Andy Cummings has an article in the November issue of Trains titled "Mileposts Along the Iron Highway". On page 64 it states "Chicago & North Western goes to Union Pacific in 1995, BN and Santa Fe merge in response".
Is that accurate? I can't recall reading anything previously that one merger caused the other.
That's the chronological sequence, but I too doubt that it was causative, any more than a rooster's crowing before dawn causes the sun to rise. What C&NW provided new to the UP was mainly direct access to Chicago, and to the Powder River Basin coal fields. Since both BN and ATSF each already had good routes into Chicago for many years, and BN had the PRB for almost 20 years - and adding ATSF didn't do much for that, either - I don't believe that "response" characterization or conclusion is correct. UP +C&NW was a preparatory step, but not enough to immediately force or compel the BN +ATSF merger as a matter of competitiveness or survival.
But in my view, the next significant merger - BN +ATSF - did force and compel the UP + SP merger, as a matter of competitiveness and survival. Keep in mind, too, at that time - 1996 - was also the NS vs. CSX battle for ConRail, so it's likely that the western roads wanted to secure their home territories so as to be prepared for however that was going to turn out.
- Paul North.
If you look over the timeline of when mergers were proposed, it looks like the UP purchased the SP after they failed to acquire the ATSF in a bidding war with BN.
The Union Pacific (UP) started a bidding war with BN for control of the SF on October 5. 1994. UP purchase and control of C&NW became effective May 1, 1995, formal merger occurred September 30, 1995. The UP gave up on the ATSF January 31, 1995, paving the way for the BN-ATSF merger September 22, 1995 . Subsequently, the UP acquired the Southern Pacific (SP) in 1996.
C&NW, CA&E, MILW, CGW and IC fan
I would note that BN did not have any railroad management depth. My personal opinion is that the BN board bought the ATSF to get Rob Krebs first and foremost. Again in my opinion, they got a good buy.
Mac
If you're not the first, all others that follow are reactionary. Of course BN-ATSF had to marry once UP had its family totally populating the neighborhood. Yeah, we sort of knew it was gonna come to that, but still didn't really matter that great until then. You will find that most mergers are the result of others either in progression or response.
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I do not believe that your statement is true but both mergers were most likely cause by one thing: the Powder River Basin. The PRB is the sole reason as to why the CP bought out the DM&E/IC&E
schlimm If you look over the timeline of when mergers were proposed, it looks like the UP purchased the SP after they failed to acquire the ATSF in a bidding war with BN. ...snip
...snip
James
PNWRMNM I would note that BN did not have any railroad management depth. My personal opinion is that the BN board bought the ATSF to get Rob Krebs first and foremost. Again in my opinion, they got a good buy. Mac
Don't you think they could have just hired Krebs for something less than $4.2 Billion?
It's not like he was an old-time Santa Fe loyalist. Given the results at ATSF, it was likely he was on his way out.
My rememberance is that ATSF was going under and Burlington Northern was stepping in to acqure it at a real bargain price... but Union Pacific started a bidding war and BN paid dearly to for it... much more than it initially was going to. 'Twernt no bargain by then.
People that owned ATSF stock were quite pleased.
U.P, then just seemed to be primed to buy something and Chicago and NorthWestern was there for the taking. I remember some folk talking about it in kind of a "shocked" tone... "What? Wait... How'd that happen?"
Semper Vaporo
Pkgs.
One financial aspect of merger "theory" and what drives successive mergers is purchasing power. And purchasing power in a competitive industry gets completely short-circuited by disparity in size between competitors. As an example, a company that has a 10% rate of return can be doing pretty well, but if it has to compete with a company twice its size that is managed less efficiently at a 7% rate of return, the 7% company will ALWAYS have more cash available to meet competitive challenges than the better-managed, but smaller, 10% company.
Where the ability to make capital investment is a key to competitive advantage, company size is crucial relative to the competitors within the industry.
This is why railroad mergers, in general, have occurred in a very lock-step pattern over the past thirty years. Size is everything, and management skill secondary to the ultimate power of cash flow. Railroad managers have long understood that attempting to compete with significantly larger competitors is a fool's errand; and that the only way to "compete" is to achieve similar sizes. This is not an economy of scale argument, but a leverage of size argument that, in fact, is independent of economies of scale and often works against economies of scale in actual practice.
