a healthy amount of arrogance involved in these decisions. Murphy while you question the shareholders allowing the PCE, we repeatedly see the same mistakes being made again and again. Do you think Jimmy Cayne of Bear Stearns or Richard Fuld of Lehman Brothers (I can go on and on) considered the magnitude of risk they took? Rob Krebs (BNSF) looks pretty good right now for his "if you build it they will come" attitude regarding expanding the Transcon 10 years ago. It gave BNSF a huge head start on the UP. At the time, BNSF's shareholders spoke out questioning the expansion. What did Krebs know that UP didnt? These lessons from 100 years ago are still important. ed
Paul:Thanks for that list of George Hilton articles.
This is a fascinating thread and I appreciate everyone's input. Today we are seeing very similar instances of companies (and BOD) not correctly assessing the risk involved in major decisions. The financial industry's missteps the past 10 years are very well apparent and have affected almost all of us in a major way. No doubt there was a healthy amount of arrogance involved in these decisions.
Murphy while you question the shareholders allowing the PCE, we repeatedly see the same mistakes being made again and again. Do you think Jimmy Cayne of Bear Stearns or Richard Fuld of Lehman Brothers (I can go on and on) considered the magnitude of risk they took?
Rob Krebs (BNSF) looks pretty good right now for his "if you build it they will come" attitude regarding expanding the Transcon 10 years ago. It gave BNSF a huge head start on the UP. At the time, BNSF's shareholders spoke out questioning the expansion. What did Krebs know that UP didnt?
This anology with todays bankers and investment companies must also include the very substantial influence, in some cases blackmail, by the Federal Government to make loans which were not secure.
Times have changed and government now influences private and corporate investments through tax policy and because "they know better than we what is good for us". I have very little confidance in our Congress and it is not limited to the presently constituted Congress. This has been ongoing for 40 + years.
Murphy Siding greyhounds Regulation did allow communities located on the inefficient carriers (i.e. D&RGW) to continue to have rail service. But this cross-subsidy came at a high price to the overall national economy. At what point, did the ICC go from being a protector of stockholders of certain companies, to (over)protecting everybody who had a rail line nearby? Take CNW for example. The ICC not allowing them to shed non profitable grainger lines in a timely fashion had to be detimental to CNW stockholder's income and equity. Couldn't the same be said for nearly every railroad at some point in the ICC history?
greyhounds Regulation did allow communities located on the inefficient carriers (i.e. D&RGW) to continue to have rail service. But this cross-subsidy came at a high price to the overall national economy.
Regulation did allow communities located on the inefficient carriers (i.e. D&RGW) to continue to have rail service. But this cross-subsidy came at a high price to the overall national economy.
The cartel organization always cross-subsidized rail lines that were not otherwise economically viable. It had to. Benifits of this cross-subsidy went to rail customers located on those lines. These customers litterally had someone else paying part of their freight bills. Once someone starts getting a subsidy it's like an adictive drug. They get so they can't imagin life without it and will go to great lengths to continue their adiction. Abandonment of uneconomical lines removed the subsidy drug and, as a result, was fought politically.
Government control over railroads (and other commerce) was increased greatly in the first two decades of the 20th Century. This increase culminated in the outright siezure of the railroads by the Federal Government in 1918. The Feds also siezed Western Union and AT&T. So they had complete control of all non-local transportation and communication. Gulp! (This was a very dangerous period in American History that doesn't seem to get a lot of study.)
There was a debate about returning the railroads to private ownership. Prominent socialists, such as Eastman, thought they were gurus who had the wisdom and knowledge to produce a "perfect" government run transportaiton system for the US - if only they were given the power. Such egomainia, when granted government power, is frightening. It exists today.
The railroads were returned to private ownership in 1920. But the regulated cartel structure was cast in steel by the Transporation Act of 1920, complete with its cross-subsidy of non-economic lines.
At about the same time, trucks and paved roads began to develop. This destroyed the ability of even a government enforced rail cartel to cross-subsidize anything. Removing the commercial ability to do the cross-subsidy didn't remove the political pressure for the cross-subsidy. So the railroads, such as the C&NW were forced to bleed in order to maintain service on uneconomic lines.
