UP–NS MERGER | PART 3: WILL THE DEAL ACTUALLY HAPPEN? | Railroad Economics 024

[00:00:02]This is part three of my three-part series on the Union Pacific NS merger.

[00:00:11]Let's call it what it is, an acquisition.

[00:00:14]In part one, we looked at the business case for Union Pacific acquiring Norfolk Southern, and they do have a compelling business case.

[00:00:25]In part two, we looked at the arguments against the merger, and there are some good points there, too.

[00:00:35]So, today, I'm going to answer the question I I seem to keep getting in some of the comments on those other videos, and it's, do I think the merger will actually happen?

[00:00:51]When it was first announced, I would have told you there was no way in hell.

[00:00:56]Today though, I'm not nearly as convinced. And honestly, the reason has less to do with politics than you might think.

[00:01:07]My name is Mark Magna, and this is Railroad Economics, where we explain why railroads do what they do and how the business really works.

[00:01:17]History. If we look at history and I I always like to look at history, should this merger, should this acquisition, should it move forward?

[00:01:30]History would say no.

[00:01:34]If you ask most railroaders about major mergers, the guys that have been around for that before, you will generally get the same reaction. And that reaction is a deep sigh.

[00:01:49]Just like that. Because railroad history is full of mergers that looked great on paper and then they became disasters in practice. The one everybody remembers is when the Union Pacific decided to buy the Southern Pacific.

[00:02:13]When the Union Pacific acquired SP back in the mid 90s, the expectation was simple. A larger railroad, a more efficient railroad, a stronger railroad.

[00:02:26]Instead, the network nearly melted down. Trains stacked up. Locomotives wound up in the wrong places.

[00:02:35]Crews were not where they needed to be.

[00:02:38]Customers couldn't get their freight.

[00:02:40]Congestion spread across much of the western United States. It became so bad that federal regulators stepped in with emergency service orders.

[00:02:54]The government stepped in.

[00:02:57]It took years before the Union Pacific finally dug itself out of the mess.

[00:03:02]If you worked in the railroad industry back then, you probably haven't forgotten that. Even if you weren't necessarily working for the UP or the SP, you you heard you heard things. And frankly, the Surface Transportation Board has not forgotten either. When people hear Union Pacific wants to buy another class one railroad, their first thought isn't excitement.

[00:03:30]Not Not in the industry.

[00:03:33]the people in the industry think here we go again and honestly it is a fair concern in my opinion though it is not quite that simple again we have to go to history not not distant history just the '90s I'm old enough to remember the '9s but the Southern Pacific merger and this proposed merger with Norfolk Southern they are fundamental ally very very different.

[00:04:06]Southern Pacific and Union Pacific both served the West. There were a lot of duplicate routes, duplicate terminals, duplicate yards. Management had to figure out which line stays, which line goes, which crews move, which dispatching center takes over. You're trying to combine two overlapping railroads while still running trains every single day. It it was a mess and it was difficult.

[00:04:36]A Union Pacific Norfolk Southern merger looks drastically different.

[00:04:43]There will absolutely be some redundancies.

[00:04:47]Corporate offices, accounting, finance, IT, executive management, some of those jobs will almost certainly be consolidated.

[00:04:59]But when you look at the physical railroad, there simply isn't the same amount of overlap.

[00:05:05]Union Pacific dominates the west.

[00:05:08]Norfolk Southern dominates much of the east. Instead of trying to untangle two competing railroads, you're basically just connecting two existing networks.

[00:05:21]That doesn't mean integration is going to be a cinch. Far from it. But I do think it's a very different challenge than what they were facing in 1996.

[00:05:36]And I have to believe Union Pacific learned some lessons from what happened with the Southern Pacific. Companies don't generally make the exact same billion dollar mistake twice.

[00:05:52]Now, touchy subject for a lot of people, but we we have to go there.

[00:05:59]This is a situation where politics matters.

[00:06:06]Whether people like hearing it or not, the politics does matter.

[00:06:11]Every administration views large mergers differently. Some administrations are naturally skeptical of consolidation.

[00:06:20]Others are generally more receptive if companies can make a convincing business case. I think it's fair to say Union Pacific is making this proposal under a friendlier administration than it would have faced a couple years ago.

