I see what you’re saying, but I was responding to rstaller’s assertion that a sole owner could buy and merge 2 Class 1’s without STB approval. Berkshire owns 22.6%, not Buffet. Buffet would have to buy out Berkshire’s portion personally. No reason to think this would happen. No reason for it to happen. Either way, the numbers are too large to suggest that it would ever be done in a sole ownership type arrangement.
I don’t know about whether or not Bershire Hathaway’s purchase will bring about mergers…however it has give me, and probably other investors, pause for thought. I don’t own any shares in BNSF…but I do have a sizable portion of my retirement savings invested in rail stock. I’ve been happy with my investment…even enjoy reading the reports…but now I’m looking at other investments. I will probably sell my shares and invest the money in my own business. I like that idea because I run the busines…its mine lock, stock, and barrell…and I therefore have more control in how my investment appreciates over time. I’m 47 years old and don’t want my retirement savings to be sidelined because some billionaire (institional or indivual) wants to buy the company.
When I heard the news I started considering that. However, this transaction is so different than the historical pattern in the industry that I think that it makes it unlikely that the purchase will be the cause of a last great round of mergers. I also have doubts that the current political climate would permit a combination of any of the big 6 roads.
When I heard the news, I was pleased. No, I didn’t buy BNI at $16 (6 years ago), nor did I buy it at $116 (two years ago). I am awaiting news about the conversion. At this point, I am leaning towards converting it to BRK/B shares. Time will tell.
As far as future mergers go, I would bet on CN taking over KCS. It is a ‘good fit’, unless CPR gets into the act. CP got ‘burned’ by the NIMBYs on the DM&E takeover. CN did much better with the EJ&J thingie. “We live in interesting times”. Dunno who said that, but it is true.
He-he-he-he. I like the Berkshire Hathaway = 1 person. Also I think legally because of it’s size, it can be argued…BNSF = Public Utility. I know thats one reason Texas has a Railroad Commission.
Interesting article on the BNSF purchase in today’s NY Times:
It may or may not provide an out, but clearly your supposition doesn’t apply in this case since BNSF was bought by Berkshire Hathaway Inc. which is a Delaware Corporation.
It is my understanding that currently a company can be one of five types, a sole proprietorship, a partnership, a Limited Liability Co. (LLC), a S- Corporation, or a C- Corporation. My own business is a S-Corporation.
rstaller you may want to look up what happened when Santa Fe Pacific Inc. wanted to merge the Southern Pacific and AT&SF railroads. Mr. John Schmidt the Chairman of the Corporation didn’t think the STB could say no either. The independent Board members consulted a top Washington law firm for advice and they quickly decided to have Mr. Schmidt shown the door, when he refused to take a no answer from the STB.
As I discussed earlier today on my blog I don’t see this deal creating another round of mergers. The status quo is very stable and I don’t see big changes happening until that balance of power is upset. Is Buffet buying BNSF enough to change this? I don’t think so. As far as we know at this time there will be little change in the day to day operation of the railroad and current management isn’t going anywhere.
Combine that with the fact that the current political climate is very hostile to mergers and I don’t think you will be seeing two mega-railroads in America anytime soon.
Nice looking Blog. One correction the Kansas City Southern is one of the seven Class I railroads in the United States. The other six are
Burlington Northern Santa Fe
Union Pacific
Norfolk Southern
CSX
Soo Line Corp.
Grand Trunk Corp.
Soo Line is Canadian Pacific now I thought
Grand Trunk is Candian National now I thought
The railroad subsidiaries of Soo Line Corp. and Grand Trunk Corp. have agreements with their parent Corporations (Canadian Pacific and Canadian National respectively) to conduct business under the parent Corporations name( a d/b/a or “Doing Business As” agreement), the subsidiaries and their subsidiaries retain their distinct names and are referred to as such for all regulatory and financial matters. A separate subsidiary is required for each Canadian company, and that subsidiary must have all the necessary assets on its books to function as a railroad ( locomotives, freight cars,employees, rail and other ROW items, plus a Headquarters in the US) For example the Soo Line Corp. is subject to STB and IRS oversight, while the rest of Canadian Pacific is not. So if you ship a carload of steel from Edmonton to St. Paul with CP as the only carrier, to the shipper it looks like just one carrier, but internally CP will book an interchange between parent CP and subsidiary Soo Line RR, just the same as if it went to BNSF instead.
