Railroad Mergers and the Language of Unification by James Burns Hard Cover 1998

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RailroadTreasures offers the following item: Railroad Mergers and the Language of Unification by James Burns Hard Cover 1998 Railroad Mergers and the Language of Unification by James Burns Hard Cover 1998 220 PagesAs the nation’s earliest big business, the railroad industry was the first to understand the power of unity so vividly related in the Book of Genesis. In the early 1860s, for example, railroads employed Samuel F. B. Morse’s telegraph to coordinate intercarrier exchanges and thereby promote service beyond the rights-of-way of individual systems. The Union Pacific and the Central Pacific joined lines in 1869 at Promontory Point, Utah Territory, thereby permitting the first transcontinental flow of traffic. A collective agreement to standardize time zones in 1883 allowed rail carriers to schedule interstate service, and the adoption of the standard gauge by southern railroads in 1886 facilitated a fuller interchange of cars and speedier operations nationwide.While these joint efforts generated enormous benefits for railroads and the public alike, rail officials learned that the corporate merger was the most powerful tool for intercarrier cooperation. Mergers could integrate the operations of multiple lines under a single management. They could facilitate new and more direct routes to markets, attract new traffic with single-system service, and permanently eliminate internecine competition. Indirect benefits included a decline in fuel expenditures, the elimination of superfluous line segments, a reduction in labor costs, and better utilization of rolling stock and other equipment.Railroad companies could also benefit from combinations with corporations outside the business of railroading. They could diversify their investment bases, secure new avenues of capital, and acquire competing modes of transportation. Diversified investment bases might allow rail carriers to withstand more effectively declines in rail traffic while obtaining needed capital from nonrail holding companies or nonrail subsidiaries. The acquisition of water and motor carriers could open door-to-door markets served exclusively by trucking companies and facilitate access to international markets dominated by shipping lines.From the time the first fledgling systems were operational in the 1830s through the late twentieth century, railroad leaders sought to exploit the benefits of unifications. Combinations were so numerous in the 1880s and 1890s that by the turn of the century, more than 15 percent of the nation’s carriers had been involved in mergers.A century later, by the 1980s and 1990s, every major railroad could be tied to a combination with another system, and most either owned or were affiliated with other modes of transportation.Almost as soon as rail companies started combining with each other, the federal government began regulating intercarrier relationships. For example, the Interstate Commerce Act of 1887, which first undertook to regulate interstate railroads, included stipulations outlawing railroad pooling arrangements. By the turn of the century, the Supreme Court ruled on the legality of certain combinations, ordering the dissolution of the Northern Securities Company and other attempted unions that were “in restraint of trade.” The Panama Canal Act of 1912 and the Motor Carrier Act of 1935 empowered the Interstate Commerce Commission (ICC) to ensure the independent development of the motor and water-carrier industries by restricting railroad acquisitions of these modes.During the early years of regulation, the ICC was critical of mergers. Commissioners believed that combinations could be a threat to competition, and the agency sought to prevent violations of the Sherman Antitrust Act (1890) and the Clayton Antitrust Act (1914) before the Justice Department brought cases to the Supreme Court. Meanwhile, Congress was so preoccupied with granting the Commission powers to regulate railroad rates that it did not consider fully the benefits that corporate mergers might afford.Legislators, however, were prepared by 1920 to give greater attention to the issue of rail mergers. Nationalization of the railroad industry during World War I gave government officials special insight into the realities of railroading and the advantages that mergers could provide. With the Transportation Act of 1920, Congress urged the combination of the nation’s rail carriers under the direction of the ICC. Federal officials hoped that such a move would preserve the benefits realized during nationalization after they returned railroads to the private sector.Twenty years later, officials in Washington continued to believe in the benefits of combinations, but they then realized that the arranging of mergers should be left to the private sector. Congress legislated its modified viewpoint in the Transportation Act of 1940. For the next three decades, railroad executives decided for themselves when and with which systems their companies would merge, while it was the Commission’s task to ensure that the unifications were “in the public interest.”One of the main reasons the Commission supported so enthusiastically the unification of the nation’s railroads after 1920 was the realization that operating