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Shiny red button

11 April 2016 By Robert Cyran

Canadian Pacific Railway’s $28 billion bid for rival Norfolk Southern pushed all the wrong deal buttons. The now-abandoned, unsolicited offer managed to alienate nearly every ally the railway needed: U.S. regulators, the target’s board, customers, lawmakers – even the American military.

The conventional wisdom over the past 15 years or so has been that regulators would block any major rail deal. A wave of messy restructurings in the industry led to higher prices and service disruptions, prompting the U.S. Surface Transportation Board to be wary of more mergers. The board tightened standards to require any transaction to “enhance, not merely preserve, competition.” That’s a difficult bar to clear.

Canadian Pacific and one of its biggest shareholders, activist investor Bill Ackman, pursued a strategy of more efficiency and some fancy legal footwork. The company argued that establishing a voting trust that would hold Norfolk Southern shares could allow the two firms to integrate quickly and smoothly. The savings expected from the deal would then be passed on to customers, meaning all sides would come out ahead. Most people beyond the CP boardroom were skeptical.

Norfolk Southern’s board dismissed the bid, and subsequent revisions, on the basis that they were too low and would never win shareholder approval. Department of Justice officials said the trust mechanism “made no sense,” because it would effectively allow CP to complete the merger before regulators had a chance to review the transaction. They urged the Surface Transportation Board to reject the arrangement.

Meanwhile, customers like UPS, the biggest user of American railways, objected to the proposed union. They said they feared costly disruption, diminished service and higher prices. Many lawmakers also spoke out against the merger, including the chairman of the House Transportation and Infrastructure Committee. Even the military argued a deal could harm national defense.

Canadian Pacific was left with little choice. After months of trying to maneuver the merger to completion, it finally pushed the right button: eject.


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