On Jan. 19, Canadian Pacific Railway (NYSE:CP) filed a complaint with the Department of Justice that CSX (NASDAQ:CSX) and Union Pacific Corp. (NYSE:UNP) were colluding to block its recent attempt to acquire Norfolk Southern Corp. (NYSE:NSC).
The complaint should be of interest to investors, because an acquisition would bring about significant competitive implications and antitrust issues for the industry and the public alike.
Can't we all just get along?
CP's recent offer of $28 billion to buy Norfolk was rejected by Norfolk's board of directors, and that rejection is likely to set the stage for a lengthy and heated proxy battle. In the midst of the takeover news, Canadian Pacific filed a complaint with the DOJ in hopes of getting ahead of the pushback from other railroads and regulatory boards while CP continues its attempt to acquire Norfolk Southern.
Criticizing the joint efforts of its fellow railroads to work against the acquisition, CP said in its letter: "The collective communication strategy of these competitor railroads is also likely illegal because it is anti-competitive: It is an agreement to collectively work together to prohibit the introduction of competition by a new competitor, which is akin to a group boycott in principle and intended effect."
However, Union Pacific Corp. refuted those claims, saying: "We have communicated with other railroads for the purpose of petitioning the government. We oppose this merger, and we are prepared to discuss our views with the government."
Other railroads have publicly opposed the merger as well. During a recent quarterly call, CSX CEO Michael Ward said, "Any merger would result in substantial regulatory costs, and any cost savings due to synergies would be extremely limited."
What happens next?
Railroads aren't the only ones opposing CP's merger with NSC. Numerous shippers have filed letters with the Surface Transportation Board (STB) expressing their concerns over possible service issues and price increases.
The Federal Railroad Administration (FRA) will also look into the potential safety issues that the combined companies could face. "Combining large rail systems, rule books, workforces, and safety cultures can lead to safety vulnerabilities and deficiencies," said administrator Sarah Feinberg. "It's our job to ensure that safety is not only not compromised in any potential merger, but prioritized."
The FRA can collaborate with railroad companies on safety plans, but it can't block railroad mergers. The STB, meanwhile, is a regulatory body that does grant merger approval for railroads.
CP makes no bones about its distaste for this entire situation. "The fact that these major railroads have joined to work so feverishly against CP's proposal speaks volumes about their concerns regarding the impact the transaction would have on their competitive positions," CP argues. And CP is not necessarily wrong about that.
STB, for its part, can't really allow further consolidation in an industry with only six large carriers remaining in North America. Under merger rules adopted in 2001, the STB, while acknowledging some benefits to consolidation, is bound to see consolidations as "likely to result in a number of anti-competitive effects, such as loss of geographic competition, that are increasingly difficult to remedy directly or proportionately."
Any merger in the industry is also likely to spur additional consolidation, as managements will do what's in the best interest of their shareholders to maintain market share and profits. The industry is consolidated enough, and extremely top heavy. To stem any kind of consolidation feeding frenzy, the STB probably won't allow the merger to gain regulatory approval.
Additional consolidation in the industry would only put pressure on the STB to regulate even further. In turn, this could increase costs and drive down potential returns of the railroads through increased regulation.