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

2. Rock Island—1970s

3. Why Did the Rock Island Fail? --Conventional Wisdom: --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: --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 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 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? 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? 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: --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? 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 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 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 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 2. Keeps up pressure to focus on regional solution 3. Proceeds with acquisition of CGW, merger discussions with Milwaukee Road 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? 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 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 3. Convinces other railroads that Midwest solution is superior 4. Ally with ICC ? Nathan Klitenic and his report winds up agreeing with Heineman 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? 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 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) 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 1964—last profitable year--$3.8 million net income 1965—(1.4 million)--loss 1965—(1.4 million)--loss 1966—(2.6 million) 1966—(2.6 million) 1967—(18 million) 1967—(18 million) 1968—(9.8 million) 1968—(9.8 million) 1969—(11.3 million) 1969—(11.3 million) 1971—(6.7 million) 1971—(6.7 million) 1972—(6.1 million) 1972—(6.1 million) 1973—(14.9 million) 1973—(14.9 million) 1974—(23 million) 1974—(23 million)

16. Langdon and Crown

17. Diversification 1. Heineman pursues diversification and creates Northwest Industries in 1968 1. Heineman pursues diversification and creates Northwest Industries in 1968 2. Larry Provo takes over as CEO of CNW and sells railroad to employees 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 3. Provo continues strategy of rejecting RI-UP combination—urges Rock Island liquidation in 1975 4. Has an “affair” with UP and John Kenefick 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 1. CNW survives and eventually merges with Union Pacific in 1996 2. Diversification strategy is something Rock Island could not do in 1970s 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) 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 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! 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”) 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 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 4. Rock could not withstand continued pressure of CNW in bankruptcy