Brooks Bentz (BB):   Chair, National Railroad Hall of Fame, Rail Industry Advisory Group
Paul Conley (PC):  VP Premium Operations, Business Planning, Union Pacific
Michael Hemmer (MH):   Senior VP Law and General Counsel, Union Pacific
John Rebensdorf (JR):  VP Network Planning and Operations, Union Pacific

 

Part One: Formation of the Merger Team
 

Brooks Bentz: Welcome to our first ever panel format interview. I’m Brooks Bentz for the National Railroad Hall of Fame, and today we come to you from the 19th floor of UP’s headquarters in Omaha, Nebraska.

We’re pleased to have three of the key members of UP’s merger team: Paul Conley, Mike Hemmer, and John Rebensdorf with us to discuss the creation and evolution of the merger team.  Our goal is to capsulize that story of the activities and the analytics that brought UP to where they are today.  

Let us start with some introductions. We’ll start with John Rebensdorf, here to my left, and each of them will give a bit of background on their personal history, how they got where they got, and their role on the merger team. John, I will hand it over to you.

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John Rebensdorf: I am a third-generation railroader.  My family was in Lincoln, Nebraska [and] worked for the Burlington.  I started with the Burlington when I was 17 years old, my first day out of high school.  I worked as a carman helper, and after two weeks I was set up as a car inspector.  Four days later I got laid off. They told me I had a bad back and they were laying 

off or failing, I should say, over 50% of the employees that they hired, so I got caught in that drag net.  

I went across town and got a job on the Rock Island as a track laborer, section gang, and I continued to work for the Rock Island while I was attending the University of Nebraska where I got a degree in civil engineering.  Then I went on for an MBA and again I continued to work for the Rock Island.  

I came to Union Pacific Corporation in 1968.  One of my professors in graduate school was consulting to the Union Pacific Corporation, so I said I’d be interested in looking at potential job offers at UP.  So, he said, “Okay, let me see what I can do.”  Long story short, I was hired by the chairman of the corporation, Frank Barnett at that time, sight unseen.  I never talked to him, never wrote anything to him. They hired me and had me work in the consultant’s office in Cambridge, Massachusetts.  The consultant was working for Union Pacific, and I worked on the UP project.

I came out to Omaha in 1971 when John Kenefick became president of the railroad. I had gotten to know Kenefick when I was working in Cambridge.  I started in Omaha as manager of budget research, and basically what that job entailed was implementing a responsibility accounting system over the UP railroad at that time.  I then moved up through succeeding positions in finance, strategic planning, and the operating department.  My last position was vice president network planning and operations.  I retired from that position in 2012 after 44 years with the Union Pacific and 51 years in the industry.

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BB: I think it was interesting that one of your advisors in graduate school was Paul Cherrington.  Maybe you would spend a moment to just talk about him because he was a leading light in the business.

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JR: Yeah, Paul Cherrington was, in the late 60’s, early 70’s, was probably one of the foremost transportation experts in the country. He was my first-year advisor at Harvard. He later became deputy secretary, undersecretary of transportation, under John Volpe, who was a former Massachusetts governor.  I worked for Paul for a while when I was consulting.  That was a real experience.  He was a very knowledgeable man, witness the fact that he was brought into DOT.

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BB:  He later went on – I didn’t have a direct connection with him – but he later went on to run the Boston and Maine, and when he passed away, Alan Dustin took over who was the man who ran it when I was there.   So yeah, a very interesting and accomplished individual.

Okay, Paul?

Paul Conley: Well, talking about generational railroaders, I’m a first-generation railroader, however, there may be more; my middle son, Todd, is currently a conductor on the Union Pacific out in Colorado on the Craig branch, and my oldest son began his business career as a trainmaster on CSX.  He later moved on to a different job with 3M.

I grew up in the New York metropolitan area. We did live in Westchester until all the kids left home, and then my parents moved back to Manhattan.  I graduated from Hamilton College in 1968, and for history buffs, that was the time of the Tet Offensive in Vietnam, and I enlisted in the Navy, and I served as a combat information center officer on two destroyers.

During my time in the Navy, I decided that I wanted to be a lawyer.  My ships were at sea all the time, so I had the ship designated as a test center, and I was the only one who showed up, on the middle of the Atlantic, to take the LSAT.  

