Gregory L. SchneiderGregory L. Schneider

gschneid@emporia.edugschneid@emporia.edu

One Man Wrecking One Man Wrecking CrewCrew::

Ben Heineman and the RI-UP MergerBen Heineman and the RI-UP Merger

Rock Island—1970sRock Island—1970s

Why Did the Rock Island Fail?Why Did the Rock Island Fail?

--Conventional Wisdom:--Conventional Wisdom:– Rock Island management was incompetent and allowed the Rock Island management was incompetent and allowed the

railroad to decline;railroad to decline;– Selfish Rock Island bondholders (Henry Crown) refused to Selfish Rock Island bondholders (Henry Crown) refused to

reinvest in the property once merger was under way with UP;reinvest in the property once merger was under way with UP;– Rock Island looked to UP and SP to save the property;Rock Island looked to UP and SP to save the property;– Interstate Commerce Commission (ICC) killed the railroad;Interstate Commerce Commission (ICC) killed the railroad;– Judge Frank McGarr killed the railroad in 1980 by his decision Judge Frank McGarr killed the railroad in 1980 by his decision

to liquidate the property (Fred Frailey in Trains magazine-2011)to liquidate the property (Fred Frailey in Trains magazine-2011)– Rock Island could have been saved—some 5,000 miles of Rock Island could have been saved—some 5,000 miles of

system still in use;system still in use;– Labor Unions helped kill the Rock Island—strike in 1979 was Labor Unions helped kill the Rock Island—strike in 1979 was

death knelldeath knell

Challenges to Conventional WisdomChallenges to Conventional Wisdom

--Rock Island story should be seen as a part of --Rock Island story should be seen as a part of railroad problem:railroad problem:– Regulation was a serious issue and impacted what Regulation was a serious issue and impacted what

management could do (or not do) and issues management could do (or not do) and issues regarding wages and ratesregarding wages and rates

– Merger was opportunity for corporate diplomacy and Merger was opportunity for corporate diplomacy and UP was isolationistUP was isolationist

– Could the Rock Island survive a changed Could the Rock Island survive a changed transportation economy (highways, barges, airlines)?transportation economy (highways, barges, airlines)?

– Government failure to bring prosperity to passenger Government failure to bring prosperity to passenger system and to northeastern railroads leads to only system and to northeastern railroads leads to only solution: deregulation and rationalization of systemsolution: deregulation and rationalization of system

Merge or DieMerge or Die

1. Railroads were hamstrung by regulations and 1. Railroads were hamstrung by regulations and inability to attract enough capital investment—average inability to attract enough capital investment—average rate of return of around 4% in 1950s; 2% in 1970srate of return of around 4% in 1950s; 2% in 1970s

2. merger was one solution and beginning in 1959 the 2. merger was one solution and beginning in 1959 the merger era beginsmerger era begins

3. Rock Island’s board seeks merger and studies begin 3. Rock Island’s board seeks merger and studies begin to merge with Milwaukee Road—rejected after several to merge with Milwaukee Road—rejected after several studies—why?studies—why?

4. In 1962 the Union Pacific becomes the partner—4. In 1962 the Union Pacific becomes the partner—Southern Pacific joins—roads file necessary paperwork Southern Pacific joins—roads file necessary paperwork with ICC in 1963—stock buyout of RI by UP—what was with ICC in 1963—stock buyout of RI by UP—what was UP’s interest?UP’s interest?

One Man Wrecking CrewOne Man Wrecking Crew

--Heineman’s strategy:--Heineman’s strategy:– Ruin the Rock Island merger with UP by offering stock Ruin the Rock Island merger with UP by offering stock

swap and exchange offer (hostile takeover)—more swap and exchange offer (hostile takeover)—more attractive than UP offer initially and UP had to renegotiate attractive than UP offer initially and UP had to renegotiate terms of the dealterms of the deal

– Once in ICC’s hands, show how RI-UP merger would alter Once in ICC’s hands, show how RI-UP merger would alter regional rail map and propose instead a “merge a trois” regional rail map and propose instead a “merge a trois” between RI, CNW and Milwaukee Roadbetween RI, CNW and Milwaukee Road

– Delay, delay, delay—keep the merger before ICC and Delay, delay, delay—keep the merger before ICC and prevent collapse of CNW in process—one railroad would prevent collapse of CNW in process—one railroad would survive and it would be the CNWsurvive and it would be the CNW

– Diversification—Heineman diversifies into Northwest Diversification—Heineman diversifies into Northwest Corporation and sells railroad to employees—Larry Provo Corporation and sells railroad to employees—Larry Provo continues as intervener in Rock Island mergercontinues as intervener in Rock Island merger

Part One: Hostile TakeoverPart One: Hostile Takeover

1. Heineman’s strategy—save CNW by 1. Heineman’s strategy—save CNW by offering to buy out Rock Island offering to buy out Rock Island stockholders—what was offer and impact?stockholders—what was offer and impact?

