- David Mercado/Reuters
The months-long pursuit of the regional railroad giant Norfolk Southern by Canadian Pacific Railway abruptly ended Monday.
It was the second scuttled merger attempt by CP in two years.
Many of the reasons for the abandoning of the deal are company-specific, to be sure.
Still, we couldn’t help noticing that the news perfectly summed up three big trends bubbling beneath the surface.
Commodities Crunch: One of the biggest reasons that CP went after Norfolk, and CSX before that, was the precipitous decline in commodity prices. Railroads depend heavily on moving energy-related materials – especially coal – and as those prices have dropped, so has traffic for the major railroads. In fact, rail traffic in 2015 was at recessionary levels. With such a tumble in traffic, railroads have been coming up with creative ways to claw back revenue. For example intermodal traffic, or the transportation of finished goods, is growing. The CP-Norfolk merger appeared to be another attempt to drive earnings and combat the commodities crunch. The question is whether its failure indicates a bounceback in confidence for rail traffic, and thus commodities, or a sign of other factors. Anti-Merger Monday: Corporate dealmaking has taken a huge hit in 2016. Not only has the initial-public-offering market dried up, but now a rash of merger deals have fallen apart. The $160 billion Pfizer-Allergan deal was scrapped last Wednesday, and the Baker Hughes-Halliburton deal has been put in jeopardy by a lawsuit from the Department of Justice. While there was no mention of it in the announcement, the end to CP’s negotiations comes the week after these moves and after the head of the House Transportation and Infrastructure Committee expressed disapproval with the plan. So the CP move may another manifestation of a possible chilling effect on mergers. Another rough go of it for Bill Ackman: On a less macro level, this is another tough pill to swallow for the billionaire investor. So far this year, Ackman has seen his hedge fund, Pershing Square, rack up its biggest losses ever, down 24.6% as of last Tuesday. His major short position on Herbalife hasn’t been as successful as hoped, and even more disastrous has been his long position in Valeant Pharmaceuticals. As one of the largest shareholders in CP, with an ownership stake of 9.1% of the company, Ackman led a shake-up in the company in 2012 in which he replaced the CEO and gained a board seat for himself and his supporters. Over the past few months, Ackman has been a big advocate of the Norfolk deal. In December he hosted a conference call to try to convince investors that it was in both railroad’s best interest.
On the face of it, a collapsed deal between two railroads worth over $20 billion each is a huge deal. But dig even further, and the failure of the deal says a lot about what’s happening in the markets.