I went to Creighton University [School of] Law and I ended up at Union Pacific, which was a good place to be for me. I had some interesting assignments early in my career, but one of the most interesting was one day when the then vice president [of] law and a guy who should get a lot of credit for the merger team, in fact if not a lot, all of it, was a guy named Barry Schaefer.  Barry hired me and after I’d been there for, I don’t know, a couple of years he came into my office one day and he said, “I want you to do some research on the legal requirements to buy a railroad,” and I’m like, “Whoa!” And he said, “It’s the Western Pacific.” So, I did that, and after about three days I got summoned up to the C-suite on the then 12th floor, and they’re talking about buying the Missouri Pacific.  And I’d been sworn to secrecy, and I thought, “This is the height of secrecy. They told me the wrong railroad!” When in fact they were buying both of them.  After that it was pretty much a full-time job for me for the next two years.  So, that’s kind of my background there.

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BB: And you stayed quite a while, yeah?

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PC: Yeah, I did. I mean, I stayed through all the rest of our mergers.  When there were no more railroads to buy, I moved on.

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BB: Mike?

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Michael Hemmer: I’m Mike Hemmer. I was born in 1949 in Oklahoma. One of the places we lived was right next to the Frisco Railroad main line.  I fell in love with trains and by [age] three, I was completely hooked.  From 1967 to 1975, I both went to school, as John did, and worked on railroads. I had positions for the Rock Island, the Santa Fe, and the Southern Pacific. They were all union jobs, outdoors in railroad freight yards.

During that period, I earned an undergraduate degree from Stanford and a law degree from UC Berkeley.  In ’76 I moved back to Washington, DC, got a job with one of the best law firms 

in the United States, a place called Covington and Burling.  They immediately put me to work helping to clean up the last vestiges of the Penn Central merger.  I also worked on a $9 billion case for Union Pacific Corporation to try to protect the railroad’s mineral rights from lawsuits.

In 1980, Barry Schaefer and Paul hired Covington and Burling to work on the UP/MP/WP case that Paul was talking about.  I immediately jumped on that project and worked on every UP merger project from then through 2000. In 2002, I moved out here to be senior vice president [of] law and general counsel for UP for a decade.
 

BB: Very good. So that’s our panel for today.  I just want to take a minute and set the scene at the beginning of all of this which was in 1972.  For those of you who may remember or those of you who weren’t around, Nixon was president, Watergate was underway, although we didn’t all know it at the time, Vietnam was still going on.  Julie King, our executive director, puts together a very comprehensive timeline of events to help track the way events unfolded and pointed out that the first handheld calculator was brought to fore by HP at that time.  I was recalling yesterday that at that particular time I was a trainee on the Norfolk & Western and out with a roadmaster one day, and he showed me his handheld calculator which was known as the Bomar Brain which would add, subtract, multiply, and divide, and he paid something like $500 for it, which they later on were giving away free with a fill up at the gas stations. So, times have changed pretty dramatically.

The economy was doing really well.  Unemployment was only about 5%, the growth rate was a little over 6%.  Interestingly, in the railroad business, there were over 100 class one railroads. My recollection was 113 at that time. The Penn Central bankruptcy had occurred a couple of years before and that had still - the effects of that were reverberating through the industry.

Also, before that, 1967, the Postal Service had cancelled the railway mail contracts for all the railway mail that was being hauled and that was the revenue producer that made operating passenger trains by the railroads acceptable, and the blood bath that occurred after that was removed ultimately by the formation of Amtrak in 1971, but deregulation was still almost a decade away in 1980 with the passage of the Staggers Act.

My reading skills are better than my memorizing skills, so I just want to take a moment and talk a little bit about Union Pacific’s situation then.  Things were good, transportation revenues were $779 million, up 11% from 1971.  UP hit an all-time high with greater than 51-billion-ton miles of revenue freight.  

