Last weekend, I got to see some of the Canadian Pacific/ DM&E Division(?) in operation in central S.D… The only thing that seemed any different, was a few red CP locomotives sitting in Huron, S.D.
What happens, when one railorad, through purchase or merger, takes over another? Is it a similar pattern each time this happens? The non-railroad businesses I’m familiar with that go this route usually follow a similar pattern. First, it seems they cut head count, and fire everybody who has been there long enough to know anything. That’s usually followed by by a slash and burn cutback of the facilities, and an attempt to run everything from a distant home office.
With the CP takeover of DME what you would see in SD is a end-end merger, about the only difference would be seeing more CP equipment on the new property as you stated. The biggest part is hammering out labor agreements to actually combine operations into one at locations both compaines have trackage & terminal facilities. From what I have seen in past mergers, this indeed takes time. When BN bought out SF in 1995, here in Wichita the BN train going east to Springfield was abolished in March, 1996 and that traffic shifted to SF trains. This basically closed the BN mainline in town. The single BN yd job itself was not taken off until July, 1998 and at that time the BNSF was offically one rr in Wichita. After the Katy was merged into UP in August, 1988 it was not until November, 1989 that Katy operations were merged into UP. For the first 14 months after the merger, the Katy yd job still worked like it always did w/the same crews, the mainline trains the same until late 1989 when traffic patterns, seniority rosters and such all changed and thus a new rr was created.
Functionally, it depends on whether/ to the extent it’s an end-to-end merger, or an overlap/ same territory merger. “In theory”, for the former not much changes except maybe in the front office, where duplicate officials and functions - purchasing, legal, Board of Directors, CEO, etc. - may be rendered redundant and could be eliminated. In the latter, the same, plus a lot of duplicate yards, shops, lines, etc. can be downsized or closed.
The key factor that I keep coming back to - whether it’s for railroad mergers, municipal government consolidation/ regionalization, or general businesses - is: How much change will occur to the actual physical work to be done ?
Specifically here, out on the line there’s still the same miles of track to be maintained, cars to be switched, and trains to be run. Maybe at interchanges there might be some streamlining, but physically it’s still the same of the block of cars that were going from RR A to RR B, except now that it’s maybe 2 branches of the same RR instead. If there’s a better / more efficient routing now, then that would allow for some cuts, but otherwise - either the operation was inefficient before, or it’s being cut too far now. But not many captains of industry agree with my view . . .
Mergers are always hard to figure out. A general rule is one of the mergees will become dominant. There are business reasons for letting people go in a takeover however. In most cases a company has to be having problems to be taken over. It is far easier to eliminate all the jobs and change to culture at once rather than take years to resolve the conflicts that existed to cause the takeover. Will some good people get hurt? Yes but most of the people are part of the problem not the solution. If more people were part of the solution the company would never have been in that position to begin with. Some companies like NS make an effort to eliminate anything that allows someone to call the railroad by its previous name. They are like the borg, “Resistance is futile you will be assimlated”…
One might wonder if the PC debacle has something to do with that. Trying to meld both entities into one with the existing personnel proved to be a disaster.
On the other hand, I haven’t heard of many problems with the Conrail split, and I’m pretty sure most of the CR people got folded into CSX or NS, as appropriate.
The Burlington Northern merger (GN + NP plus subsidiaries CB&Q and SP&S) seems to be an example of one that worked out well. It seems part of the reason was that it took so long to finally happen. The railroads wanted to merge back into the early twentieth century, and tried unsuccessfully several times to do it thru the 1950’s.
Finally in I think 1961 the railroads started up trying to merge again and were eventually able to get ICC approval for the merger, scheduling it to take place in 1968 - but an appeal was filed by I think the Milwaukee Road so it ended being postponed until March 1970. Those involved have said the two year delay may have made the deal, they really weren’t ready in 1968 and the extra time let them tie up a lot of loose ends and ensure a smooth merger.
Murphy, the CP locos in Huron are nothing new. There used to be more, but they have gradually been painted DM&E over the years. Most of the CPs haven’t seen fresh paint in 20 years. When DM&E first started there were also old Milwaukee Road and Soo Line locos, but they’ve all been repainted or scrapped. With the economic slowdown, I don’t think they’ve had to bring any new equipement to this area.
I finally got moved back to Lake Preston, and now I’m 1 block from the tracks. Had my first wakeup call last night. With 4 crossings and 30-40MPH, they pretty much lean on the horn from one end of town to the other. In two weeks, they won’t even wake me up, at least until I start sleeping with the window open, then it’ll be another 2 weeks to adjust to that.
Railroad mergers are fascinating to me. The combining of lines on the map with new offerings of service, with new traffic patterns are a big puzzle.
It seems the UP had considerable difficulties with their mergers in the 90’s, yet the MoPac and WP mergers seemed to go well. Then again, anyone that picked up MoPac would have been pretty lucky. Santa Fe seemed to have missed the opportunity during the 70’s to become a dominate western carrier by passing on MoPac.
CN integrated IC and WC fairly easily. Will they have the same success with the much smaller, but far more complex EJE?
Was the NW/Southern merger a joining of equals? Who was in control when the dust settled? They seemed to do a good job of integrating the two systems and creating markets, particularly Chicago - Southeast.
I would like to read a post “The Men Who Loved Trains” description of the Conrail split into NS and CSX. Until then, I will probably read it for the third time. What a great book.
