M & A Roundup: U.S. Agency AppliesBrakes to Rail Mergers

Unhappy with the outcome of large mergers that it previously cleared, the U.S. Surface Transportation Board (STB) has red-flagged additional giant railroad combinations until mid-2001 – or well into the next presidential administration. The decision abruptly halted the proposed linkup of Burlington Northern Santa Fe and Canadian National, which countered with a legal battle to get their massive deal back on track. Ultimately, the controversy could be settled by the federal courts with decisions that had the potential to impact consideration of mergers and acquisitions by other federal regulatory agencies. In a March 17 order, STB declared a moratorium on future mergers of large railroads while it adopted new rules, which should be ready in about 13 months, or by June 2001. The agency acted after receiving a barrage of complaints about service disruptions following the merger of Union Pacific and Southern Pacific and the dismemberment of the former Conrail Corp., whose assets were parceled out between CSX Corp. and Norfolk Southern Corp. The board made no bones about its displeasure with results of prior deals or its fear that quick approval of the Burlington Northern/Canadian National merger would aggravate the situation by unleashing even more transactions under the old rules. A statement supporting the moratorium noted that only six large U.S. and Canadian railroads (Canadian Pacific is the sixth) have survived the aggressive consolidation of recent years, “but merger implementation has not typically gone smoothly, and indeed the railroad industry and shipping public have not yet fully recovered from the service disruptions associated with the previous round of mergers.” The board added that a Burlington Northern/Canadian National merger probably would trigger “responsive mergers involving each of the other four large railroads” and that “it simply makes no sense” to develop new rules in “what could be the final round of major railroad mergers.” Infuriated managements at Burlington Northern and Canadian National charged that STB exceeded its legal authority in temporarily blocking all large rail mergers. They asked the board to stay its own decision so that their combination could be considered and they asked the U.S. Court of Appeals for the District of Columbia to overturn the moratorium. Executives for both railroads claimed that they could implement their merger without service disruptions and maintained that the STB’s directive was anticompetitive. Huge deals go off the track However, William A. Mullins, a railroad attorney at the Washington office of TroutmanSanders, noted that while the moratorium is unprecedented, it is grounded in the 1995 law that created STB as a successor to the old Interstate Commerce Commission (ICC). Alone among regulatory agencies, he said, STB has the power to halt developments in the rail industry, including mergers, on its own if it believes that they will cause “irreparable harm.” Most other agencies must seek injunctions from the courts. A former ICC attorney, Mullins said that the board apparently concluded that “rail mergers don’t have a good track record yet,” and “because it happened on our watch, we need to make sure that the rules adequately ask for appropriate information so we have a better handle on these types of issues.” During the 13-month hiatus, he said, the board hopes to get a better feel for what additional information they need for a review – basically, information that was not required in previous proceedings. While other federal agencies that consider mergers apparently lack specific statutory authority to declare moratoriums, the railroads’ court challenge to the STB directive is being closely watched by regulators and attorneys dealing with other merger-heavy industries. Among the agencies with hefty m&a caseloads are the Federal Energy Regulatory Commission (FERC), the Federal Communications Commission (FCC), and the Federal Reserve Board (FRB). Several senators welcomed the STB’s moratorium on railroads, and there have been some calls in Congress for merger moratoriums in other specific industries. Sen. Barbara Boxer (D., Calif.) recently called for a moratorium on oil industry mergers, and there were bipartisan appeals in late 1999 for a breathing spell for agriculture-related deals. The STB moratorium does not affect mergers of smaller railroads or deals in the short-line railroad industry, in which there has been considerable roll-up activity, accentuated by the recent acquisition of RailTex Inc. by RailAmerica Inc., which combined the two leading consolidators in the sector.