U.S. Approves $5.4-Billion Rail Merger

Union Pacific Corp.’s historic purchase of Southern Pacific Rail Corp. was approved by the U.S. government Wednesday, clearing the way for a $5.4-billion merger that will create the nation’s largest railroad and the dominant rail shipper in California.

The deal is the most dramatic example yet of the rail industry’s effort to use mergers as the means of reestablishing itself as a leading provider of intercity goods, a role it surrendered decades ago to the trucking industry.

To be sure, railroads are still key players in both transportation and the overall economy. They are particularly important to California, where they employ thousands directly and indirectly. For example, the bustling ports in Los Angeles, Long Beach and Oakland rely heavily on the railroads.

Yet Union Pacific and other railroads believe that by consolidating, they can further reduce overlapping services, slash their expenses and offer businesses a more efficient and less expensive way to ship their goods.

In the case of Union Pacific and Southern Pacific, the U.S. Surface Transportation Board agreed. In a 3-0 vote, the agency--which succeeded the disbanded Interstate Commerce Commission--said the deal is in the overall public interest.

In making its decision, the STB spurned critics, including the U.S. Justice Department, which maintained that the merger would stifle competition and ultimately raise prices.

“There are many publics and many interests, and we cannot satisfy each; what we have achieved will allow the greatest good to be achieved with a minimum of harm,” said STB Commissioner Gus A. Owen.

The new Union Pacific will span 31,000 miles of track across 25 states, Mexico and Canada, and have annual revenues of $10.6 billion.

Among the goods the combined railroad will move in and out of California are automobiles and auto parts, grain, coal, farm goods, lumber and other wood products, chemicals and “intermodal” cars, the box-like containers that can be ferried aboard trains, trucks and ships and carry everything from apparel to electronic equipment.

Union Pacific’s combined work force will total 72,000 people, although the companies have said 3,400 jobs--including 1,940 in California--will be eliminated after the merger. But Union Pacific also has vowed to invest more than $350 million to upgrade Southern Pacific’s facilities, including its big switching yard in West Colton.

After the merger, Union Pacific will be the only major railroad west of the Mississippi River other than Burlington Northern Santa Fe Corp., which is based in Fort Worth, Texas.

Indeed, the STB approved the Union Pacific-Southern Pacific marriage only after the companies agreed to share about 4,000 miles of track with Burlington Northern, mainly between California and Colorado, in Texas and in the Southeast.

But that was one of the few major conditions that the STB required to minimize anti-competitive effects of the deal. The agency did not order Union Pacific to divest itself of any track--a condition Union Pacific had said might scuttle the merger.

“History has shown that restructuring in the rail industry has strengthened the rail transportation system in the form of better service and lower rates,” STB Chairwoman Linda J. Morgan told the Associated Press. “And this merger should be no exception.”

Nonetheless, some critics of the merger did not concede defeat, and the STB’s decision--to be finalized with the agency’s written decision Aug. 12--could still face legal challenges. Barring a successful appeal, the deal is expected to close in mid-September.

“We have made no determination about an appeal, but we will be sitting down with our lawyers and members to review the ruling,” said Robert Voltmann, director of policy for the National Industrial Transportation League, a trade group for shippers.

It was another big merger--Burlington Northern’s $4-billion purchase of Santa Fe last year--that helped prompt Union Pacific to chase Southern Pacific. The Santa Fe deal enabled Burlington Northern to become the leading freight railroad in California, a role Union Pacific Chairman Drew Lewis found intolerable.

Lewis, who plans to retire from Union Pacific by year’s end, applauded the STB’s decision Wednesday, saying: “We are going to make sure the merger works for the best interests of our customers.”

The Union Pacific deal also was seen by many as the only way for San Francisco-based Southern Pacific to survive. Once so dominant in the West that it was dubbed “the Octopus,” Southern Pacific has withered over the past decade amid huge losses, despite having a California route system that is the envy of the industry.

The industry itself once held a commanding lead for moving freight around the whole country, handling 70% or more of the volume of U.S. shipments. But that changed dramatically after World War II, when construction of the interstate highway system enabled trucking firms to flourish.

The truckers’ mobility, along with their competitive rates, enabled the trucking industry to garner a rapidly growing share of freight volume, and the railroad industry’s share dropped as low as 33% in the 1970s.

The railroads have since rebounded to nearly 40% of the market, and they hope their consolidation trend will enable them to grab an even bigger part of the business.

The continued pressure from the trucking industry, and from shippers themselves, is why fears of railroad monopolies or duopolies are unjustified, said Mark Reutter, a rail historian and author in Urbana, Ill.

“Most shippers have large groups protecting their interests, and they have a lot of political clout,” he said.

Scott Flower, an analyst at PaineWebber Inc. in New York, agreed that “truckers are vigorously competitive” with railroads, and therefore “it’s not in the interests of the railroads to try to gouge their customers.”

Union Pacific spokesman Harvey Turner said a name for the merged company has not been chosen, nor has its headquarters site. Union Pacific, currently based in Bethlehem, Pa., will wait until it has received a copy of the STB’s written opinion, he said.

Investors also cheered the STB’s ruling. Union Pacific’s stock rose 62.5 cents a share, to $72.75, and Southern Pacific’s jumped $1.50 a share, to $28.25, on the New York Stock Exchange.

Peltz reported from Los Angeles and Shiver from Washington.

* ECONOMIC NECESSITY: Railroads still matter. D1