The Chessie System and Seaboard Coast Line were once in a three way merger discussion with Southern Pacific. It failed miserably for Southern Pacific.
First, the pivotal phone call. In May 1978, Hays Watkins, then the CEO of Chessie System (Chessie), picked up the phone and called Tom Rice, the chairman of Seaboard Coast Line (Seaboard). The phone call from Watkins was about the possibility of merging Seaboard and Chessie. At the time, Rice was not too excited about a merger discussion, as the former WWII general was two weeks removed from a rough 10 months of such a discussion with Southern Pacific. Yet, Rice agreed to meet Watkins and the two gentlemen had lunch in Rice’s hometown of Richmond on June 8th at the Commonwealth Club. At this time, there were still concerns about the reaction of Southern Pacific, which had acquired a large portion of Seaboard stock and had made itself Seaboard’s majority shareholder.
Southern Pacific in the three-way association talks with Chessie and Seaboard. Hays Watkins tells us in his memoirs that the talk of an association between Chessie with another railroad began in late 1976 at a meeting of railroad executives. Watkins happen to be sitting next to Ben Biaggini, the chairman of Southern Pacific. At one point, Biaggini told Watkins that Southern Pacific wanted to combine with other roads and if he could talk about an association between Southern Pacific and the Chessie System. “Sure we would talk,” was the answer Watkins gave, “even though nothing may happen” (Watkins, 2001 133). Both railroads began to engage in secret talks, trying to figure where they mesh, and after these talks, the only place the two railroads meshed at was at St. Louis and this was unsatisfactory.
Chessie was a northeastern road and Southern Pacific was southwestern to west coast road. So, the experts of both Chessie and Southern started their study work and came up with Rock Island Railroad. Rock Island was teetering on bankruptcy, so it was ruled out. Some other railroad was needed to fill in the southeast and connect Chessie and Southern Pacific. Seaboard Coast Line nicely fit that need, Chessie meshed with Seaboard in three cities and with Southern Pacific in three cities (New Orleans, Memphis and St Louis). Watkins then invited Tom Rice, Seaboard’s chairman, to the talks and once Rice accepted we now had a three-way merger that would create a mammoth rail network that would stretch up the US west coast to Washington State, run from California to Florida, and reach to Chicago and Canada.
In early 1977, the three railroad chairmen turned to discussions of each railroads’ ratio in the new company. Watkins proposed that Chessie get 30 percent of the new company, and Seaboard would get 30 percent and Southern Pacific would get 40 percent. Watkins viewed these percentages as fair to all three roads, especially to Southern Pacific, a road that had greater stock value than Chessie and Seaboard. The three railroad executives took this suggestion back to their companies. At the next meeting, Biaggini argued that a 40 percent piece of a new company was not enough and that Southern Pacific would not settle for anything less that 55 percent and will be “calling the shots.” Well, this arrangement was unacceptable to Watkins and Rice, and they both pulled out of the talks.
The three way talks were over for Watkins and his Chessie System, but not for Rice his Seaboard Coast Line. On December 19, 1977, the Wall Street Journal announced that discussions were underway for an association between Southern Pacific and Seaboard that would be America’s first transcontinental railway system. A few months earlier, Southern Pacific had acquired 700,000 (5%) of shares of Seaboard common stock from the open market. Rice had little options once Biaggini called and said, “Now that we are your largest shareholder, let’s sit down and talk.” Rice was not too thrilled about this subordinate relationship with Southern Pacific. Biaggini once told Rice that Southern Pacific insisted on paying a discounted price for the railroad and was going to fire most of Seaboard’s people. Rice and Seaboard’s board were looking for a final exit from this “merger of unequals.”
We are now at May 1978, where this post began.
“You had your chance at Seaboard. Now it’s Chessie’s turn.” Biaggini was giving a speech to the annual shareholders’ meeting when Prime Osborn called to give him the goodbye news. Seaboard’s board made the decision to drop its association with Southern Pacific. Biaggini was utterly furious with Osborn’s news. Between June 30th and July 27th 1978, even as Seaboard started associating itself with Chessie, Southern Pacific went on a Seaboard stock buying frenzy until it had acquired 9.5% or 1,387,635 shares. Seaboard filed its complaint to the ICC in an effort to stop this hostile takeover attempt, and, finally, on August 8th, an ICC judge issued an order to Southern Pacific to cease and desist the further acquisition of Seaboard stocks. However, both Seaboard and Chessie were fearful of the fact that Southern Pacific was the majority shareholder of Seaboard stock.
To ease the fears, Watkins placed a phone call to Biaggini and told him that Chessie and Seaboard were keeping in mind that Southern Pacific was the majority shareholder of Seaboard. “You had your chance at Seaboard. Now, it’s Chessie’s turn,” Watkins told Biaggini. This time Biaggini was gracious on the phone, thanked Watkins for his phone call and promised to get back to him after Southern Pacific “studied its options.” Watkins writes that Biaggini called back a few days later and indicated that Southern Pacific “regretted” not being a part of the Chessie-Seaboard combination and it “looked forward to being your largest shareholder.” Southern Pacific was finally out and there would be no interference in the association talks between Chessie and Seaboard. It would hang on to its Seaboard stocks until August 1980, before the Chessie – Seaboard merger into CSX was approved by the ICC in late September.
A Happy Ending. If the talks between Southern Pacific and Seaboard would have been successful, we would have seen America’s first transcontinental railway. Railroad industry analysts of the day gave the merger a high possibility of success and the Interstate Commerce Commission was open to such mergers as an effort to help revive the ailing railroad industry. As William Griffin pointed out, we would have a radically different railroad system, with very different companies from what we have today, and CSX would not be one of those companies. We have CSX today mainly because of the greed and aggressive nature of Southern Pacific’s chairman, Ben Biaggini.
The happy ending is not so much that we have CSX, but that Seaboard escaped a hostile takeover that never resembled the 50-50, merger of equals with Chessie that was about to be made public on September 6th, 1978.
References
Business Week. Southern Pacific’s Coast-to-Coast Rail Plan. no. 2554, Oct, 1978, pp. 59.
Griffin, William E. Seaboard Coast Line & Family Lines System. 1967-1968, A CSX Predecessor. 2004.
Hammer, Alexander R. Dow at 938.23, High for 3 years. New York Times. August 7, 1980
Loving, Rush Jr. The Men Who Loved Trains. The story of the men who battled greed to save an ailing industry. 2006.
Wall Street Journal. No Headline in Original. December 19, 1977.
Wall Street Journal. No Headline in Original. August 10, 1978.
Watkins, Hays T. Just Call Me Hays. Recollections, Reactions and Reflections on 42 Years of Railroading. 2001.
Wilner, Frank N. An Atlantic to Pacific Railroad. Journal of Commerce. December 12, 1996.
