Railroads are a good investment. Bill Gates and Warren Buffett have invested heavily in rail as have many mutual funds, and smaller individual investors. Yet…some of the large non rail fortune 100 companies seem to be missing the boat…would they not do well to buy a class 1 or at least a big chunk of one?
Look at GE or EMD… a locomotive builder could do worse than own its own customer… GE might for example buy BNSF…and why not…they are already one of the world’s most diversified companies and probably have the wherewithal to go out and buy one of the big class 1 lines…and be taken seriously in the attempt.
Same with Exxon… here is one of the world’s largest companies…I foget where they are on the listing…but they would also be able to purchase a large railroad…or at least a majority interest in one. This would be a smart move too as Exxon relies heavily on railroad transportation…and owning the means of transportation would certainly be a major competitive advantage.
Power utilities…need I say more? Lots of opportunities… the saviest investors (Buffett, Gates) who have little to gain apart from divendends and share value appreciation see the light…
Well…according to the Clayton Act which regulates mergers and acquisitions, “No merger or acquisition is permitted if the result of doing so may be to substantially lessen competion, or to tend to create a monopoly”.
The above doesn’t necessarily lessen competition nor does it create a monopoly. Manufacturers and retailers (like Walmart) are allowed to own trucking companies…and these so called “private carriers” which are owned by shippers are fairly commonplace…Exxon, Shell, etc not to mention most food retailers … own their own trucking fleets…why not rail too?
I too seem to recall an anti-trust concern - though I may have it backwards [it’s kinda early in the morning for that level of thought [;)] ]. Anyway, the Pennsylvania coal railroads - Reading comes to mind - were prohibited from owning a coal company after some of the early 1900s anti-trust laws were enacted. I don’t think it was the other way around - that a coal company couldn’t own a railroad - here, it would be Exxon or GE instead - but I could be wrong on that.
More likely is that any well-run business probably has opportunities in its own enterprise to put any potential or available investment capital to work, and earn a better internal return on that investment than it could by investing in a relatively stolid and comparatively low-return business as railroads. Normally, investing in other companies is done to moderate or counter-act business cycle swings, not exacerbate them, which this would likely do. Such other investments - in addition to the usual ones of more or improved or larger facilities - today might include just keeping enough capital on hand to ensure liquidity [after the bank melt-down stupidity last fall] to satisfy shareholders, lendering and financing agreement covenants, any regulators, etc., as well as the ever-popular share buy-back programs.
Lastly, any business that purchases a railroad has perhaps set itself up for reduced competitive power in the marketplace. Suppose a power generating company, or Exxon, or GE purchases most or all of BNSF. How do you think the coal mines are going to view that - BNSF has now been co-opted by a common customer [Q] How do you think other power generating companies would view it - they’d be supporting their competition - recall RWM’s exposition on U.S. Steel’s ownership of the EJ and E a couple of weeks ago. And as for GE buying BNSF - UP wou
I would venture to say that it is probably unusual for a company that actually produces things, rather than services, to just hold stock in companies. As Paul stated, they may have better things to do with their cash. An exception would be a company buying stock in another company with the goal of acquiring full ownership and control of the targeted company.
Compared to other places to put excess cash, i.e., things like bonds and money market funds, stocks are risky investments. To the greatest extent possible, company managers want to control the assets and activities of their companies. Just as with any investor, the result of a stock purchase is largely out of the control of the purchaser.
Going back to the original post, it is worth noting that Bill Gates’ investment is with his personal funds, rather than Microsoft. On the other hand, what is often referred to as Buffet’s holdings is actually held by Berkshire-Hathaway. To say that B-H is “different” is a major understatement. B-H’s subsidiary insurance companies generated cash beyond the amount required by regulations to be held as cash or cash equivalents and Buffet took the risk to invest the excess cash in the common stock of many companies. He did rather well.
The trend in modern industry (especially in the United States) is for corporations to try to stick to their “core competencies” and not buy up other lines of business such as they did back in the "conglomerate era"of the 1950’s-1970’s when many of the fortune 500 where extremely diversified. GE, to some degree, still bucks this trend but GM selling off EMD is a good example of it. Wall street analysts, who have a huge influence on the way corporate restructuring has been done, are also big cheerleaders for the concept.
Buying one of your customers can seriously hurt your total sales with your other customers. Note that the class 1 railroads have
At one time SOU RR owned a chunk of the original Piedmont airlines. During that time a Piedmont airplane slid off the north end of what is now runway 36R at the cLT - douglas municiple airport… I believe it slid onto SOU’s ROW and fouled the CLT - ATL main line. Had some biting caption on the picture.