Canadian Pacific directly owns Soo Line Corp, a Minnesota Corporation, and recognized by the STB as a Class I railroad.
In turn Soo Line Corp owns the following;
Soo Line Railroad
Delaware and Hudson Railroad
Dakota, Minnesota & Eastern Railroad
49% interest in the Indiana Harbor Belt RR.
some percentage of the Belt Railway of Chicago
Thank you for the correction. Has KCS always been that big? I know the definition of Class 1 is somewhat arbitrary and has changed over time but I’ve only been following railroads seriously for the last few years (I’m 19).
Grand Trunk Corp is the US subsidiary of Canadian National
Soo Line Corp is the US subsidiary of Canadian Pacific
Kansas City Southern is the seventh US Class 1 railroad.
Not so fast–
I think it is a little unfair to characterize sole ownership of a company as one of a ‘T. Boone Pickens’ sort. I’ve worked in companies that were sole ownership and did not find them to be ripping people off as much as —say—some that we have read about in the not so recent past. Remember Enron? Adelphia? 3Com? etc—etc—all fine stockholder–diverse owned corporations.
Wherever humans are you will find a human who will be a Gordon Gecko sort. And from what I’ve seen of Berkshire Hathaway’s operations they don’t seem to interfere with much—
There are pros and cons for public and private ownership.
If a railroad is public, the capital equity markets are available, in which stock can be issued to raise capital. Also, majority owners have a much more liquid method of selling their holdings. The cons include public reporting of accounting, the Sarbane Oxley rules (working for a company which is owned by a publicly traded company, I can verify Sarbane Oxley is a very difficult and expensive, but overall is not a bad thing).
By taking a railroad private, a company such as Berkshire Hathaway is basically saying I believe in BNSF and am going to hold this for a very long time. This is much different than a private equity firm or investment firm. Fortress purchased Rail America 2 years ago and loaded it with debt and then recently issued stock. There were two purposes to the stock IPO. One was to raise capital and the other to recoup their investment. A certain percentage went to the company coffers, but quite a bit to Fortress. Now, that is their right as they are the owner (along with the banks), but the long term goals of the railroad are often sacrificed.
There is a very interesting and timely book review in the WSJ today about the Private Equity industry. Generally, the author (The Buyout of America, by Josh Kosman) seems that PE buyouts adds debt, leads to reduction in employees, often the movement of a company to lower cost regions, etc. Obviously Berkshire Hathaway cannot move the railroad.
Further, Buffett and BH have an outstanding long term history of buying and managing companies. There have been some bombs such as Salamon Bros, US Air, and the newspapers are currently not doing so well, but from all indications this has to be positive for BNSF employees and management.
Interestingly, I have a report from Bear Sterns from 3 years ago abo
BTW, anyone interested in the blowup of the current financial markets would find the book House of Cards by William Cohan to be a very informative source.
It explores the “tale of hubris and wretched excess on Wall Street.” Lessons should always be learned from failures.
ed
Today’s Wall Street Journal has a shortish article on page C-3 that quotes Matt Rose - BNSF’s CEO - as saying and a compnay SEC filing as stating that Berkshire Hathaway will sell off all of its NS and UP shares before completing the purchase of BNSF early next year.
- Paul North.
Anyone happen to know the level of foriegn ownership allowed in the Class 1 railroads? Would it depend on the country involved? For instance, would a German company be allowed to own a larger share of Union Pacific than a Chinese company?
Not sure about other countries, but the Class 1 US subsidiaries of the CN and CP are wholly owned by a bunch of foreigners. LOL
And just to make the relationship with Canada more complicated, the CN and CP undoubtedly include on their stockholder lists many, if not a majority, of US based individuals, mutual funds and other investment vehicles.
Our economies are so integrated that one could spend a lifetime just attempting to understand all of the relationships. I do wish they would do something about those pesky cold front exports, however.