The Merger Express in big US railroads: and now there are 6
This week Santa Fe Industries and the Southern Pacific Company threw the last switch. The two railroads announced a definitive agreement to merge. If the merger is approved, it will leave the country with three major railroads in the West and three in the East. This setup could eventually lead to three cross-country mergers, analysts say.
In the past few years, mergers by smaller railroads have led to larger carriers getting together. The result of this trend is expected to be a more streamlined rail system, with fewer owners.
With Santa Fe and Southern Pacific, the merger is seen as a defensive move, designed to protect the two Southwestern railroads from Burlington Northern and Union Pacific. These two have become giants in the Midwest and West because of recent mergers of their own.
''If we are to maintain our competitive balance, we need to add strength of our own,'' explains Robert Gehrt, a spokesman for Santa Fe. ''We think the two of us combined would be stronger than either one would hope to be on its own.''
The combination would make the new holding company, Santa Fe Southern Pacific Corporation, the third-largest rail system in the country, behind Burlington Northern and CSX Corporation. Joined, they would have rail revenue of $4.3 billion. Mr. Gehrt says procedures are moving along swiftly, although the company has yet to file with the Interstate Commerce Commission, which must approve the merger.
The spate of mergers in the last three years began with the Staggers Rail Act of 1980. To a large extent, the law deregulated the industry, freeing it from government-approved rates and procedures. Since then, consolidation has taken over.
''We have reduced the number of railroad lines in this country substantially in the last five years and have weeded out unprofitable branch lines; we had too much in the system,'' explains Robert Neuschel, director of the Transportation Center at Northwestern University. ''In addition to reducing that, we have also leaned down in terms of numbers of people.''
Most of the mergers that have taken place since 1980 have been ''end to end.'' That is, the railroads have extended their lines in front and in back, rather than joining with roads that run parallel to them. This means a bigger market and better service, railroaders say. The merged roads can serve a larger area without the time and procedure complications that go with changing from one railroad to another. Some savings and efficiencies come from this, but the benefit is mostly in service.
The Santa Fe and Southern Pacific merger is not an end-to-end one, since their routes covered the same general area. Analysts say this kind will have more impact on cost-cutting, because the two companies could eliminate more excess routes and labor.
The mergers have also helped the railroads through this last recession. ''Normally when you have a recession of the magnitude we've just gone through, many railroads' earnings would have literally collapsed,'' says Richard Fischer at Merrill Lynch. But the roads have ''come through the recession in relatively strong shape,''partly because of deregulation, a larger financial base, and greater efficiencies achieved by mergers. Though down from last year, the railroads still earned $711 million in the first six months of '83.
The evolution is not over, however. The number of railroads, especially west of the Mississippi, will continue to shrink.
''The broader issue of capacity is one (the industry) has been grappling with for a long time,'' says C.Barry Schaefer, executive vice-president of the Union Pacific system. With deregulation, ''the competitive situation has increased dramatically,'' Mr. Schaefer says, and he believes it will cause further consolidation. He points out ''the Granger Road area,'' which runs north and south from the Mississippi to the Missouri Rivers, as a prime target. The railroads here are smaller, regional carriers, and one has already shrunk by two-thirds, while another has been eliminated.
With the prospect of three major railroads on each side of the country, there is an even match for cross-country mergers. But analysts and executives are divided on whether such a match-up will occur.
Schaefer explains that most traffic moves in three areas of the country, the West, the East, and the South. ''Most traffic moves within (the areas) rather than from one to another,'' he says, so he doesn't really see a need for one big , transcontinental railroad. He also explains that if a Western railroad merged with an Eastern one, the roads would lose the cooperation of other railroads they normally interchange with. The combined road would be competition that other railroads would avoid.
What it comes down to, analysts say, is who makes the first move. Santa Fe has been eyeing Conrail, the profitable, government-owned Eastern railroad that is up for sale. Santa Fe is still considering buying it, a company spokesman says, and will make its decision soon. But some analysts argue that with Southern Pacific on its mind, Santa Fe will rule out the Conrail possibility. The Department of Transportation says other railroads have inquired about Conrail, too.
Schaefer hopes the situation will stabilize with three companies on each side of the country. But he says that if anyone ''goes after Conrail, it may force other carriers'' into cross-country mergers.
One railroad in a strong position to buy is Norfolk-Southern Corporation, one of the three major railroads in the East. The carrier has almost $900 million in cash and ''is in an acquiring position,'' says Kidder, Peabody analyst Graeme Lidgerwood. ''They are the ones to watch,'' she says.