Opinion: Of mergers, courts and Carl Icahn's interest in railroads WASHINGTON -- The railroad world -- carriers, stockholders, analysts and customers -- is anxiously waiting for two shoes to drop, writes Lawrence Kaufman in a Journal of Commerce Online editorial. First, what will the U.S. Court of Appeals for the District of Columbia Circuit do about the 15-month moratorium imposed by the Surface Transportation Board on major railroad combinations?Second, what does Carl Icahn have in mind with his planned purchase of up to 15% of the stock of CSX Corp.? It's not too much of an exercise in linguistic gymnastics to tie these two events together. Without the one -- the merger moratorium -- it is unlikely that the other -- Icahn's sudden interest in railroads -- would have occurred. A lot of people are wondering about the delay in the expected court decision, and what it means. The three-judge panel of the appellate court agreed to hear the appeal of the STB order on an expedited basis. It did. It received briefs and replies from Burlington Northern Santa Fe, Canadian National, the Western Coal Transportation League and their allies and from the STB and its allies, then held oral argument on June 13. Many expected a decision by June 14, or at least a stay of the STB order. In hindsight, that obviously was unrealistic. What can we read into the delay, which may extend into August or even September? In this case, we don't even have the proverbial tea leaves to read. I don't think we can read anything into the court's delay. The issue before it really has nothing to do with the merits of rail mergers or consolidations. It has only to determine whether the STB had the legal authority to order a merger moratorium. In trying to sway the judges, both sides gave it their best and most persuasive shots in their written and oral arguments. BNSF, CN and their shipper allies cited the specific and shrinking time limits for deciding merger cases that Congress imposed on the former Interstate Commerce Commission and more recently the STB. They argued that Congress clearly wants mergers approved or disapproved promptly, which is dichotomous with the idea of delaying the process by imposing a moratorium. They further argued that the STB cited the results of its Ex Parte 582 proceeding on the future state of the railroad industry in deciding the moratorium was necessary. The problem with that, BNSF and CN said, is that no witnesses were sworn, the issue of moratorium never was on the agenda, and the STB's decision was arbitrary if not capricious. The STB and its "Five Amigos" in the case -- Canadian Pacific, CSX, Kansas City Southern, Norfolk Southern and Union Pacific -- said they had authority and cited the precedent that courts rarely intervene in regulatory agency decisions. So why is it taking so long for the court to render a decision? A month isn't that long. This particular court frequently takes four to six months to rule on cases before it. The normal procedure following the close of the record would be for the three judges to meet and informally agree where they want to come out. One would be assigned the task of drafting the decision, which would be assigned to a clerk. Once written, the assigning judge would review, edit and approve the draft decision and order. Then it would be circulated to the two other judges, each of whom might want to have concurring or dissenting opinions drafted. Unlike Executive Branch agencies, it's almost impossible to handicap the courts. They don't follow clearly defined policies that allow observers to forecast a decision with any degree of certainty. And, above all, neither judges nor clerks leak. So, nothing can be read into the lack of a decision, and we'll just have to wait while the wheels of justice grind. Thinking positively, if the STB moves with alacrity -- Ha! -- it could have new merger policy and rules virtually complete by the time the legality of its moratorium is determined. After all, that was the reason it gave for having the moratorium in the first place. What does the merger moratorium have to do with Carl Icahn's interest in railroads -- or at least one railroad? Famous -- or, infamous -- corporate raider Icahn revealed his decision to become an investor in a filing with the Securities & Exchange Commission. He said he believed CSX had been undervalued by the market and therefore was a good investment. If you believe that Icahn will be a passive investor, you probably also believe the old, burned Penn Central bridge over the Hudson River at Poughkeepsie, N.Y., is about to be rebuilt. There are two likely scenarios: one with merger, the other without. Rail stock prices have been hammered recently, with most analysts believing the uncertainty of merger timing accounts for part of the decline. If the moratorium is overturned, many expect a UP-CSX union to be announced within months. With non-rail assets of perhaps $1 billion or more, CSX might bring a premium over current market price in an all-stock transaction of 25% or more. Icahn might see that as a decent short-term return on his investment. If further rail mergers are delayed, the lurking presence of Icahn could stimulate CSX management to sell off the non-rail assets, reduce debt and give the stock price a fairly quick boost. CSX rail operations probably have hit bottom and the new operating management is likely to produce slow but steady improvement, which also should drive the stock price off the bottom. (Next Story)

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July 12, 2000
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