a railroad profitably was difficult. Federal operators could not do it during nationalization, and in the half century following privatization, only a few railroad companies prospered.By 1970, the nation’s railroads were under enormous financial strain. Returns on net investment and returns on equity were at dangerously low levels, the railroad market share of freight shipped and the numbers of passengers transported were spiraling downward, and railroad trackage and equipment were deteriorating. The industry was facing a crisis as numerous railroads filed for bankruptcy; and corporate mergers, which became commonplace in the 1950s and 1960s, seemed unable to ameliorate the situation.The blame for the industry’s troubles lay in antiquated and burdensome regulation, poor railroad management, and competition from other modes of transportation. Regulations governing rates prevented railroads from generating adequate income, while other laws limited the ability of the carriers to abandon unprofitable lines. These constraints contributed to a growing pool of incompetent managers who, mesmerized by Commission restrictions, failed to develop new approaches to operations as did the leaders of other industries in the decades after the World War II. Finally, railroads faced enormous competition from motor carriers which increasingly absorbed a greater percentage of freight transportation markets. This challenge to railroad viability limited railroad market expansion that often had helped carriers overcome financial burdens in the past.This latter problem was augmented by the federal government’s funding of other modes of transportation. Between 1946 and 1975, for example, the trucking industry received over 69 percent of all federal aid to transportation. Twenty-nine percent was allocated to the automobile, airline, and barge industries, and a mere 1 percent was set aside for railroads. This disproportionate allocation of federal transportation funds to the trucking industry was important in providing motor carriers rights-of-way into traditionally rail-dominated markets.By the 1970s, federal officials realized that they had to act if they wanted to preserve the railroad industry. Between 1970 and 1980, Congress passed legislation that heavily funded ailing systems, gave carriers greater corporate and operational flexibility, and promoted combinations. The Rail Passenger Service Act in 1970 relieved carriers of unprofitable passenger operations and consolidated that service under a National Rail Passenger Service Corporation (Amtrak). The Regional Rail Reorganization Act of 1973 provided funding for a pseudo-public company, Consolidated Rail Corporation (Conrail), to unify the operations of numerous failing freight systems in the Northeast. Finally, the Railroad Revitalizaiton and Regulatory Reform Act (1976) and the Staggers Rail Act (1980) freed railroads from regulations that prevented operational flexibility and continued to inhibit unifications in the private sector.As legislators transformed the regulatory structure, railroads continued to combine with other carriers. Rail officials, like many federal regulators, still believed that mergers could be a panacea for many of the difficulties inherent to railroading. In a freer regulatory environment, officials assumed that they might realize the benefits of mergers that combining systems of the 1950s and 1960s had not achieved. Consequently, dozens of merger applications were filed with the Commission during the 1970s and 1980s, and the ICC was predisposed to approve them.As railroads unified with other rail systems, they began to acquire other modes of transportation as well. While carriers avoided direct violation of the Panama Canal Act and the Motor Carrier Act by the establishment of holding companies, the Commission sanctioned intermodal unifications in a liberal interpretation of the law. As a result, railroads joined with trucking and shipping firms to form global multimodal transportation enterprises.By the 1990s, the industry had changed significantly. Reduced regulation, mergers with other transportation companies, and affiliation with huge diversified conglomerates helped railroads stem the decline in their share of intercity freight. Rail carriers had access to new domestic and international markets through a booming intermodal industry, and a resurgence of the shortline industry permitted the larger carriers regularly to abandon service over superflous or marginally profitable line segments. As a result, railroads reported returns on investment at levels not seen in decades, and they boasted of highly advanced equipment and rights-of-way in first-class condition.The consolidation that transformed the nation’s rail carriers between 1970 and 1995 was important not only in changing the prospects of the railroad industry but was also significant in that it represented a phenomenon sweeping corporate America at about the same time. During the 1980s and 1990s corporations in numerous industries engaged in mergers that awed Americans in both their frequency and value. This merger mania was most significantly felt in the chemical, petroleum, drug, food, defense, banking, telecommunications, media, healthcare, and retail industies.As in the railroad industry, the stimulus for large-scale combinations was economic pressure. The