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.
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.
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.
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
As a young C&NW fan, I felt UP swallowed C&NW because of the loss of the bidding war. Sort of a, “See we can take over a railroad!” kind of action.
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?”
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.
They should have allowed UP to acquire the entire Milwaukee Road system to the Pacific Northwest, thereby equalling the playing field with BN.
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 streng
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.
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.
Mac