ICLand One financial aspect of merger "theory" and what drives successive mergers is purchasing power. And purchasing power in a competitive industry gets completely short-circuited by disparity in size between competitors. As an example, a company that has a 10% rate of return can be doing pretty well, but if it has to compete with a company twice its size that is managed less efficiently at a 7% rate of return, the 7% company will ALWAYS have more cash available to meet competitive challenges than the better-managed, but smaller, 10% company. Where the ability to make capital investment is a key to competitive advantage, company size is crucial relative to the competitors within the industry. This is why railroad mergers, in general, have occurred in a very lock-step pattern over the past thirty years. Size is everything, and management skill secondary to the ultimate power of cash flow. Railroad managers have long understood that attempting to compete with significantly larger competitors is a fool's errand; and that the only way to "compete" is to achieve similar sizes. This is not an economy of scale argument, but a leverage of size argument that, in fact, is independent of economies of scale and often works against economies of scale in actual practice.
Maybe this is an over-simplification of your statement...but "the only thing that can deal with an 800 lb gorilla is another 800 lb gorilla!" kind of makes sense to me.
Could you give an example (with numbers) of your first paragraph? I think I get what you're saying but want to be sure.
Dan
They should have allowed UP to acquire the entire Milwaukee Road system to the Pacific Northwest, thereby equalling the playing field with BN.
CNW 6000 Maybe this is an over-simplification of your statement...but "the only thing that can deal with an 800 lb gorilla is another 800 lb gorilla!" kind of makes sense to me. Could you give an example (with numbers) of your first paragraph? I think I get what you're saying but want to be sure.
Say, for instance, your railroad company has revenues of $1 Billion, and is well-managed. It earns 10% NROI, or $100 million. Physical plant depreciation represents $30 million annually. Simplifying for the sake of brevity that $100 million with depreciation added back in represents a positive cash flow to the company of $130 million.
Your competitor is a railroad company, twice as large in the key respects, and earns $2 Billion in revenues annually. It is managed by neanderthals, and they can only extract 7% per year, but also have depreciation of $60 million annually. The NROI is $140 million, and when depreciation is added back in, they have a net positive cash flow of $200 million.
You are the better manager, but $200 million to spend beats $130 million every time.
So, in competitive situations, the poorly managed company, by sheer virtue of size, will have 50% greater ability to throw money to obtain markets and competitive advantages. And they will still only likely earn 7% compared to your 10%, and they will always outspend you, and eventually at each turn of the competitive screw, they will be chewing at your 10%, eroding it and corroding it over time, and over the broad perspective there's isn't a thing you can do about it no matter how brilliant your team is: they will outspend you; buying your high end markets out from under you simply because it helps them, hurts you, and they have more cash to do it with.
And over the long run, there is an ultimate resolution in favor of the larger competitor over the smaller competitor that has nothing to do with the strength of the market system but which rather represents its Achilles heel because there is nothing "market" about it: it is the inevitable result of size leverage of cash flow and can, as the example is designed to illuminate, reward the less efficient at the sacrifice of the better manager.
This was one of the outcomes which the Sherman Anti-trust Act was originally designed to allay.
"The only thing that can deal with an 800 lb gorilla is another 800 lb gorilla!" sums it up nicely.
Murray They should have allowed UP to acquire the entire Milwaukee Road system to the Pacific Northwest, thereby equalling the playing field with BN.
The BN merger illuminated the problematic nature of merging redundant lines: with two major transcontinental routes that more or less started at the same places and ended at the same places, one had to go, at a high sacrifice of investment, employment, and service, and of course that was the historic and venerable Northern Pacific Railway.
UP/MILW would have presented much the same dilemma. Milwaukee and UP were big competitors for transcontinental traffic to and from the PNW, more so than the MILW and BN. UP was, in fact, the biggest beneficiary of the MILW withdrawal because of that.
Now, Southern Pacific coveted that MILW mainline, but without a way of extracting it from the Granger burden, it passed.
Back to the original question: yes and no.
The fact that C&NW had come partially under UP control (when C&NW was fighting to stay out of the hands of Japonica Partners...I well remember getting phone calls at home from them asking for my proxy!) may have led to BN and ATSF merger plans. When those were announced, UP made the bid to control ATSF, probably primarily to drive up the price. However, UP did not acquire full ownership of C&NW until later. And when UP management addressed C&NW stockholders, they said that the big reason they were merging the company was in response to the soon-to-be-consummated BNSF merger.