stagflation that characterized the late 1970s, and that culminated in a recessionary economy by the end of the decade, influenced congressional support for legislation that liberated industry from federal regulation. This support for deregulation measures, which continued in the 1980s, stimulated corporate reorganization in much the same way that regulatory relief in the railroad industry encouraged corporate adjustment. As in the railroad industry, moreover, this adjustment manifested itself in a merger craze that set records in both the number of combinations that transpired and the value of those unifications. Also, as was the case with railroads, other businesses found that corporate combinations afforded numerous operational and financial benefits which they had not been able to realize in the past.This study will show that corporate combinations with other companies between 1970 and the mid-1990s were a panacea for many of the financial and operational problems of the nation’s major rail carriers. This thesis rests on the idea that the successful operation and financial performance of rail carriers depends on a single variable-access. As rail executives and industry regulators know, all railroad operational and financial ills can be traced to either a lack of access to capital or a lack of access to markets. Assuming that rail managers strive to achieve peak efficiency in daily operations in order to generate the greatest profits possible and that federal regulations do not interfere with that method of operation, a given railroad’s performance will directly relate to its access to both capital and markets. Intensive capital investment is critical for the purchase and maintenance of expensive equipment and right-of-way; and huge markets, capable of providing adequate levels of traffic, must be exploited if railroads are to be profitable.Corporate mergers that transpired in the railroad industry between 1970 and 1995 ensured railroad access to both markets and capital. Through combinations with other systems, railroads formed the most efficient network yet realized for delivering freight to existing rail markets throughout the United States. Unifications with motor and water carriers generated comprehensive transportation networks for delivering freight door-to-door domestically and to markets around the world, and combinations with companies outside the business of transportation ensured railroad access to capital.This access contributed to the improved health of the railroad industry by the mid-1990s as evidenced by operational and financial performance data. Increasing ton-miles of freight hauled reflected increased operating efficiency in rail markets, while growing numbers of trailers and containers hauled suggested increased penetration of motor carrier and water carrier markets. Rising returns on both investment and equity indicated an increase in the worth of railroads, and declining debt-to-equity ratios suggested greater access to equity capitalization.At first glance, this thesis appears to challenge directly that in Richard Saunders’ Railroad Mergers and the Coming of Conrail (1978). In his study, Saunders argued that mergers were not a panacea for the ills of financially ailing railroads in the period between 1954 and the collapse of Penn Central, the juggernaut of the Northeast, in 1970. He contended that although rail officials were able to treat the symptoms of financial illness through combinations, unifications failed to provided a cure. As far as Saunders was concerned, a decade had been wasted on the wrong medicine, on a panacea that proved to be a placebo.The present study, however, does not challenge the assesment made by Saunders for the period that he addressed. Clearly, the railroad industry was in dire straits by the early 1970s, and many scholars judged railroad mergers unsuccessful up to that time. Mergers did not stem the degeneration of the industry as a whole nor did they appear to provide short-term solutions to the problems of individual systems involved in them.How then does one reconcile the two sharply different perspectives about mergers during two contiguous periods? If mergers were deemed a failure for the period from 1954 to 1970, how can they be singled out as a panacea for railroad problems between 1970 and the mid-1990s?The answer lies in the changed times. This study demonstrates that railroad officials, industry observers, and federal regulators were correct in their belief that corporate mergers could remedy many of the difficulties intrinsic to railroading. The pre-1970 environment in which the industry operated, however, did not permit rail carriers to exploit fully the advantages that mergers afforded. Transportation regulation, which discriminated against railroading, prevented it.By the 1980s and 1990s, however, the entire regulatory structure of the industry had been reorganized; and railroads were permitted to conduct operations like any other business. Once railroads obtained a level playing field with other industries and other modes of transportation, they showed how effective combinations could be.This study focuses strictly on the nation’s Class I rail systems. For purposes of organization, the ICC arranged carriers into three classes based on gross annual operating revenue. Class I carriers were those systems with the largest