The Long Courtship

The highballing trend to mergers has made U.S. railroads--and their stocks--more interesting than at any time in years. One sign: in its third record-breaking week in a row, the Dow-Jones railroad index last week rose to an all-time high of 236.93. Yet it often seems to take the courting railroads an un conscionably long time between their announced intention and the actual merger. No fewer than eleven mergers involving some 30 U.S. railroads are now pending, including the linking of the Pennsylvania and New York Central, and some of them have been held in suspense for as long as eight years. Why the long engagements?

One answer came last week as the Interstate Commerce Commission heard final arguments in Washington about the Penn-Central union. The Justice Department, which believes that the merger would create an unhealthy monopoly, asked the ICC to reject the proposal completely or, at the very least, to delay it for 18 months. Three smaller railroads, which would be left out of the merger, pleaded for a similar delay, complaining bitterly that an early marriage of the two goliaths would ruin their own bargaining attempts to join up with the Norfolk & Western.

Obstacles & Opposition. The very logic of mergers--reduced costs and greater efficiency by ending duplication --draws fire from practically every group that has an interest in traditional patterns. Besides the Justice Department and outraged competitors, the list includes labor unions that will lose jobs, communities that will lose revenues and vital services, stockholders who fear a watering-down of their shares, even executives who feel that they may be lost in a reshuffle.

Because railroads generally use fairly standard equipment, the physical barriers to merger are often not as great as they seem. Stuart T. Saunders, chairman of the Pennsy and chairman-designate of the proposed Penn-Central, believes that union of the two giants can be accomplished in 60 days, with only a few changes in switching yards.

Other barriers are harder to hurdle. The Penn-Central merger, first announced in 1957, was held up for three years while Central President Alfred Perlman worked to upgrade his line and put it into a better bargaining position with the larger Pennsy. Result: when agreement with the Pennsy finally came in 1962, Central stockholders were assigned 1.3 shares of the new line, Pennsy stockholders only one. Advantageous though the delay was to Central, it has already cost, by conservative estimate, $240 million in potential savings--and will cost a lot more before the ICC makes its final decision, expected in early 1966. The ICC has on several occasions overruled Justice Department objections to approve rail mergers.

Ponderous Deliberations. Railroad men tend to blame lengthy merger proceedings on the ponderous deliberations of the ICC and the federal courts, a process that can take upwards of five years. In its defense, the ICC cites the enormous complications of amalgamation. ICC Commissioner Kenneth H. Tuggle points out that railroad mergers involve hundreds of millions of dollars and can determine the economic development of a region for decades to come. Says he: "It takes time to listen to the grain people, the milling companies, the commuters, the mayors of cities, the Governors."

Whatever their cause, the delays pose the question of whether a lot of merger talk is just that--talk, perhaps meant only to run up a railway's shares. "It's bad for the public to have the process take so long," complains Prime F. Osborn III, a vice president and general counsel of Atlantic Coast Line. After his line won ICC approval for a merger with the Seaboard Air Line, it was turned down by the courts, is now pending in appeal before the Supreme Court. Osborn figures that the two lines--which would form the South's second biggest railway system--are being hurt to the extent of $38 million a year in potential savings. He has a railway man's simple solution for speeding up the merger process: a strict timetable that would limit both the length of the ICC's deliberation and the time a case would spend in the courts.

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