[00:06:36]Now, does that mean automatic approval?

[00:06:40]Despite what you might think, absolutely not. Not even close.

[00:06:45]But I also don't think we should pretend the political environment doesn't matter. It always has.

[00:06:57]The Surface Transportation Board doesn't have to say yes or no.

[00:07:03]Here's something that gets overlooked.

[00:07:05]Everyone talks as though regulators only have two choices. Approve it. Reject it.

[00:07:11]I don't think that's how this one is going to end.

[00:07:14]The Surface Transportation Board has tremendous flexibility.

[00:07:19]Imagine regulators saying something like, "All right, UP, you can have your merger. However, you must preserve competition here. You must grant trackage rights there. You must protect these customers. You must keep certain gateways open. or maybe you could have your merger, but you need to sell certain rail lines.

[00:07:49]A situation like that is entirely possible. And in that situation, who benefits?

[00:07:57]So suppose we have a situation where the surface transportation board is is saying, "Okay, but if that happens, who who buys those lines? Is it another class one railroad?

[00:08:12]Does does some of that track end up CSX or BNSF? Maybe.

[00:08:18]But I would not overlook the short lines here. We did a video on the short lines last week. And believe it or not, they are extremely important. Companies like the Genesee Wyoming, which owns I don't know how many short lines, but a lot.

[00:08:34]Waco, Omnitra, regional railroads. Could a company like the Wheeling and Lake Gary benefit if certain lines became available in Ohio, Pennsylvania, West Virginia?

[00:08:47]Maybe.

[00:08:49]Maybe even Indiana or Michigan. They would drastically extend their network.

[00:08:56]I'm not saying that is definitely what is going to happen, but every major merger creates opportunities somewhere.

[00:09:05]Sometimes the biggest winners aren't the companies making the headlines.

[00:09:10]Initially, I I thought there was no way this was going to happen.

[00:09:16]Now, here's the part that really changed how I think about this.

[00:09:23]Most of this discussion has been about railroad competition. Union Pacific, BNSF, CSX, Norfk Southern, CPKC.

[00:09:34]But I think sometimes people forget something. Railroads don't just compete with each other. They compete against trucks.

[00:09:44]And they compete against trucks every single day.

[00:09:52]The trucking industry is not standing still. Automation is advancing.

[00:09:57]Technology is improving. Logistics companies are getting smarter. If railroads want to keep freight on steel wheels instead of rubber tires, they're going to have to become more competitive, whether you agree with Union Pacific's argument or not. So, do I think this merger happens?

[00:10:21]If you asked me the day it was announced, I would have said no. And I would have said that pretty confidently.

[00:10:28]Today, I'm more in the middle. I think the odds are considerably better than they were before and that people in general believe they are.

[00:10:39]Not because the concerns aren't real.

[00:10:41]They absolutely are. Competition matters. Customers matter. History matters.

[00:10:51]But I also think this merger is fundamentally different from the ones everybody keeps talking about and comparing it to. And I think the competitive landscape has changed. It isn't 1996 anymore, as much as part of me wishes it was.

[00:11:08]Railroads aren't just competing against railroads. They're competing against the entire trucking industry. and that has evolved at a much more rapid pace.

[00:11:19]If regulators believe Union Pacific's argument, I think this deal has a real chance.

[00:11:26]Will it be approved exactly as proposed?

[00:11:30]I doubt it. If I had to guess, I think any approval would probably come with some significant conditions and there's going to be some compromise there. It won't be a rubber stamp, but it won't be a rejection either.

[00:11:47]A merger with enough conditions to preserve competition while still allowing Union Pacific to build the Coast to Coast Railroad. It is envisioning. That is my prediction.

[00:12:02]No matter where you come down on this merger, I think one thing is certain.

[00:12:07]The decision will shape the railroad industry for decades. Whether it's approved or rejected or approved with conditions, any which way this goes, the the the ramifications, the consequences are going to be farreaching.

[00:12:25]Future railroad executives are going to study this case the same way today's executives studied the Southern Pacific merger.

[00:12:34]And that's what makes it one of the biggest railroad stories of our time.

[00:12:40]Thank you so much for watching this episode of Railroad Economics. If you didn't see parts one and two, please go back and check those out. My name is Mark Magna. Thank you so much for watching.

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