Carl
Railroader Emeritus (practiced railroading for 46 years--and in 2010 I finally got it right!)
CAACSCOCOM--I don't want to behave improperly, so I just won't behave at all. (SM)
In response to the various notes speculating on the relationship between the BNSF and UP-CNW mergers, I was on the inside of CNW at the time of these transactions. UP's run at ATSF was, of course, a response to the proposed BNSF merger. The UP-CNW control transaction predated the BNSF merger proposal, and actually goes back to the attempted takeover of CNW by Japonica (Blackstone and UP were the "white knights" that defeated Japonica). However, until the BNSF merger was announced, UP did not intend to absorb CNW. The announcement of the BNSF merger, and UP's failed run at ATSF, were what changed UP's mind
The UP spent the 1960's attempting the Rock Island merger, which they ultimately walked away from (1974?) due to the deteriorated condition of the Rock. Upon the final bankruptcy of the Rock Island -- 1980 -- did the UP make an attempt to obtain the east/west portion of the Rock that became the Iowa Interstate? For that matter, was any attempt made to acquire the Chicago/Savanna/Council Bluffs portion of the Milwaukee?
Was working for IAIS back in '89 when UP acquired an option to purchase IAIS. An interesting situation although everybody knew it was in response to the Japonica Partners pursual of CNW at the time and UP was simply protecting all their options. Actually, given that UP and CNW had been partners for DECADES in moving traffic from Chicago to the West Coast (and this would include the period when the "Cities" Streamliners ran on the MILW from 1955 to 1971) I'm surprised the merger between the two didn't take place in the late 70's or early 80's.
Murray,
The UP did far better than that, they got the few bits and pieces of the MILW in Washington State that had value, most importantly the MILW's half of the UP/MILW main between Tacoma and Seattle and the MILW's then new Fife Yard and terminal trackage in Tacoma.
The MILW in MT, ID, and WA was not an asset. It had the most mountains, thus the highest operating cost. The celebrated electrics were an indication of weakness, not strength. MILW served no important markets except Tacoma, Seattle and Spokane, all of which were already served by the NP, GN, and UP.
The Pacific Extension was perhaps the greatest error in railroad investment in the history of the business. It was the cause of three subsequent bankruptcies and the chronic weakness of the MILW in the 20th century.
PNWRMNM MILW served no important markets except Tacoma, Seattle and Spokane, all of which were already served by the NP, GN, and UP.
Interesting opinion. The UP "already" served Seattle ahead of the Milwaukee by what, seconds, minutes? The "Joint Line" into Seattle was shared. Milwaukee actually built it and maintained it. UP piggybacked on Milwaukee Road into Seattle. That means ... what?
Add Butte, historically, and Portland after 1971.SP was intrigued by that Portland connection, and was using the MILW transcon fairly heavily considering that it was shorthauling itself to do so.
The "other" major markets were ... what? Ephrata? Davenport? Havre?
Dakguy201 Upon the final bankruptcy of the Rock Island -- 1980 -- did the UP make an attempt to obtain the east/west portion of the Rock that became the Iowa Interstate? For that matter, was any attempt made to acquire the Chicago/Savanna/Council Bluffs portion of the Milwaukee?
By the time the Rock went belly up, the Union Pacific was already heavily invested in the CNW as their primary Chicago routing partner (which came about just as the UP lost interest in the Rock merger in the early 70s). By the late 70s the CNW's route across Iowa was selected as the "preferred" 4R rehabilitation route as well, so by 1980 the CNW main line was in pretty good shape, whereas the Rock and especially the Milwaukee (whose Iowa Division main had been severed since 1978 between Tama and Atkins) were in very poor shape. Another caveat of the CNW was the "Fremont Connection"- which allowed UP-CNW runthroughs to bypass Omaha/Council Bluffs by running over the CNW's line via Blair, something the MILW and RI routes couldn't offer.
That connection was featured in a Trains article at the time, titled "Flight of the Falcon" if I recall correctly. However, since we no longer have the on-line "Index to Magazines" available to us here, I can't readily provide a citation to the issue date and page, author, etc.
nordique72. Another caveat of the CNW was the "Fremont Connection"- which allowed UP-CNW runthroughs to bypass Omaha/Council Bluffs by running over the CNW's line via Blair, something the MILW and RI routes couldn't offer.
