The Justice Department reviews most corporate mergers but does not regulate them. An article yesterday on the combination of Canadian National Railway Co. and Burlington Northern Santa Fe Corp. was unclear on the department's role. (Published 12/22/1999)

Canadian National Railway Co. and Burlington Northern Santa Fe Corp. said yesterday that they planned to combine into a coast-to-coast transportation behemoth under a Montreal-based holding company called North American Railways, with a majority-Canadian board of directors.

The combination of the largest Canadian railroad and the second-largest U.S. railroad, with 50,000 miles of track that stretch from Halifax, Nova Scotia, to the Gulf Coast and to the U.S. and Canadian West Coasts, would be by far the largest railroad in North America. The new holding company would have a stock market value of about $19 billion.

If the plan clears regulatory hurdles, it almost certainly would be the first step in the final consolidation of all North American railroads into two giant systems as the remaining major railroads--Union Pacific, CSX, Norfolk Southern and Canadian Pacific--react in defense. The two Virginia-based railroads, Richmond-based CSX Corp. and Norfolk-based Norfolk Southern Corp., have been financially weakened by their own merger problems and likely would be gobbled up in the process.

Although trucks haul more freight than railroads, many trucks travel significant distances on rail flatcars. Railroads also are the main carriers of coal, grain and other bulk commodities, making them so essential that Congress has immediately stepped in to halt every major rail strike for decades.

Opposition has already begun to bubble up from other railroads and shippers, still stung by severe service problems from other recent mergers. Major rail shippers such as United Parcel Service of America Inc. and Ford Motor Co. have felt the ripple effect of these problems, and there have even been temporary plant shutdowns around the country.

The head of the country's largest association of major industrial shippers said the deal "doesn't make any sense," and even the chairman of the U.S. regulatory board that must decide on the plan publicly questioned the timing of the announcement because U.S. shippers are still facing problems created by earlier rail mergers.

Railroads began an era of mergers more than three decades ago, first as a means of cutting costs. But as railroads began a resurgence in the mid-1980s, mergers became a way to provide better service with single-line service over long distances. One of the dumbfounding long-term problems with railroading is that companies can't seem to hand off a rail car from one railroad to another without delaying it 24 hours or more.

Norfolk Southern and CSX, both southern and midwestern railroads, absorbed the eastern railroad Conrail on June 1, creating two large systems east of the Mississippi and giving both railroads access to the lucrative New York-New Jersey market. From the first hour, the mergers went downhill, first because of problems in combining computer systems. Now that computer problems are being worked out, both railroads are suffering from congestion, delaying shipments and forcing some shippers back to more expensive truck transportation. There is no accurate estimate of the cost so far to industry, but industry groups say it is many millions of dollars.

The Canadian National-Burlington consolidation plan also is likely to revive a congressional debate that had been considered largely settled--whether railroad mergers will be regulated by the independent Surface Transportation Board or be turned over to the Justice Department under antitrust law, like all other major industrial mergers. That debate also could reopen the question of whether deregulation of the transportation industry has gone too far.

The reauthorization of the transportation board--the last remnant of the old Interstate Commerce Commission--has been put off until the next Congress. The deal is structured to avoid regulatory entanglements in Canada but must be approved by the transportation board--if it survives.

Transportation board chairman Linda Morgan, who barely won renomination over strong opposition from some unions and some coal-state and farm-state members of Congress, appeared to express reservations in a statement.

"I am surprised by the timing of this proposal," Morgan said. "Railroads, together with their customers and employees, have not yet fully adjusted to recent mergers, and this proposal may represent the beginning of another round of major rail mergers."

"Shippers are not going to be happy," said Edward M. Emmett, president of the National Industrial Transportation League, which represents almost all large U.S. industrial shippers. "I defy them to find one shipper who said, 'Why don't you two combine?' It just doesn't make any sense."

Union Pacific, Burlington Northern's chief rival in the West and the country's largest railroad, said it is studying the proposal and will consult with its customers, but railroad and government sources said it is gearing up to fight the combination.

CN and Burlington Northern said they have combined revenues of $12.5 billion. However, Burlington Northern stock fell 12.5 percent, to $24.18 3/4, yesterday. CN fell 2.3 percent, to $29.06 1/4.

While the companies avoided calling the deal a merger, the two rail lines would be owned by a holding company, and it is clear that they will be controlled from Canada, at least initially. Burlington Northern Chairman Robert D. Krebs would become non-executive chairman of the holding company, North American Railways, and CN President Paul M. Tellier would become president and chief executive of both North American Railways and CN.

The new 15-member board would consist of six current CN board members, six current Burlington Northern board members and three new members. The board would have a majority of Canadian residents.

Burlington Northern holders will receive for each of their shares a security that combines one North American Railways common share and one Canadian National voting share. Canadian National shareholders would get 1.05 voting shares and either 1.05 shares of the new company or 1.05 Canadian National common shares that can be exchanged for the new company's stock.

Krebs and Tellier said in an interview that there will be a slight lowering of employment, well within the rate of attrition, and no employees will be transferred between the two countries. Burlington Northern would continue to be headquartered in Fort Worth and CN in Montreal, and there would be no centralized dispatching and operations center, although the two companies would coordinate operations.

Tellier said everyone is aware of the potential for international misunderstandings, and therefore the two companies would even continue to paint their locomotives in current colors and continue to operate by their current names. "We have to be sensitive to the regional dimension of this," he said.

CAPTION: Burlington Northern Santa Fe and other railroads' freight cars wait at the Alliance Terminal near Haslet, Tex., to be sorted and sent on their way.

CAPTION: RAIL CONSOLIDATION (This graphic was not available)