John Kenefick had taken the helm in 1971, that’s a position he held until 1987, and he was a transformational character in the history of the UP.  We’ll get into that in detail with these gentlemen shortly, but he had come from the East from New York Central and had a more, I think, enlightened attitude.  The railroads were typically fairly militaristic in their approach to 

running the business, and he was trying to get rid of the vice-like grip of this authoritarian system and open it up to the – going away from the “We’ve always done it this way” attitude.  And he also was instrumental in hiring more women and minorities in the workplace, and I think instructively, he was the genesis behind the drive to merge and wanted to develop in-house the capabilities to do the analytics and the strategy behind merging rather than outsourcing that. So, he relied on people like the folks here in this room to do that. Interestingly, his influence didn’t end when he retired. He retained an office in the UP headquarters building until he died which was highly unusual at the time, and he was relied on by the leadership for continuing advice as the company evolved.

So, that’s the background that we’re going to go into this with.  I want to dive in and talk first about the origins of the merger team, and I’m going to turn to John here and let him discuss how that occurred and why it occurred and what activities and analytics were being done.
 

JR: Brooks, I think, we talked about the backgrounds of three of us that are here.  There are three other people that are not here that I think we need to recognize.  One of them, and Mike will address this individual, has since passed away. The other two I’ll speak to are Dale Salzman and Dick Peterson.  Dale was a graduate of the University of Illinois, grew up in Illinois, went to work for the Missouri Pacific upon graduation, and was in the industrial – it was called industrial engineering - on the Missouri Pacific, but what it really was, was Downing Jenks’ planning and analytical office. So, Dale had a lot of good exposure to the Missouri Pacific and specifically to some of the senior officers like Downing Jenks. Dale came out to Union Pacific in 1973, I believe it was, and came into the industrial engineering group, but in 1975, and we’ll get into this in more detail, he became a part of what became known as the merger team.

The other person is Dick Peterson.  Dick is a native of Annandale, Minnesota, which is on the Soo Line, just west of the Twin Cities. Dick went to the University of Minnesota, got a civil engineering degree at the University of Minnesota, and came to Union Pacific in 1970 in the marketing department. Dick was manager of service planning in our marketing organization and was responsible for some of the more innovative service products that we put out in the marketplace. Just one of them, to give you an idea, back in the mid-70’s we established expedited perishable service from California to the New York market called ‘Fresh from the West.’  That was Dick’s creation, and it was very successful.  Unfortunately, the business got poached away by non-regulated truckers, so it was hard to maintain it, but that service existed for at least 15 years before we started consolidating it with other trains.

So, those two people were very critical, and I guess both of them, I’d have to say, had an encyclopedic knowledge of the US railroad network.  Somebody could ask them, “What about a railroad …”, in someplace in Pennsylvania and they would know about it, and it was this knowledge that served the merger team very well, particularly as we went head-to-head with 

some of the opponents and the other mergers.  So, Mike, [do] you want to talk about Arvid?
 

MH: Yes, the third gentleman, who would be here if he had not passed away very young, was named Arvid Roach.  Arvid was one of the people who was on the UP/MP/WP team starting in 1980.  He knew nothing about railroads and had no particular interest in them.  That changed over time.  Arvid was brilliant, and he fell in love with railroading, as well. He was a kind of renaissance guy. [He had] lots of interests, had one of the best collections of railroad books in the world in his home.  As a railroad lawyer, he came to be Union Pacific’s real outside legal counsel.
 

BB: And he was with Covington and Burling?
 

MH: He was with Covington and Burling, that’s right. He played a leading role in all of the railroad merger cases after UP/MP/WP.  I have no hesitation in saying that Arvid was the finest railroad merger lawyer in the nation during that entire era, and I think that every opponent lawyer in Washington would agree.
 

JR: I would just add one thing to that.  Arvid is one of the few people that has had a siding named after him on the Union Pacific, and appropriately, it is on what we call the Golden State Line, and I guess it’s about 40 miles from Tucumcari, New Mexico. Most people probably haven’t heard about Tucumcari, but anyway, that is very rare for the company to do that, and I think it shows the respect that all of us had for Arvid Roach.
 

MH: What really showed the respect was not just naming a siding for him in a remote part of New Mexico, but that the Union Pacific senior management, to a man and woman, went to that siding and held a memorial service for him and invited all of us who had worked with him. It was very touching.
 

BB: Impressive, impressive.
 

