The months-long pursuit of the regional railroad giant Norfolk Southern by Canadian Pacific Railway abruptly ended Monday.
It was the second scuttled merger attempt by CP in as many years.
Many of the reasons for the deal being abandoned are company-specific, to be sure.
Still, we couldn’t help but notice that the news perfectly summed up three big trends bubbling beneath the surface.
Commodities Crunch: One of the biggest reasons that CP went after Norfolk, and CSX before that, is the precipitous decline in commodity prices. Railroads depend heavily on moving energy-related materials — especially coal — and as those prices have dropped, so has traffic for the major railroads. In fact, rail traffic in 2015 was at recessionary levels.
With such a tumble in traffic, railroads have been coming up with creative ways to claw back revenue. For example intermodal traffic, or the transportation of finished goods, is growing. The CP-Norfolk merger appeared to be another attempt to drive earnings and combat the commodities crunch. The question is whether its failure indicates a bounce back in confidence for rail traffic, and thus commodities, or a sign of other factors.
Anti-Merger Monday: Corporate dealmaking has taken a huge hit in 2016. Not only has the IPO market totally dried up, but now a rash of merger deals have fallen apart. The $160 billion Pfizer-Allergan deal was scrapped last Wednesday, and the Baker Hughes-Halliburton deal was been put in jeopardy by a lawsuit from the Department of Justice.
While there was no mention of it in the announcement, the end to CP’s negotiations comes the week after these moves and after the head of the House House Transportation and Infrastructure Committee expressed disapproval with the plan. So the CP move may another manifestation of a possible chilling effect on mergers.
Another rough go of it for Bill Ackman: On a less macro-level, this is another tough pill to swallow for the billionaire investor. Thus far in 2016, Ackman has seen his hedge fund, Pershing Square, rack up its biggest losses ever, down 24.6% as of April 5. His major short position on Herbalife hasn’t been as successful as hoped, and even more disastrous has been his long position in Valeant Pharmaceuticals.
As one of the largest shareholders in CP, with an ownership stake of 9.1% of the company, Ackman led to shake-up in the company in 2012 in which he replaced the CEO and gained a board seat for himself and his supporters. Over the past few months, Ackman has been a big advocate of the Norfolk deal. In December, he hosted a conference call to try and convince investors it was in both railroad’s best interest. So the loss of the deal is another tough pill to swallow.
On the face of it, a collapsed deal between two railroads worth over $20 billion a piece is a huge deal. But dig even further, and the failure of the deal says a lot about what’s happening in the markets right now.