One Man Wrecking Crew : Ben Heineman and the RI-UP Merger

1. One Man Wrecking Crew:Ben Heineman and the RI-UP Merger Gregory L. Schneider gschneid@emporia.edu

2. Rock Island—1970s

3. Why Did the Rock Island Fail? • --Conventional Wisdom: • Rock Island management was incompetent and allowed the railroad to decline; • Selfish Rock Island bondholders (Henry Crown) refused to reinvest in the property once merger was under way with UP; • Rock Island looked to UP and SP to save the property; • Interstate Commerce Commission (ICC) killed the railroad; • Judge Frank McGarr killed the railroad in 1980 by his decision to liquidate the property (Fred Frailey in Trains magazine-2011) • Rock Island could have been saved—some 5,000 miles of system still in use; • Labor Unions helped kill the Rock Island—strike in 1979 was death knell

4. Challenges to Conventional Wisdom • --Rock Island story should be seen as a part of railroad problem: • Regulation was a serious issue and impacted what management could do (or not do) and issues regarding wages and rates • Merger was opportunity for corporate diplomacy and UP was isolationist • Could the Rock Island survive a changed transportation economy (highways, barges, airlines)? • Government failure to bring prosperity to passenger system and to northeastern railroads leads to only solution: deregulation and rationalization of system

5. Merge or Die • 1. Railroads were hamstrung by regulations and inability to attract enough capital investment—average rate of return of around 4% in 1950s; 2% in 1970s • 2. merger was one solution and beginning in 1959 the merger era begins • 3. Rock Island’s board seeks merger and studies begin to merge with Milwaukee Road—rejected after several studies—why? • 4. In 1962 the Union Pacific becomes the partner—Southern Pacific joins—roads file necessary paperwork with ICC in 1963—stock buyout of RI by UP—what was UP’s interest?

9. One Man Wrecking Crew • --Heineman’s strategy: • Ruin the Rock Island merger with UP by offering stock swap and exchange offer (hostile takeover)—more attractive than UP offer initially and UP had to renegotiate terms of the deal • Once in ICC’s hands, show how RI-UP merger would alter regional rail map and propose instead a “merge a trois” between RI, CNW and Milwaukee Road • Delay, delay, delay—keep the merger before ICC and prevent collapse of CNW in process—one railroad would survive and it would be the CNW • Diversification—Heineman diversifies into Northwest Corporation and sells railroad to employees—Larry Provo continues as intervener in Rock Island merger

11. Part One: Hostile Takeover • 1. Heineman’s strategy—save CNW by offering to buy out Rock Island stockholders—what was offer and impact? • 2. Counter UP in press and with offer which looked attractive on surface • 3. Argue that midwestern regional system was better than UP-RI merger—merger with CGW, Milwaukee Road and Rock Island

12. Impact • 1. Heineman fails to impact stockholders—but, end result is improved UP stock offer to purchase Rock Island • 2. Keeps up pressure to focus on regional solution • 3. Proceeds with acquisition of CGW, merger discussions with Milwaukee Road

13. Part Two: ICC Intervention • 1. How did Heineman intervene in the ICC hearings? • 2. Has allies with railroads like ATSF (split of Rock Island into south/north)—Santa Fe offers $100 million for southern lines • 3. Convinces other railroads that Midwest solution is superior • 4. Ally with ICC ? Nathan Klitenic and his report winds up agreeing with Heineman

14. Bleak House • 1. Intervention by other railroads—5 railroads initially oppose merger, joined by 7 others—why? • 2. hearings delayed until 1966—finish in 1968—then . . . A waiting game (48,000 pages of testimony, 200,000 pages of evidence, 247 days of hearings in total)—longest and biggest case in ICC history • 3. use of Rock Island to remake western railroad map—Nathan Klitenac—report released in 3 volumes (final volume in 1974 recommends merger with conditions)

15. Rock’s Worsening Condition • 1964—last profitable year--$3.8 million net income • 1965—(1.4 million)--loss • 1966—(2.6 million) • 1967—(18 million) • 1968—(9.8 million) • 1969—(11.3 million) • 1971—(6.7 million) • 1972—(6.1 million) • 1973—(14.9 million) • 1974—(23 million)

16. Langdon and Crown

17. Diversification • 1. Heineman pursues diversification and creates Northwest Industries in 1968 • 2. Larry Provo takes over as CEO of CNW and sells railroad to employees • 3. Provo continues strategy of rejecting RI-UP combination—urges Rock Island liquidation in 1975 • 4. Has an “affair” with UP and John Kenefick

18. Provo and Kenefick

19. Impact of CNW Strategy • 1. CNW survives and eventually merges with Union Pacific in 1996 • 2. Diversification strategy is something Rock Island could not do in 1970s • 3. CNW purchases spine line from Rock Island after bidding war with Soo Line (for $100 million) • 4. CNW pared mileage under deregulation and relied on UP for trackage rights to coal fields in Wyoming

20. Impact on Rock Island • 1. Is Heineman the main culprit in the Rock Island’s failure? In a way, yes! • 2. Heineman outwits RI-UP (Langdon realizes this and urges a deal, but UP refuses—”leave it to the lawyers”) • 3. UP diversification helps in establishment of relationship with CNW to detriment of merger partner • 4. Rock could not withstand continued pressure of CNW in bankruptcy