Author Topic: KCS, conglomorates and the merger game  (Read 647 times)

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Missaberoad

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KCS, conglomorates and the merger game
« on: April 15, 2016, 02:17:45 PM »
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I was inspired to do some digging by a question that @Spikre brought up in the CP/NS thread.

    but there must be a reason that theres been "Hands Off"
   on KCS thru the various spurts of Merger Madness.   

My favorite references for corporate history of railroads in the 20th century are Richard Saunders two volumes Merging lines and Main lines
They are both excellent tomes of Knowledge from someone who has actively researched American railroad business and politics since the 1970s

I quickly read the entries pertaining to KCS in the latter book (focusing on the 1970s to the 2000s)
And came to the conclusion that the KCS wasn't off limits and didn't have a magic bullet for avoiding the merger mania of the last 40 years. From the best I can determine its a combination of

- Protective management that believed in the Railway
- Being just big enough not to be an easy target
- the complexities of cross border mergers. (USA/Mexico)
- and simply luck... (the excerpts I've chosen to share kind of show it could have gone the other way)

A few excerpts that discuss potential sales/takeovers, any notes I've added are in bold

Quote
Deramus's top lawyer in these troubled times was Irvine Hockaday. Hockaday became head of KCSI in 1972. He might have sold the dilapidated railroad Burlington Northern might have been interested; so might Santa Fe. it was just then that the gulf states utilities and southwestern electric power were looking for new sources of cheap energy; Powder River coal would soon be available off the BN at Kansas City and KCS could deliver it. There was alot of money to be made and Hockaday ordered investment in the railroad... ...to pay for it he sold a number of under-preforming subsidiaries of KCSI with less earning potential then the railroad

Quote
There were pitfalls along the way. Billionaire George Soros was apparently preparing for a hostile takeover of KCSI in 1985, when another group led by Howard Kaskel moved in aggressively to seek control. Soros folded, and a friendly purchase of 10% of KCSI stock by Halmark cards (Irvine Hockaday left KCS to become CEO of Halmark in 1983)
stymied the Kaskel attack in 1988

Quote
Winter of 1988-89 when it was trying to buy the Southern Pacific, a battle it lost to Rio Grande

Quote
KCSI thought about selling the railroad when it was on top. with the emergence of the super seven, it was not clear whether a regional like KCS was going to fit. KCSI and some wallstreeters thought it could fetch around 2b$ which made it rather pricey for any would be acquirer. SF UP or BN probably could have paid that much but it would have been a jolt to their capital structure.

Quote
in the spring of 1994 the resurgent Illinois Central offered to buy KCS for a stock swap package... ...The price was a disappointment to KCSI, but for a time they considered it.

Coming back to the CP Discussion Hunter Harrison was President of Illinois Central at the time, and negotiated to become KCS' Canadian connection in 1998 when at CN. Not that this indicates anything beyond his knowledge of KCS' value as a connection.

Quote
but in 1995 they hired a new CEO Mike Haverty (of Santa Fe fame) he was full of ideas of how to turn the KCS into a true Hotshot.

This apparently Changed KCS' ideas about selling the railroad, and seems to be the turning point in KCSI's history where they go from a conglomerate back to a railroad, selling off their non railroad holdings by the early 2000s. Haverty of course led KCS through the TFM acquisition and "Nafta railway" era.

As for the nature of KCSI's conglomerate these two excerpts seem to bookend how it related to the railway.

Quote
KCS industries was a classic 1960s style conglomerate. Its big holdings besides the railroad were DST systems a computer data network that kept records for mutual funds and Janus Capital funds a successful Family of mutual funds with over 22b$ under management by the 1990s

Quote
When the railroad first set up these diversified holding companies in the 1960s, the assumption was that once the railroad outlived its usefulness for tax loss purposes it would be dumped somewhere on the government or the scrap heap. But it was the railroad that survived and became the great generator of income and profit.


One final quote coming back to the CP merger hypothesis :)
This would be pre 1998 before the newly combined CN/IC became KCS' Canadian connection.
Quote
KCS billed itself as the Nafta railway and with its allies I&M Rail Link and Canadian Pacific, began dreaming of through Mexico city-Montreal intermodals

Hopefully this sheds a little more light on the subject, and I still feel that KCS could become a player in a future merger (with whom is up for debate, )
and I say that realizing its all an academic exercise, and like anything the true stories probably never left the boardrooms  :)

 

Ryan in Alberta

Spikre

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Re: KCS, conglomorates and the merger game
« Reply #1 on: April 29, 2016, 03:31:33 PM »
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 :)
  Ryan,
    thanks for the info.
   wish that issue was still here,but really doubt it is.
   when U.P. decided they wanted Katy,the IOUs or
  what ever those "Funny Little Pieces of Paper" didn't
  stop them.so there may be more to KCS staying an Indie
  than is easy to find.
  but it is nice that they are Independent so far.
    Spikre
      :?
« Last Edit: April 30, 2016, 01:57:25 PM by Spikre »

Missaberoad

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Re: KCS, conglomorates and the merger game
« Reply #2 on: April 29, 2016, 05:11:57 PM »
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  but it is nice that they are Independent so far.
    Spikre
      :?

That's the truth for sure!  :)

It's funny, when you look at the original US congress plans for rail consolidation in the 1930s the system they envisioned with a few notable differences (they didn't envision nafta or the Canadian factor) is pretty close to what we have today.

I'm not sure Hunter Harrison is correct in his opinion that further consolidation is inevitable or necessary. Or that a three system North America is good for anyone. Personally I think the Chicago/interchange issue can be solved by other means.

It will be interesting to see what the next move is however... 
Ryan in Alberta

Philip H

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Re: KCS, conglomorates and the merger game
« Reply #3 on: April 29, 2016, 09:38:54 PM »
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Having modeled and thus followed KCS since the early 1980's I think it boils down to KCS management and shareholders being happy with what they have built, being diversified beyond just rail, and making sure to be competitive in markets and ways others are 't. It's no secret that absorbing most of MidSouth Rail (spun off from ICG) created east west connections I the middle of the system that enhanced traffic. I thin KCS might end up buying some smaller roads in the future but I don't see them getting night out.
Philip H.
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Baton Rouge Southern RR - Mount Rainier Division.

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Lenny53

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Re: KCS, conglomorates and the merger game
« Reply #4 on: May 01, 2016, 08:06:52 AM »
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- the complexities of cross border mergers. (USA/Mexico)


Hardly think this would be any great concern to the likes of CN and CP.