2. Counter UP in press and with offer 2. Counter UP in press and with offer which looked attractive on surfacewhich looked attractive on surface

3. Argue that midwestern regional system 3. Argue that midwestern regional system was better than UP-RI merger—merger was better than UP-RI merger—merger with CGW, Milwaukee Road and Rock with CGW, Milwaukee Road and Rock IslandIsland

ImpactImpact

1. Heineman fails to impact stockholders—1. Heineman fails to impact stockholders—but, end result is improved UP stock offer but, end result is improved UP stock offer to purchase Rock Islandto purchase Rock Island

2. Keeps up pressure to focus on regional 2. Keeps up pressure to focus on regional solutionsolution

3. Proceeds with acquisition of CGW, 3. Proceeds with acquisition of CGW, merger discussions with Milwaukee Roadmerger discussions with Milwaukee Road

Part Two: ICC InterventionPart Two: ICC Intervention

1. How did Heineman intervene in the ICC 1. How did Heineman intervene in the ICC hearings?hearings?

2. Has allies with railroads like ATSF (split 2. Has allies with railroads like ATSF (split of Rock Island into south/north)—Santa Fe of Rock Island into south/north)—Santa Fe offers $100 million for southern linesoffers $100 million for southern lines

3. Convinces other railroads that Midwest 3. Convinces other railroads that Midwest solution is superiorsolution is superior

4. Ally with ICC ? Nathan Klitenic and his 4. Ally with ICC ? Nathan Klitenic and his report winds up agreeing with Heinemanreport winds up agreeing with Heineman

Bleak HouseBleak House

1. Intervention by other railroads—5 railroads 1. Intervention by other railroads—5 railroads initially oppose merger, joined by 7 others—why?initially oppose merger, joined by 7 others—why?

2. hearings delayed until 1966—finish in 1968—2. hearings delayed until 1966—finish in 1968—then . . . A waiting game (48,000 pages of then . . . A waiting game (48,000 pages of testimony, 200,000 pages of evidence, 247 days testimony, 200,000 pages of evidence, 247 days of hearings in total)—longest and biggest case in of hearings in total)—longest and biggest case in ICC historyICC history

3. use of Rock Island to remake western railroad 3. use of Rock Island to remake western railroad map—Nathan Klitenac—report released in 3 map—Nathan Klitenac—report released in 3 volumes (final volume in 1974 recommends volumes (final volume in 1974 recommends merger with conditions)merger with conditions)

Rock’s Worsening ConditionRock’s Worsening Condition

1964—last profitable year--$3.8 million net income1964—last profitable year--$3.8 million net income 1965—(1.4 million)--loss1965—(1.4 million)--loss 1966—(2.6 million)1966—(2.6 million) 1967—(18 million)1967—(18 million) 1968—(9.8 million)1968—(9.8 million) 1969—(11.3 million)1969—(11.3 million) 1971—(6.7 million)1971—(6.7 million) 1972—(6.1 million)1972—(6.1 million) 1973—(14.9 million)1973—(14.9 million) 1974—(23 million)1974—(23 million)

Langdon and CrownLangdon and Crown

DiversificationDiversification

1. Heineman pursues diversification and 1. Heineman pursues diversification and creates Northwest Industries in 1968creates Northwest Industries in 1968

2. Larry Provo takes over as CEO of 2. Larry Provo takes over as CEO of CNW and sells railroad to employeesCNW and sells railroad to employees

3. Provo continues strategy of rejecting 3. Provo continues strategy of rejecting RI-UP combination—urges Rock Island RI-UP combination—urges Rock Island liquidation in 1975liquidation in 1975

4. Has an “affair” with UP and John 4. Has an “affair” with UP and John KenefickKenefick

Provo and KenefickProvo and Kenefick

Impact of CNW StrategyImpact of CNW Strategy

1. CNW survives and eventually merges 1. CNW survives and eventually merges with Union Pacific in 1996with Union Pacific in 1996

2. Diversification strategy is something 2. Diversification strategy is something Rock Island could not do in 1970sRock Island could not do in 1970s

3. CNW purchases spine line from Rock 3. CNW purchases spine line from Rock Island after bidding war with Soo Line (for Island after bidding war with Soo Line (for $100 million)$100 million)

4. CNW pared mileage under deregulation 4. CNW pared mileage under deregulation and relied on UP for trackage rights to coal and relied on UP for trackage rights to coal fields in Wyomingfields in Wyoming

Impact on Rock IslandImpact on Rock Island

1. Is Heineman the main culprit in the 1. Is Heineman the main culprit in the Rock Island’s failure? In a way, yes!Rock Island’s failure? In a way, yes!

2. Heineman outwits RI-UP (Langdon 2. Heineman outwits RI-UP (Langdon realizes this and urges a deal, but UP realizes this and urges a deal, but UP refuses—”leave it to the lawyers”)refuses—”leave it to the lawyers”)

3. UP diversification helps in establishment 3. UP diversification helps in establishment of relationship with CNW to detriment of of relationship with CNW to detriment of merger partnermerger partner

4. Rock could not withstand continued 4. Rock could not withstand continued pressure of CNW in bankruptcypressure of CNW in bankruptcy