That's the long way around, but the answer to your question: "At what point, did the ICC go from being a protector of stockholders of certain companies, to (over)protecting everybody who had a rail line nearby?" I'd say about 1920 and after, when the rail cartel was made increasingly impractical by the rapid development of motor freight technology.
jrbernier Murphy, The Milwaukee Road(then the St Paul Road) had built a quite extensive granger network in the Midwest. They realized two things: There was not enough traffic being generated to really support the heavy debt load. They needed a new traffic source. A 3rd factor was basic 'I want to control my own railroad'. They could see that they were not the 'Super Grainger' and would be bought out at some time(and control would be moved out of the local area). The answer was to build the 'Pacific Extension'. The line had several issues: The GN & NP were already there The alignment crossed 'one too many mountains' They had to electrify due to the grades/weather conditions It took a lot more money to build than forecast And to top it off, the Panama Canal opened and transcon traffic fell off for years They took a gamble and it did not pay off. Had they not built it, maybe they could have sold their Midwest lines for top dollar - Who knows. That is 'History'..... Jim
The Milwaukee Road(then the St Paul Road) had built a quite extensive granger network in the Midwest. They realized two things:
A 3rd factor was basic 'I want to control my own railroad'. They could see that they were not the 'Super Grainger' and would be bought out at some time(and control would be moved out of the local area). The answer was to build the 'Pacific Extension'. The line had several issues:
They took a gamble and it did not pay off. Had they not built it, maybe they could have sold their Midwest lines for top dollar - Who knows. That is 'History'.....
Jim
Hi, Jim -
Looking back over the posts on this thread re the MILW and the PSE / PCE, it seems that early on you neatly summarized most of the important points. However, in reviewing the Charles & Dorothy Wood The Milwaukee Road - West book (Superior, 1972) last night, I did note that they claimed that the MILW was financially sound and not heavily indebted before the PSE, contrary to your 1st point above. I forgot the exact numbers - I could retrieve the book and post them tonight or tomorrow if you're interested.
As to the effects of the Panama Canal on the MILW, I've seen claims both ways in the past 2 days. It certainly didn't help, anyway. Again, I'll see what the Woods say on that.
Otherwise, your post pretty much agrees with them, if you didn't already know that.
I appreciate your insights on this and the many other topics on the Forum.
greyhounds Paul_D_North_Jr [snip by PDN] CB&Q did go to Chi-town, but only by swinging way to the south and then northwest. In its home territory, the MILW wasn't challenged by any of these - C&NW and others, yes, but none of them went west either. [snip by PDN; emphasis added by greyhounds] - Paul North. I'm going to disagree with this. The CB&Q route between St. Paul and Chicago was not "round-about". When the GN/NP bought the "Q" they acquired a fully competiive, direct route into Chicago. Mileages between Chicago Union Station/Northwestern Station (two blocks or so apart) and St. Paul were: CB&Q: 427 Milwaukee: 410 C&NW: 409 17/18 miles is no big deal and can easily be offset with other factors. Such as, the Milwaukee had to cross the Mississippi River twice with moveable bridges between Chicago and St. Paul (Hastings, MN and La Crosse, WI) while the "Q" stayed on one side. The "Q" provided access to the St. Louis and Peoria gateways. The MIlwaukee had niether.
Paul_D_North_Jr [snip by PDN] CB&Q did go to Chi-town, but only by swinging way to the south and then northwest. In its home territory, the MILW wasn't challenged by any of these - C&NW and others, yes, but none of them went west either. [snip by PDN; emphasis added by greyhounds] - Paul North.
I'm going to disagree with this. The CB&Q route between St. Paul and Chicago was not "round-about". When the GN/NP bought the "Q" they acquired a fully competiive, direct route into Chicago.
Mileages between Chicago Union Station/Northwestern Station (two blocks or so apart) and St. Paul were:
CB&Q: 427
Milwaukee: 410
C&NW: 409
17/18 miles is no big deal and can easily be offset with other factors. Such as, the Milwaukee had to cross the Mississippi River twice with moveable bridges between Chicago and St. Paul (Hastings, MN and La Crosse, WI) while the "Q" stayed on one side. The "Q" provided access to the St. Louis and Peoria gateways. The MIlwaukee had niether.
greyhounds - You're quite right; thanks for bringing that up. Frankly, I'd overlooked that line - I was focussing on the branch-line network instead, though looking back now on what I wrote, you wouldn't have known that either. But it doesn't affect my main point, because I'd taken it for granted that the CB&Q had a great line and was an effective eastern link for both the NP and the GN, paralleling and competing with the MILW's main line. You've reinforced and detailed that presumption.