Ed – it’s a threshold problem few outside the industry know about. It’s not idiosnycratic to particular railways or particular times. It’s fundamental and intrinsic to railways themselves. They’re intricate beasts and each one functions in almost ridiculously interdependent ways. They don’t have reset buttons, they don’t stop every night for the mechanics and cleaners to scurry around and restock the shelves and reconcile the cash registers and fix the broken seats, and when trains stop running at any location the effects ripple outwards at 40 mph until the ripple bounces off the other end of the system and reflects back. If a big terminal catches a cold, like Chicago, within 24 hours almost every terminal in the country catches a cold.
There always have been issues with mergers. Everyone inside knew that. But they were always small-enough mergers that the issue
I think you hit it when you mentioned “IT”. That would seem to be critical.
My fascination of mergers goes beyond railroads. Certain business mergers work and other dont. It takes an enormous amount of willpower to change the course of two businesses, integrate the cultures, keep egos in check, get everyone on board and move forward.
Barbarians at the Gate, the late 80’s examination of KKR’s buyout of PM is a great example. Henry Kravis paid too much. With so much time and effort invested, he couldnt walk away, when everything indicated run, dont walk. KKR has been rather successful over the years, but they overpaid for several companies in 2006/7.
I have a fascinating equity report by Bear Stearns in May, 2007 entitled “Railroad Enlightenment” which explores the feasibility of PE firms taking each of the class 1’s private. Consider the changes in two short years…
Railroad mergers seemed to be a lot more about practicality than other industries. Right now I am looking at the CenturyTel / Embarq merger and trying to make sense of two companies in a rapidly changing world. Is the 10% dividend of CenturyTel safe? Probably not.
Searching for the right descriptive words here, but failing…When railroad A takes over railroad B, is one of the first orders of business making the aquisition lean & mean, or was that usually done beforehand, to make the property look more enticing? Is there also a push to eliminate all that is non-standard from railroad B in the eyes of railroad A?
Ed, the difference between railroaders and non-railroaders is that railroaders want to do nothing but railroading, whereas for most people, a business is a business is a business. Railroaders love railroads – if they didn’t they would quit, because it is the hardest business on health, happiness, and family I know of. Railroaders understand the business has to make money, and be competitive with other businesses, so they are hard-nosed about it. It’s not romantic in execution, only in commitment.
This is important, because it means railroads do not merge with each other purely for financial chicanery, ego trips, or greed. They do it for business reasons. I don’t think we’ll ever se
The short sighted mentality was my prime concern with the TGI Proxy fight for CSX.
We are told the Hollywood movies cost in the tens to hundreds of millions of dollars to produce and make…and very few actually make back their original investment during their theatre release, and with the creativity of the show biz accountants, very few if any will ever turn a ‘profit’ for those persons who invested in the production expecting to get a share of the ‘profits’. When railroads invest equivalent amounts of money into their capital projects - capacity enhancement, locomotive purchases, car purchases, track and physical plant renewal - those investments are not made unless there is proven rate of return on the invested money…The railroads do not take a ‘leap of faith’ when it comes to their plant investment projects.
Investing in companies in other areas of business is another story, with many successes and many failures, just as occurs when other forms of business branch out from the category of business that made their original name in the world.
The Bear Stearns report (quite detailed at 270 pages) was fascinating in that it did explore the possibilities of PE purchasing railroads, what the leverage would entail and the possible payouts in a “short” period of time. BS didnt see there would be great risk return potential in highly leveraged deals.
Too bad they didnt take their own advice in the use of highly leveraged vehicles.
This months Trains (p 11) reports that TCI’s chairman would not stand for reelection at the next annual meeting. TCI had very radical plans for CSX if you recall including slashing capex, dramatically raising rates, and others. Did CSX need a shakeup. Seems like they did. What pressures, if any, did Berkshire Hathaway bring to BNSF after picking up substancial number of shares last year? My guess is there is an occasional phone call between Warren Buffett and Matt Rose and not much else. Of course, with BH’s downgrade in debt from AAA to AA, there is plenty to worry about.
High leverage is very difficult to manage during economic downturns. It is quite a task to determine the proper capital structure (equity and debt) in an industry as capital intense as railroading.
RWM, when do you see the next railroad mergers occuring (if ever)? What efficiencies could be gleaned from such a move? What is the political landscape for such mergers?
Does the current system of 7 class ones work? There will always be a level of interchange between all carriers, based on the last mile of track to a customer. It seems intermodal would be the biggest segment for improvement.
There were many problems in the PC merger. Arch enemies for nearly one hundred years now in a shotgun marriage where each group of employees had a vested interest and no one was going to give in. Only after the mereger did anyone consider that the two railroads computers couldn’t talk to each other to keep track of cars and engines or locations. Most people don’t make the same mistake twice so when CR was broken up all the logistical stuff was pretty much done ahead of time like the little PRR on certain engines to signify where it was going after the takeover. Wouldn’t I want to get all that equipment into my computer data base as soon as possible? At that point why do I need your IT department or computer system, most of your management (duplication of hign,paying jobs) and a host of other departments like maintenance since my shops are not running at capacity. Remember my loyalty as the purchaser is not to you but to my organization. Sometimes takeover of a railroad has other reasons like CN buying EJ&E to avoid the mess that is Chicago or N&W buying the Virginian to get their mainline which had a better more favorable route
After having spent 35 years as a non-operation (engineering) middle management employee for a Class 1 RR I agree completely with RWM’s analysis, and I know most who have shared my experiences agree. We still talk about it, not only at this site but in our private get-to gathers.
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Ed, the difference between railroaders and non-railroaders is that railroaders want to do nothing but railroading, whereas for most people, a business is a business is a business. Railroaders love railroads – if they didn’t they would quit, because it is the hardest business on health, happiness, and family I know of. Railroaders understand
