Just want to say I LOVED and appreciated TRAINS’ July 2005 cover article about possible future mergers among North America’s seven remaining Class One RR’s. I do not know the Chicago-based attorney/analyst who penned that insightful and most interesting overview, but I sense a passion for RR’s (and great savvy[;)]) underneath the cool reason. [8D]
I am recommending this article to friends who, like me, have been known to fiddle with the stock market. (In other words, the sort of folk who, unfortunately, don’t get off on “I Remember Chessie”[;)] but do try and tend to make money in the long run.) These various roads’ share prices are fascinating, but usually when an acquiring company buys (and merges w/) a smaller company, it’s the “acquired” corp. whose share price goes up in the interim! Not the intuitive guess (the bigger corp. is supposedly enriched and made more efficient), but the reverse happens more often than not (the smaller corp’s stock goes up as a kind of “premium” because it has received attention from a larger, and possibly competitive, neighbor).
I really like the idea of having both TRAINS and CLASSIC RAILROADING because I like the “I Remember Chessie” type of nostalgia but also an overview of what the roads are doing right now–and possible implications.
I really enjoyed reading the article because it had so much information in it. But I am really surprised that it did not mention that Union Pacific owns 26% of Mexico’s largest railroad, Ferromex. If UP were to increase it’s ownership of Ferromex, I believe BN would go after KCS. However, BN+KCS would still be stuck with a poor route to TFM across south Texas and BN has better connections with Ferromex at El Paso and Eagle Pass. TFM has their gateway at Laredo where UP has the best route. Perhaps the best solution would be for UP and BN to divide KCS in the manner that CSX and NS divided Conrail. BN should get KCS and Ferromex while UP would get TFM.
Mike Blaszak made a lot of good points in discussing various merger possibilities and some of the ramifications and possible reactions to each of them. Another set of possibilities that was more alluded to than discussed was the absorption of regionals by Class I carriers.
From a business perspective, Trains/Kalmbach seem to have a tendancy to report more hearsay which would make me extremely leary about investing on an article found in trains. Go through back issues and see how many reported events actually happened. A Conrail/NS merger that was reported numerous times in Trains starting in the early/mid 90s would be a good example.
I’m not trying to be negative against Trains or Kalmbach publishing, just giving a word of caution of investing strictly on a story found in one of their publications.
Take it from a guy that has had his time and made a little bit of scratch from investing in RR securities as well a few equipment trusts from as far back as the mid- 80’s. A FEW RULES ABOUT THIS (1)You never knows when financial actions take place untill they do take place. (2) We can suspect, prognosticate or even have a SWAG or two about any business aquisition or mergers, but untill they happen, they will not happen. (3) It is even illegal for anyone that is in talks about such a thing to speak in puplic about it. The reason being that folks would play the stocks on what is called insider information. On the last point, Martha Stweart’s troubles began with just such an information practice and we all got to see what that got her. But I do have to admit it is fun to speculate on what might be or happen.[2c]
Don’t confuse this as a faulting of Kalmbach, as I am really glad they released the article and I thought it was professional and well written—worthy of Trains. However, I was as concerned over this article as I have ever been.
Didn’t Mr. Blaszak represent SP and SF in the ill-fated 80s merger? My only point in making this statement is that he—though obviously more knowledgeable than myself—might be far from a neutral observer on this all-important transcendent industry issue. I certainly felt as though the article championed rail mergers and did not really give a fair nod to the deleterious consequences of such a merger. If the article had listed the top 5 to 10 problems caused by such a merger and made an attempt to counter them, I might have been less concerned.
I think the next round of mergers is the most important railway topic of the next 10 years of railroading. I wi***rains could have either provided an article that more fairly balanced both the pros and the cons of another round of mergers or have printed two articles (one from Mr. Blaszak and another from a prominent opponent of another round of mergers). What I would give to write an article raising the problems of rail mergers. I am not saying another round shouldn’t happen—I would just like to see the problems of another round addressed in the forum of ideas before we start marching to Babylon.
I don’t blame Trains, as I am sure this is much easier said than done. I just feel as though “the merger paradigm” is becoming insidious and there has not been a lot of thinking regarding some of the bad things that might happen as a result of another round of mergers.
Re: The change in price of the target firm’s stock prior to acquisition. It is well-established in financial economics that target firm shareholders get the benefit of the merger instead of the acquiring firm. There are a couple of reasons for that. One occurs when there is a bidding war for the target. In that situation, the price of the target goes up until one bidder ends up paying too much. The phenomenon is know as the “winner’s curse” and it is common in auctions. Bidders keep running the bid up until somebody bids more than the target is worth. At that point, everybody else drops out, and the winner has paid too much. This effect may be attenuated when different bidders expect different synergies between themselves and the target. If the target is much more valuable to one firm than to the other bidders, then the winning firm shareholders may be O.K.
Another issue is the agency problem: Corporate management may not always act in the interests of shareholders. They can get away with this due to the fact that they know more about what is happening inside the company than do their shareholders. Often, corporate management would rather spend excess cash on assets that are not in the best interests of shareholders rather than pay that cash out in dividends and lose control of the resource. This sort of thing is also well-documented in the literature. Another problem is the tendency for management to be overly optimistic about the value of the target to their own firm. After all, the merger proposal is “their baby.”
In the case of railroad mergers, my take is that the central issue would be the operating and routing synergies between the target and the acquirer. The other key issue is the STB’s attitude towards the merger. KCS looks like the most likely target of the next round, especially with NAFTA in the mix. The real question is which road would most benefit from the acquisition. [?]
I certainly didn’t mean to imply that the TRAINS July 2005 cover article is the “be-all and end-all” of business reporting, or that it alone consists of a sufficient investment guide–free information, after all, is worth what you pay for it. Still, as others have remarked, isn’t it fascinating to speculate?