Two Suitors Bid for Santa Fe But Railway Plays Hard to Get

SANTA FE PACIFIC CORPORATION is trying to repulse a hostile merger bid by Union Pacific Corporation that many see as the railway management equivalent of a high-stakes hijacking.

Santa Fe's directors have snubbed the $3.27 billion merger proposal, saying the Interstate Commerce Commission (ICC) would probably reject such an arrangement as detrimental to competition. Still, Santa Fe might be goaded into a merger by its shareholders since Union Pacific, the nation's largest railroad, offers top dollar, analysts say.

Indeed, on Oct. 13 Union Pacific said it will encourage Santa Fe investors at a Nov. 18 shareholder meeting to reject a proposed tie-up between Santa Fe and Burlington Northern Inc. Also, Union Pacific has offered to raise its bid if Santa Fe justifies a higher price. Initially, Union Pacific offered to buy Santa Fe, which is based in Schaumburg, Ill., for $17.33 a share, a 38 percent premium above the Oct. 4 closing price of Santa Fe stock.

The Union Pacific proposal is seen as an effort at least in part to sabotage a plan by Santa Fe and Burlington Northern Inc. to merge into the biggest railway in the United States.

This is a battle for dominance of rail traffic west of the Mississipi. A Santa Fe-Burlington merger would create a potent competitor to Union Pacific on some of its most profitable lines from Chicago to Los Angeles, and to Seattle. On the other hand, if Santa Fe is swallowed by Union Pacific, that would give Union Pacific an unrivaled hold on railways across the grain-producing states and into California, industry analysts say.

Union Pacific's proposed price for Santa Fe is 29 percent higher than Burlington's offer.

Union Pacific's bid is ``in part an effort to acquire Santa Fe, but also to derail Burlington,'' says Clay Hoes, a vice president of equity research at Kemper Securities Inc. in Chicago. After Santa Fe's rejection, Union Pacific filed suit in Delaware chancery court seeking to nullify the Santa Fe/Burlington merger and force Santa Fe into negotiations.

Union Pacific says it has no backhanded motives. ``This is a very serious bid; We are not throwing a hand grenade'' at the Santa Fe/Burlington merger plan, says Harvey Turner, spokesman for the Bethlehem, Pa.-based Union Pacific. Mr. Turner says he does not know if Union Pacific began considering a merger with Santa Fe before the announcement of a Santa Fe/Burlington deal.

Union Pacific has so far not responded to Santa Fe's effort to call its bluff, as some analysts describe it. It has ignored an Oct. 11 suggestion by Santa Fe that the two companies establish a trust overseeing their operations until the ICC decides on a merger. Under such a ``voting trust,'' Union Pacific would have to pay Santa Fe shareholders up front for the buyout and bear the risk of an ICC rejection. Union Pacific could win regardless of the ultimate outcome of its merger bid, analysts say.

If Santa Fe remains recalcitrant, Burlington may try to lock up its merger by offering the railway more than the $2.54 billion the two agreed on in June. In so doing, Burlington would weaken itself financially. ``I think Burlington will have to raise the price just as a gesture of good will,'' says James Higgins, a transport analyst at Brown Brothers Harriman & Co. in New York.

Both mergers are subject to ICC approval. Of the two, the Santa Fe/Union Pacific combination is considered less likely to gain approval because the two railroads haul freight across the same regions. Santa Fe and Burlington overlap far less and therefore would foster competitive pricing more, analysts say.

The proposed mergers are part of a consolidation trend among the 12 major freight haulers on the country's booming railways. Since deregulation in 1980, the railways have resorted to mergers and cost-cutting that have enabled them to lure business away from trucking companies. The major railway companies have reduced their total number of employees from 460,000 in 1980 to 193,000 last year. Since 1987, productivity has annually surged by 7 percent, according to the US Bureau of Labor Statistics.

Most remarkably, the railways enjoyed business growth even during the recent recession, an outstanding feat for any cyclical industry, but especially remarkable for the once- moribund railroads. ``In the recent down period, the railroads gained traffic even though the economy was in a valley, and that is a very, very unusual trend,'' says Robert Banks, chief executive officer of R. L. Banks & Associates Inc., a transportation consulting firm in Washington.

The boom continues in the current recovery. From January until August, the 12 biggest firms hauled 5.5 percent more car loads than during the same period in 1993. ``Compared to even a few years ago, railways are truly in a growth mode now,'' Higgins says. ``For the first time literally in decades, they are regaining market share from trucking companies.''

Although most analysts say consolidation has benefited customers by promoting efficiency, they add that it is not certain that the gains from further mergers will outweigh the costs. Consolidation can undermine competition, a key element in making railways more efficient, they say.

Santa Fe and Burlington would eliminate 2,750 jobs and save a total of $100 million from the deal, the two companies said in a merger application filed with the ICC on Oct. 13.

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