Railroad mergers: On rejecting, for now, the urge to merge

— by Pat Foran, editor

On Oct. 20, Canadian Pacific confirmed that conversations about a proposed combination with CSX Corp. had ended, and that no additional talks were planned. The next day, CP Chief Executive Officer E. Hunter Harrison hosted a teleconference in an attempt to "clarify" CP's position on mergers. During the call, Harrison said CP didn't make an offer to CSX, so CP wasn't "rebuffed." CP strategists had a "dialogue" with CSX execs and asked them if they'd be interested in "exploring, quote, 'opportunities,'" Harrison said. CSX execs indicated that they were interested, he added.

Representatives from the two Class Is held "three or four meetings," Harrison said. Ultimately, CP proposed an "integrated coast-to-coast combination" aimed at improving customer service, promoting competition, alleviating rail network congestion in North America (specifically, the Chicago gateway) and generating "significant" shareholder value.

"We had fascinating discussions about the potential, but it became evident that we saw the world differently," Harrison said.

Given the immediate public responses from a number of industry analysts and observers, and at least three Class I CEOs, CP strategists view the world differently than a fair number of people — for now, anyway. For example, the CP brain trust doesn't believe the Surface Transportation Board would have put the kibosh on CP-CSX simply because conventional wisdom suggests it's not a good time for railroads to merge; a well-planned proposal could pass muster, Harrison said. Moreover, he believes shippers might have embraced the plan: CP would have allowed other railroads to access its network if customers weren't happy with CP's service and/or price for same.

Harrison added that he isn't "obsessed" with completing a transcontinental merger. He also suggested he wasn't advocating mergers as the be-all and end-all. But given network congestion issues, the NIMBY mindset regarding what railroads haul and the infrastructure they'll need to continue hauling it efficiently, the potential for additional regulation and the notion that more freight will move by rail in the years ahead, something's got to give, Harrison said.

"I know we're [all] working very diligently to solve issues, but I don't see a lot of answers," he said, adding that if any of his counterparts come up with a non-merger-related solution, "more power to them."

Somebody was going to be the first in 15 years to raise the mega-merger question; that it was Mr. Harrison, who's had a history of casting conventional wisdom aside, is hardly a surprise. What'll surprise me is if no one else raises it in the next few years, particularly as new leaders take the reins at a few of the potentially interested parties. In the meantime, we'll continue to share what we hear, question (and answer) wise.