It was "there" but I don't recall that much traffic going that way.
Later mergers of Western railroads occurred in the context of the ICC's mishandling of the 1960's merger plans. Everyone -- and I mean everyone -- had the idea that there needed to be a series of mergers particularly among certain Western railroads. This had begun in the 1950s when the CNW and MILW first talked merger. And that was a big one. As it fell through, it got everyone thinking because it would have changed traffic dynamics of the Midwest and West considerably. By 1964, negotiations had brought out the following plans: 1) MILW/CNW (again), 2) UP/RI, and 3) CBQ/NP/GN. There were numerous others, involving some of these roads simultaneously, but these were the biggies. And each was, in some respect, a direct reaction to the others, in an effort to protect traffic origination, and to maintain the leverage of size. CNW stuck its fingers into the pie by also applying to get the Rock or parts of it, and opposed the Northern Lines merger as well.
UP was in the toughest position, strategically, because any merger would dilute its traditional strong earnings source: the long haul with low collection and distribution costs -- other railroads did 80% of that work for UP. It was the perfect "bridge" railroad. Merger with ANYONE would dilute that strength, and history has shown that that is exactly what happened. It was a little hard to explain to shareholders: "never again will your dividends be as strong and never again will we achieve 65% operating ratios, but this is for the good of the company."
MILW and CNW was an ideal partnership, and that had been recognized since the 1860s. It would have greatly strengthened the long haul of both roads by higher utilization of Milwaukee's excellent mainline out West, and permitted substantial consolidation of expensive and redundant facilities in the Midwest.
GN/NP/CBQ was, after MILW/CNW, perhaps the second longest railroad courtship, dating back to 1901 when JJ Hill lost his bid for control of the Milwaukee and had to take the Q instead. It was also perhaps the "most necessary" of proposed mergers. Corporate projections of future performance showed all three companies beginning to generate losses -- structural losses -- by 1972. MOW budgets had been slashed during the 60s to maintain the illusion of health, but tie replacements had dropped in half and rail replacements -- railroads had generally begun programs of upgrading of mainline rail to 132 lb in 1956 -- had practically ceased. The GN, for instance, had only 77 miles of 132 lb rail by 1970, whereas most Midwest roads, MILW, CNW and CBQ, had well over 1,000 miles installed on each of them, and NP had nearly 800 miles.
However, thanks to ICC dallying, the Rock Island fell apart, and CNW stock price took a tumble upsetting the carefully contrived valuation that underpinned the share trade enabling CNW's participation in the CNW/MILW merger.
Yet, everyone had agreed that a condition of any of the mergers was the successful achievement of all of the mergers on the table. Fortuitously, for UP and MILW, the only "successful" merger -- NP/GN/CBQ -- was very nearly a complete dud from their perspectives. UP lost very little traffic as a result of that merger, MILW gained considerable traffic on its Western line as a result of the merger, CNW increased its traffic share as the result of conditions imposed, and the leverage of size -- the BN was considerably larger than the UP, MILW, and CNW -- was mitigated entirely by the poor financial performance of the merged company for the next 15 years.
Indeed, the structural losses anticipated by corporate planners in the mid-1960s showed up nearly on schedule and the reason was clear: the structural reasons remained intact, the BN had 15% of US railway mileage, but only 8% of US railway revenues. It looked almost exactly like its Midwestern counterparts MILW, CNW, RI in that regard. UP had something like only 8% of US railway mileage, but cornered something like 10% of US railway revenues.
So, that whole era gave UP considerable breathing room at the same time that it spelled the doom of the Rock Island in a bungled bankruptcy. MILW entered into a similarly bungled bankruptcy, and CNW managed -- in the words of one colleague "the worst managed railroad with the best public relations department" -- to eek out its existence until a later consolidation. ICG should have been in bankruptcy, but had a rich father. The Q would have been bankrupt but for the BN merger, and had the BN not also acquired the Northern Pacific land grants in the merger, it too would have likely entered bankruptcy by 1977 or 1978. That left the Santa Fe and the Southern Pacific to ponder their fates and perhaps, in both cases, they moved too slowly.
The shakeout, in any case, was dramatic and forced the survivors in certain directions; choices were fewer, and led perhaps more or less inevitably to UP/CNW and perhaps less inevitably to BN/ATSF.