JR: Let me just make one other comment about the merger team itself.  There’s six of us that should be here:  the two Dick and Dale that I talked about, and Arvid.  We’re what I would call the core team.  We are the people that were with this group for anywhere from 30 to 40 years through every merger that we have gone through, but there were other people involved.

We had sat down in preparation for this and started trying to put a list together of who was all involved on the merger team.  It is well over 100 people, probably closer to 200 people, that came in and out and helped us as we were either evaluating mergers or pursuing the merger in front of the regulatory authorities.  

Also, I want to recognize the railroads that we merged with, people that came from other railroads.  They were totally committed to what we were trying to do in terms of pushing a merger through the ICC or the STB.  Everybody was on board; it’s one of the most amazing things I’ve ever seen.
 

MH: There was one more component of the merger group. Union Pacific had a Washington, DC, government affairs office. They were the premier government affairs operation in the railroad industry and perhaps most other industries. They played key roles in generating support for the mergers and in blunting political opposition that might have overridden them. Very effective.

BB: Yeah.  Paul, maybe it’s a good time to comment on the plate that we have on the table in front of us. [Camera shows a plate commemorating the UP/SP merger on September 11, 1996]
 

PC: Yeah, well when we think about how many people were really involved in the mergers, one of the things that I think made us effective is that we were dealing with merger partners whose cultures were completely different, maybe not completely because we were all railroaders, but they were different, and the way that came together was [that] we had total support from senior management.  If we needed something we got it. The senior management - and that moved down through the department heads to almost everybody -- knew that this was job one, and we were going to get it done.  

So, when John commented about when we sat back and started thinking about how many people were involved in this, I thought about how we recognized people who were involved, and one of the things that we did for every one of our deals was we had a commemorative plate put together.  It was either porcelain, or it was pewter.  And we put on them, how many of them were done.  So, in the earlier mergers, I think in the UP/MOP merger our plate had 350 distributed. Now the plate that’s here on the table was for the UP/SP merger, and the reason I picked that one is twofold.  One is it shows all the constituent railroads that we ended up merging with, but two, on the back, we made 750 of those, and that’ll just show you how many people were involved in this effort.
 

BB: I want to back up to when you arrive at the UP.  What happened, what transpired, that you know someday you get a call and say, “I want help on creating merger intelligence and analytics capability inside the company”?  How did that evolve?

JR: The genesis of what became known as the merger team was something called Project Manhattan, which was initiated in 1972 by Barry Schaefer when he came to the railroad from the corporation as vice president [of] law.  Barry started asking questions as he looked at the railroad environment, which you have described: the Penn Central Bankruptcy, the Midwestern railroads, some of them were starting to teeter on the brink of bankruptcy at the time.  And he was asking the question, “Where does UP fit into all of this and how are we preparing to survive in this type of environment?”

He talked to someone by the name of John Jorgenson, who headed up what UP called Management Information Systems.  Now it’s generally referred to as information technology. John Jorgenson knew me from when he was sent back to a management development program at Harvard.  I met him, and he was somewhat instrumental in my ultimately coming to the railroad in 1971.  But John suggested to Barry that he talk to me, which Barry did, and Barry asked me to develop a plan for how we would evaluate where we should be positioned in the railroad industry.  I did that and that’s probably the major work product that came out of Project Manhattan.  

Really when this jelled was, and we can get into this in more detail later, but what was known as Project XYZ in 1975.  That’s when Dick and Dale came into it.  I was brought into it also and that was really when we got started in terms of working as a team and that core group stayed together as I previously indicated for basically the next 30 years.

Brooks, let me make one other comment about Project Manhattan before we get off of it, that is: Why was it called Manhattan?  As everybody probably knows, Project Manhattan was the name of the atomic bomb development in the Second World War.  And Barry had a sense of humor, so he named this Project Manhattan and it really was appropriate because if Union Pacific would have pursued anything, it would have opened up, it would have been like a big bomb. The Rock Island merger, which was ongoing at that time, was a good example.  When Union Pacific applied to merge with the Rock Island it brought everybody out of the woodwork, mostly in opposition.  So, Barry recognized that, given the question he’s asking [any initiative by UP was probably], that he’s probably going to do the same thing.  So that’s how Manhattan got [started].

BB: You know, in a lot of railroads there was a departmental function, operations planning or strategic planning or something.  You didn’t have a formal department; you had a team.  Did you have an official leader?  How was it structured?

