If you are interested in rail transport, you certainly will be interested in the proposed merger of the Kansas City Southern (KCS) rail line with a Canadian railroad.
Both Canadian Northern (CN) and Canadian Pacific (CP) have made offers to merge with KCS.
It’s important because either merger would let there be direct rail service between Canada and Mexico. Mexico is an important low-cost component manufacturing country, and Canada is a highly developed first-world economy, with also many intrnational connections. KCS has taken great pains over the last 10 years to develop service into and outof Mexico, and is probably the paramount player. Other major US railroads, such as BNSF, UP, and Norfolk Southern (NS), have not worked to build this capability to the same degree. So KCS is a kind of unique prize, especially for the Canadian railroads.
So far the story is one of competing buyers for KCS. CP made the first offer, but as time was running out for acceptance, CN came in with a larger offer. It involves some specialized and complex merger techniques. The Surface Transport Board (STB), a US government agency which regulates railroads in the US, has just rejected the merger, based on the form itis to take. This means that the two firms in the current merger discussions will need to try to rearrange their proposed deal structure to try to meet the STB objections. It also gives the alternate partner, CP, an opportunity to come back to the negotiations with KCS and make an offer more likely to succeed.
If there is a merger, what will happen? One thing you can be sure of is that over time the leader in the merger, the Canadian firm, will influence rail operations more and more. For shippers, it will be easier to make arrangements from Mexico to the US and Canada, and vice versa. It’s not clear how domestic US shippers will be affected. KCS serves a rural midwestern region that is not as well served by other railroads, and that will probably continue. ButKCS connections with other parts of the US may suffer a bit.
The combination of companies will be a powerhouse, putting the line in the class of UP and BNSF, the top major railroads in the US.
Chris Dupin has an interesting article in the most recent American Shipper. CMA/CGM is trying to buy a majority interest in CEVA, the 3PL firm based in Switzerland. CEVA has been the target of another buyout effort by DSV, another 3PL. the time was certainly ripe for a consolidation in both the 3PL and the maritime transport space. This merger or combination is another attempt to deepen the reach of a maritime company into downstream supply chain management.
Like all of these mergers, we’ll have to see if it works out, and if the combination succeeds in improving results for shippers and receivers of goods. But for me it is a step in the right direction for a maritime company. If you try to tackle the downstream problems, you will start to understand how to improve and deliver more value. Whether a purchase is the best route is an open question, but it is certainly a good try.
The article also points out that CMA/CGM is innovating in other ways now. It has an in-house incubator, ZeBox, of small concerns that have ideas for improvements. It’s moving ahead on tracking containers and monitoring some of the risk conditions they face while traveling; and it is making some investment in bill of lading improvements through a blockchain technology project with BuyCo, another startup. These are certainly ways to get innovators thinking about the maritime supply chain problems. Who winds up with the rents is yet to be determined.
Alex Lennane has written in the Loadstar about the merger or assimilation of six UK diverse logistics firms under one management. Perhaps this is what’s necessary to get firms to work together– a bigger hammer. If they cannot learn to do it on their own, let’s put them together under one management.
However, this approach is fraught with issues. Most mergers do not reach the state of grace they envisioned, because of resistance to change within. And much of the value of a firm is in its people, and their skills at dealing with the countless exceptions that mark any business. Another is the heterogeneity of the businesses– every firm in a merger thinks their way of doing something has to work that way for them. It might not be true, or it might, but even thinking it draws boundaries that can take considerable effort to crack.
We will have to see if this new management structure generates rewards the size the PE firm expects. Of course if they just make something big enough to sell publicly with temporary results, that will be enough for them to make their money and pass the risk on.