Paul_D_North_Jr But in my view, the next significant merger - BN +ATSF - did force and compel the UP + SP merger, as a matter of competitiveness and survival.
But in my view, the next significant merger - BN +ATSF - did force and compel the UP + SP merger, as a matter of competitiveness and survival.
The financial condition of the SP, as the paramount source of traffic for UP, was of great concern. And SP had become a somewhat less friendly connection for that traffic in recent times, for a variety of reasons relating to UP's position on rate divisions. But, it was deteriorating and entry in bankruptcy could have led to various alternatives. My view is that, without the BN/ATSF merger, UP would still have been inclined to move on the SP simply because circumstances internal to SP compelled it. UP equipment was suffering lengthening cycle times because of SP's condition, for instance, and this was having a direct financial impact on UP's financial performance and ability to deliver equipment.
UP's fate had always been tied historically to CP/SP and there was nothing to be gained by letting that relationship be left in the hands of a bankruptcy trustee.
Semper Vaporo My remembrance is that ATSF was going under and Burlington Northern was stepping in to acquire it at a real bargain price... but Union Pacific started a bidding war and BN paid dearly to for it... much more than it initially was going to. 'Twernt no bargain by then.
My remembrance is that ATSF was going under and Burlington Northern was stepping in to acquire it at a real bargain price... but Union Pacific started a bidding war and BN paid dearly to for it... much more than it initially was going to. 'Twernt no bargain by then.
Yes, ATSF had performed poorly under Kreb's management and fiery temper. Several of my friends worked for the man, and had little good to say about either his management skill or his personality. I would have to go back and look, but my failing memory seems to offer that after Krebs came on board, BN's financial performance began to falter for exactly the same reasons that ATSF's had faltered under Krebs: costly projects, no sense of IRR.
ICLand The BN merger illuminated the problematic nature of merging redundant lines: with two major transcontinental routes that more or less started at the same places and ended at the same places, one had to go, at a high sacrifice of investment, employment, and service, and of course that was the historic and venerable Northern Pacific Railway. UP/MILW would have presented much the same dilemma. Milwaukee and UP were big competitors for transcontinental traffic to and from the PNW, more so than the MILW and BN. UP was, in fact, the biggest beneficiary of the MILW withdrawal because of that. Now, Southern Pacific coveted that MILW mainline, but without a way of extracting it from the Granger burden, it passed.
But wasn't either GN or NP going to go away in any case -- as the Milw did? In those days, elimination of "redundant" trackage was one of the things driving mergers: Get rid of that nuisance competitor that was responsible for both of you making a poor living.
S.P. going for Milw's PCE would have been different, representing a territorial expansion.
ICLand:
Your mention of IRR (internal rate of return) was an elusive concept that few still understand.
However, today's BNSF, UP and I presume other Class 1's appear to have it. Since you appear to have it I would reqest that you offer a condenced explanation.
I have mentioned this concept twice before on other threads and RWM commented about it and a lack of understanding from those he presented it to..
dakotafred But wasn't either GN or NP going to go away in any case -- as the Milw did? In those days, elimination of "redundant" trackage was one of the things driving mergers: Get rid of that nuisance competitor that was responsible for both of you making a poor living.
Well, competition does that. That's why it promotes continuing efforts at efficiency.
Right?
Marxism offers you an alternative vision, I suppose, for those that have all this "competition is bad" ideology.
ICLand [snip; emphasis added - PDN] I would have to go back and look, but my failing memory seems to offer that after Krebs came on board, BN's financial performance began to falter for exactly the same reasons that ATSF's had faltered under Krebs: costly projects, no sense of IRR.
Wait a minute here - Krebs famously graduated from the Harvard School of Business, after Stanford. How could he have done that if he had no sense of Internal Rate of Return ? I couldn't have passed even my senior year Engineering Economics course without that and knowing how to apply it . . .
And IRR wasn't new or rocket science even in the 1960's - my textbooks on it had been written some years by the Bell Labs guys. . So Krebs must have known what it was - but perhaps he couldn't or wouldn't apply it, or was forced by circumstances to take acts that did not have a decent IRR.
Can you provide some examples of those costly projects ? The Powder River Basin line was largely built by then, and right now I can't think of or remember anything major that either railroad did in that time frame - no new classification yards or line relocations, purchases of fleets of cars or locos, other acquisitions, etc. - but maybe my memory is failing, too.
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