operating revenues and usually the longest lines. Although the threshold dividing class rose with the growth of the industry, Class I operations accounted for more than 90 percent of all railroad traffic in the nation for every year between 1970 and 1997. Class II and Class III carriers, that is, regionals and shortlines, made up the remainder. They participated in mergers of their own.When 1970 opened, there were seventy-three Class I carriers in the nation. Thirty-two crisscrossed the Northeast, fourteen dominated the South, and twenty-seven covered the West. The railroads in the Northeast participated primarily in the movement of manufactured products, coal, and other ores. Western carriers dominated movements of agricultural goods from the plains states and connected the major industrial regions of the Northeast to western ports. Southern carriers connected the growing lumber, paper, and pulp industries to manufacturing centers outside their region, while they interchanged agricultural products, manufactured goods, and ores with northern and western lines.By 1997, only ten Class I carriers remained. As a result of bankruptcy, merger, or a changing classification threshold, some sixty-three systems had disappeared from the Class I category. Because of the economic malaise surrounding the industry in the 1970s, several carriers, including the Chicago, Rock Island & Pacific (Rock Island) were either divided, sold, or left to rust. As a result of numerous combinations, many Class I carriers fused into a single system. For example, the Great Northern’s merger with the Northern Pacific and the Chicago, Burlington & Quincy, among others, reduced by two the number of carriers on the Class I list. Finally, the Class I threshold changed three times between 1970 and 1997. In 1970, a carver was a Class I if it had annual operating revenues in excess of $5 million. That number was raised to $10 million in 1977, $50 million in 1978, and $250 million in 1992. As a result, a few carriers were downgraded to Class II status.While railroad growth required changes in revenue classifications, the sheer size of the newer systems necessitated a change in geographic classification. No longer could regulators, rail officials, or industry observers speak of railroads as belonging to one of three districts. Combinations among carriers in the Northeast, South, and West rendered that categorization meaningless. In 1986, carriers were considered to be either eastern or western sytems. By 1997, as a consequence of further combination, even that classification was being challenged.The research for this study was based on three major kinds of primary sources-finance dockets of the Interstate Commerce Commission, reports by federal agencies and congressional committees, and trade journal articles. ICC dockets provided the bulk of the information relating to specific combinations of two rail carriers or of a railroad and another mode of transportation. Reports by federal agencies and congressional committees contained the majority of the material used for assessing both the financial and operational health of the industry and the advantages and disadvantages of corporate combinations. Finally, trade journal articles were immensely important in helping to tie together developments over the period as a whole.The ICC’s finance dockets include a plethora of information. Each docket consists of the application filed by merging parties with explanations of forecasted benefits and possible detriments, the objections and/or compensatory claims of competing transportation systems, the views of numerous third parties that expect to be affected by a given merger, the comments of federal agencies, and the analysis and decision of the Commission. Some merger cases fill more than three dozen volumes consisting of from five hundred to one thousand pages per volume, so sifting through such material can be daunting. Fortunately, however, the ICC published a neatly organized version of the more important dockets in a series of regulatory volumes found in most federal depository libraries. With the sunset of the ICC in December 1995 and the transfer of its functions to the Surface Transportation Board of the Department of Transportation, these kinds of sources became that much more of a convenience.The reports produced by federal agencies, associations, and congressional committees were the most helpful in assessing the industry and mergers as a whole. Studies and annual reports of the Interstate Commerce Commission, the Department of Transportation, the Association of American Railroads, and the Senate Committee on Science, Commerce and Transportation were among the most useful. They provided detailed analyses for regulators and federal legislators on nearly every issue concerning rail operations.A variety of journal studies and articles supplemented the government documents and offered their own analyses and perspectives. Considering the dearth of books on the issue of recent railroad mergers, one must depend on these sources to provide a broad perspective of the period. Articles assessing individual combinations helped relate the federal data to the socio-political environment of the period while comparing or contrasting proposed unifications with those of the recent past.
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