What I intended to say was that the CB&Q didn't have enough of a branch-line network in the MILW's home territory to seriously threaten the MILW's originated traffic base (albeit mostly granger-type traffic). Aside from the main line (only) from Chicago to the Twin Cities that you describe - which once north of Savanna was away from the action, being on the east/ north bank of the Mighty Miss - the only other CB&Q main line was way to the south, along the Chicago-Galeburg-Burlington-Council Bluffs/Omaha-Lincoln-Aroura-Alliance axis. The Q's branch line network was well away from the MILW's, being mainly south and west of the Missouri, and within only a few miles of that westerly main line, except for the branches to Des Moines and Sioux City. It wasn't until much farther to the west that the CB&Q had branches heading north into the MILW's prospective territory, at Deadwood, S.D. and to Billings Mont. See the 1907 CB&Q system map at:
http://www.davidrumsey.com/maps900059-24568.html
and the pop-up enlargement at:
http://www.davidrumsey.com/luna/servlet/detail/RUMSEY~8~1~24568~900059:Map-of-the-Burlington-Route-and-con
Therefore, in 1906 the MILW shouldn't have felt vulnerable to the CB&Q in terms of the CB&Q competing for the MILW's local/ originated traffic. For the bridge or overhead traffic to & from the NP and GN at Minn.-St. Paul, sure - but that was a "done deal", already going to the CB&Q - see the map above - and was never going to be the MILW/'s anyway. So building the PSE made no sense vis-a-vis the Burlington - as objectively viewed now (from 103 years later ), the PSE wasn't going to alter that competitive equation between the MILW and the CB&Q at all.
That's my story, and I'm sticking to it ! (at least until I see a better version)
Thanks for participating in the discussions.
Murphy Siding greyhounds [snips] The Interstate Commerce Act was written by a lawyer in the pay of the Phildelphia and Reading Railroad. [snips; emphasis added - PDN] At what point, did the ICC go from being a protector of stockholders of certain companies, to (over)protecting everybody who had a rail line nearby? Take CNW for example. The ICC not allowing them to shed non profitable grainger lines in a timely fashion had to be detimental to CNW stockholder's income and equity. Couldn't the same be said for nearly every railroad at some point in the ICC history?
greyhounds [snips] The Interstate Commerce Act was written by a lawyer in the pay of the Phildelphia and Reading Railroad. [snips; emphasis added - PDN]
At what point, did the ICC go from being a protector of stockholders of certain companies, to (over)protecting everybody who had a rail line nearby? Take CNW for example. The ICC not allowing them to shed non profitable grainger lines in a timely fashion had to be detimental to CNW stockholder's income and equity. Couldn't the same be said for nearly every railroad at some point in the ICC history?
Murphy Siding - "When they [the ICC] started believing their own press releases !" (as John G. Kneiling often said).
The actual answer may well be in one of the lengthier posts above; if not, it is in the depths of the history of transportation regulation in the U.S. It was sometime after the original ICC Act of 1887, through the Mann-Elkins Act of 1906 (?), another Act of 1914 (?), the Transportation Act of 1920, and maybe a few others as well.
If you can, you (we) really need to get and read the George W. Hilton articles from Trains of the 1960s and 1970s. He covers all this at a pretty sophisticated (post-graduate level ?) of detail. It's heavy going at places, but its the best and clearest explanation of this esoteric subject that I've seen. He said: "I write about this not because I enjoy it, but because I think it's important." (He went on to say that he'd rather write about oddball switching in Baltimore. Sadly, I don't think that ever happened, at least not in Trains.) Below is the list, from my search of the Trains magazine index a few minutes ago for "Hilton" and "ICC". Note that the sub-title for the 3rd one is "transportation is a cartel, and ICC is running it" - this is from pre-OPEC 1972, before most people outside of the world of economics had heard of the word "cartel" :
greyhounds - I understand it was a Pennsylvania Railroad lawyer, most likely from the Hilton article referenced above. Since I'm in Pennsylvania and "close to the scene of the action", Id like to run that down. Can you provide a name or reference for that ? Thanks !
