Birth of the Penn Central

For nearly a century the first and third largest U.S. railroads--the Pennsylvania and the New York Central--have battled each other with wary, and sometimes hostile, respect. Last week, in a dramatic communique carefully withheld until the New York Stock Exchange had closed for the weekend, the boards of directors of the two longtime rivals announced plans to merge them into one giant enterprise: the Pennsylvania New York Central Transportation Co.

Out of the proposed merger would come a massive rail network with 20,372 miles of track crisscrossing the big industrial areas from Boston to St. Louis. With assets of $4.2 billion and combined annual revenue of $1.5 billion or more, the new Penn Central line would tower far above any other U.S. railroad and with its subsidiaries would rank as the 13th largest corporation in the country.

As the bigger and financially stronger of the two merging lines, the Pennsy would dominate the new road. Under the terms agreed upon by the two boards, each Central share (selling at 20 7/8 at week's end) would be worth 1.3 shares in the Penn Central, while each Pennsy share (18 1/8) would be worth only one new share. But with twice as many Pennsy shares presently outstanding, Pennsylvania stockholders would wind up with 60.8% of the new company. In addition, Pennsy directors will nominate the chairman-chief executive officer and one vice chair man of the merged line. For top man their choice seems likely to fall on Pennsy Chairman James M. Symes (pronounced Sims), 64, a railroad man all his life. His directors are pressing him to postpone his retirement in order to launch the new line. Central directors will name the president-chief administrative officer of the new road plus a second vice chairman. As a gesture to the Pennsy, Central directors seem ready to tap as president Allen Greenough, 56, currently president of the Pennsylvania. Central President Alfred Perlman, 59, a tough operating man but less effective in administration and not too highly regarded at the Pennsy, seems slated for a vice chairmanship.

Up from the Mohawk. Forcing this elaborate treaty between two old combatants was one overriding consideration: the increasingly parlous economics of Eastern railroading. The Pennsy, which as late as 1955 reported net profits of $41 million, showed a deficit of $2.7 million in the first eleven months of last year. The Central, which netted $52 million in 1955, lost $15.9 million in the first eleven months of 1961. By merging, the two roads hope to save as much as $150 million a year in operating costs. They can eliminate hundreds of miles of side-by-side track, cut back to one terminal in cities where they are now rivals and do away with duplicating jobs, rolling stock and maintenance facilities.

For all its economic practicality, however, the merger proposal drew a nostalgic sigh from railroad buffs steeped in the two lines' colorful contributions to U.S. business history. For them, the Central, founded in 1853 as a consolidation of nine little railroads in the Mohawk River Valley, still carries the swashbuckling stamp of Commodore Cornelius Vanderbilt. Vanderbilt, who acquired control of the line in 1867, did so by the simple device of blackmail; he cut off the Central's wintertime rail links with New York City until Central stockholders in desperation gave him control of the road. Along with his buccaneering, the Commodore built the Central system into such a solid moneymaker that for decades it was considered a better investment than Government bonds.

Unlike the Central, the Pennsy has always presented a good grey image. Founded by Philadelphia businessmen in 1846, the Pennsy was still a small connecting line in 1852 when its third president, shrewd, sensible J. Edgar Thomson began to build it into the nation's largest road with a series of railroading firsts, including the laying of the first steel rails in the U.S. The Pennsy's proudest tradition is that in 114 years it has never missed paying a dividend.

The Great Rate War. In the 1880s the Central and the Pennsy locked in a head-on battle that saw them spitefully cutting rates until passenger fare from New York to Chicago dropped to $8. When the fight threatened to bring on a stock market. panic, the redoubtable John Pierpont Morgan steamed home from London to take both presidents for a ride up the Hudson on his yacht Corsair while he bulldozed them into declaring a truce. Thereafter, though the two lines fought fiercely for freight, their passenger competition was held mainly to rivalry in luxurious appointments between the Central's famed Twentieth Century Limited and the Pennsy's Broadway Limited.

In recent years the two railroads have not been able to afford the luxury of such rivalry as competition from trucks, planes, cars and buses brought them both hard times. The Central seemed on the verge of a comeback eight years ago when the late Financier Robert R. Young won control and brought in Perlman as president. But despite such spectacular attempts to cut costs as the automation of the Central's huge Big Four freight yards near

Indianapolis, the efforts of Young and Perlman were not enough. At the Pennsy, meanwhile, Symes and Greenough were finding heavy going, even after such imaginative deals as turning the road's old right of way into central Philadelphia over to a massive urban redevelopment project capped by the 20-story Penn Center. Increasingly, it became clear that the best possibility of restoring both roads to health lay in merger.

Renewing the Urge. Talks between the Central and the Pennsy began in 1957, but in 1959, in a move apparently designed to sandbag the Pennsy into offering better terms, Perlman broke off negotiations, incautiously declaring that the merger was not in the public interest. The Central then sounded out the possibility of merging with the B. & O. and C. & O.

The Central's urge to merge with the Pennsy was renewed by two events: 1) the Pennsylvania seemed to be considering joining up with the projected merger of the Norfolk & Western (of which it owns 32.7%) and the Nickel Plate; 2) after a titanic proxy fight, control of Alleghany Corp.--the holding company that controls the Central--passed from Robert Young's associate, Financier Allan P. Kirby to the Texas brothers, Clint and John Murchison, and Perlman found himself working for new bosses who insisted that the solution to the problems of the Eastern railroads lay in merger. Reopening negotiations, the two lines called in a trio of prestigious investment banking houses--Morgan, Stanley & Co., the First Boston Corp. and Glore, Forgan & Co.--which spent two months digging into the intricate finances of both lines before approving as equitable the stock exchange ratios agreed upon last week.

Off-Track Trouble. With the bankers' encouragement, stockholders of the two roads are expected to approve the merger at the annual meetings in May. Approval from the sympathetic Interstate Commerce Commission will come--if ever--only after tedious deliberations in which town after town will object to losing tax revenues from consolidation of Pennsy and Central terminals. Still another hur dle lies in the attitude of Justice Department trustbusters, who have taken no position so far but who might argue that the sheer bigness of the merged railroad would outweigh the fierce competition it would face from trucks, airlines and cars. Even if everyone else approves, the roads will certainly face trouble with the railroad brotherhoods, which last week extravagantly denounced the merger agreement as "the most catastrophic proposal . . . ever placed before the public" and asked up to three years' pay for anyone laid off. In the end, the fact that it is the only visible alternative to steadily deteriorating railroad service in the eastern half of the U.S. seems the best guarantee for the birth of the Pennsylvania New York Central Transportation Co.

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