Railway Man Murphy Siding PDN Jr.: I had to go find my copy of The North American Railroad and start reading again. As far a the PCE goes, I still can't quite grasp the decision making process made by the Milwaukee directors. After doing a location survey (or whatever you would call it) to determine the reason to build the line, and the where and at what cost factor, they still voted yes? By 1906, there were already 6 transcons to the west coast sharing in that asian traffic. Was there that much traffic, and was there enough to support 1 more? No. (I think this question is a variant of "begging the question" called "see how much RWM PDN will do anything to avoid working tonight today.")
Murphy Siding PDN Jr.: I had to go find my copy of The North American Railroad and start reading again. As far a the PCE goes, I still can't quite grasp the decision making process made by the Milwaukee directors. After doing a location survey (or whatever you would call it) to determine the reason to build the line, and the where and at what cost factor, they still voted yes? By 1906, there were already 6 transcons to the west coast sharing in that asian traffic. Was there that much traffic, and was there enough to support 1 more?
As far a the PCE goes, I still can't quite grasp the decision making process made by the Milwaukee directors. After doing a location survey (or whatever you would call it) to determine the reason to build the line, and the where and at what cost factor, they still voted yes? By 1906, there were already 6 transcons to the west coast sharing in that asian traffic. Was there that much traffic, and was there enough to support 1 more?
No. (I think this question is a variant of "begging the question" called "see how much RWM PDN will do anything to avoid working tonight today.")
Seriously, this is wonderful, fun, and informative thread. I'm having way too much fun with it ! But I'm over my self-imposed limit for the Forum today with my lengthy post to the "FRA Inspection" thread, so I'll have to be brief here.
Last night I took a look at Charles & Dorothy Wood's The Milwaukee Road - West (Superior Publishing, 1972) [a few of those details are more correct than in my earlier post, so that's why I'm repeating it here]. Their recounting of the PSE decision by the MILW in the early years of the 20th century is a lot better than I'd expected. Short version:
1) No, I personally doubt if there was enough such traffic. But yes, apparently they did expect that much traffic to materialize out of the developing and expanding territory;
2) This was likely an outgrowth of their view of the "natural expansion" or "natural territory" doctrine of railroad building and operation - kind of like a railroad-version subset of the "manifest destiny" beliefs of the period; [you have no idea of how hard I had to rack my brain to recall that one !]
3) The Woods include several quotes and paragraphs from James J. Hill and the UP (Harriman ?) to the effect of "We don't mind if the MILW expands west - we have more traffic than we can handle now." To their credit, the Woods then explore that a further with a lot of skepticism, including a couple of funny editorial cartoons featuring Hill essentially saying one thing but doing another. I can readily see this as the railroad geo-politics version of " 'Come in to my parlor !', said the spider to the fly". Vance notes at several places that the MILW PSE was essentially where UP wanted to go - and that upon the abandonment of the PSE, UP got most of the pieces. (My impression doesn't square with the latter, but I don't hold myself out as being well-informed on that point - maybe somebody esle here can confirm or provide details, etc.);
4) It gets better: The Woods say that the MILW had a cost estimate of the PSE from 1901. Note that date - that's right around when the Northern Securities Co. trust was formed, and a good 3 years before the US Supreme Court said NorSec was a violation. That cost estimate was for $45 million. In or around 1906, the managment of the MILW upped it to $60 million to be safe. It actually wound up costing . . .
wait for it . . .
$234 million (if I remember right) - about 4 times the already-inflated estimate ! The Woods provide a laundry list of the usual reasons - none of them were justifiable or unforseeable, in my opinion. As did RWM, the Woods also say that the costs of operating the grades on the PSE were so high that it drove the MILW to implement the electrification. [Was it above on this thread that somebody wrote that "Poverty is the mother of invention ?" Wonderful turn of phrase - "well said".] Anyway, in addition to the 1925 bankruptcy that I'd mentioned previously, the MILW found it necessary to "rinse and repeat" same again in 1935.
As RWM noted previously, this whole topic has aspects of a religious fervor to it. I suspect that is not a recent development - instead, that characteristic appears to go back to the genesis of the PSE.
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