JR: There was not a leader, per se, of the merger team.  It usually depended on what we were doing.  In terms of two primary products of the merger team.  One was what I would call the strategic evaluation of, “Who should we be looking at in terms of mergers?” and that usually would be headed by myself because I headed up a group, by 1975, that was called Planning and Analysis.

Kenefick was one of the people that was instrumental in the establishment of that group, because as you had previously indicated, prior to that time when we did merger studies, it was contracted out. Like, in the Rock Island merger, it was a company by the name of Wyer Dick, and a lot of the legal work was also contracted out.  As you had indicated, Kenefick wanted to bring a lot of that in-house, which he did through the establishment of the P&A organization.  

The other product of the merger team, though, was once we had identified someone and negotiated a merger agreement, we had the whole regulatory process that we had to work our way through.  That was usually headed by the law department.  Barry Schaefer, or as Barry would phase out of it, Paul.  Paul became, in later mergers, [he] was the leader of getting the regulatory approvals done.
 

BB: Maybe we could take a moment and just talk about John Kenefick in a little more detail for the benefit of those who maybe know the name but don’t know the man, and maybe I could get the views of each of you on him.

JR: John Kenefick was, in my estimation, one of the most brilliant railroaders that came out of the last half of the 20th century.  He was very knowledgeable about the industry.  We used to always say he knows more about your job than you do and that led to the realization -- some people had to learn this lesson the hard way -- that you never tried to bluff your way through something with him if you didn’t really know what it was, because that could lead to disaster. (Laughs.)
 

BB: …unfortunate consequences.
 

JR: He was direct.  He kept good control of what was going on within the company.  Again, this goes back to – he knew more than a lot of people that reported directly to him and…
 

BB: He had come up through the New York Central organization with Al Perlman and Mike Flannery?
 

JR: Yes.  The other thing I would say about John Kenefick, in my estimation, he was a real leader.  He gave people the resources they needed to get the job done and usually he stayed out of the way.  I know that from my experience where he gave me enough rope, I guess you could say, that I could hang myself.  Fortunately, I didn’t do it, but…
 

BB: And he was accessible.

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JR: Pardon?

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BB: He was accessible.

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JR: He was very accessible, and that was one of the things that I think made the merger team effective.  Once we got through the MP/WP, you could call him directly on an issue and he’d always talk to you, but he [would] always caution you, “Make sure your boss knows about this. Whenever you talk to me, make sure your boss knows about it.”  So, there was never anything under the table, there was no hidden agenda. He was right out there, up front with you.

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BB: Paul, last night you were telling an interesting story about how to get access to him, sort of.

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PC: I completely agree with John.  Of all the presidents that I worked for at Union Pacific, Kenefick was kind of my favorite.  We were working, all of us, working 24/7 on these mergers, and we used to fly to Washington on the company jet on Sunday afternoon, and we would fly back to Omaha on Friday afternoon.  We’d go to the office and sometimes I’d be in the office both days until I got on a jet to fly back to Washington.  One day I was sitting there on a Sunday morning and Kenefick walks into my office and sits down and talks to me about what we’re doing and expresses appreciation for the time that we’re putting in, and I thought, “Wow, that’s impressive.” 

John talks about his sense of humor, and he really had one.  And I’ll tell you a personal story about it.  My oldest son, who was not old at the time, but we lived in a neighborhood pretty close to Kenefick, and one day I get to work, and Schaefer calls me up, and he says, “Have you heard from Kenefick this morning?”  And I said, “No.”  And he said, “Well, you’re going to.” And so, I get a phone call from Kenefick.  I answer the phone, “Paul Conley,” and he says, [imitating a deep voice] “This is Ooolld Maan Kenefick.”  And the reason he was doing that is [because] my son went to sell him a magazine subscription for the school, and when he walked in, he looks at Kenefick and he goes, “Do you know my dad? He works for Union Pacific.”  Kenefick says, “Well, yes I do.”  And Paul, my son Paul, says to him, “Are you Mr. Kenefick’s father?” (laughter), and Kenefick says to me, “Mr. Kenefick’s father really likes that story, but his mother hates it.” That was kind of typical; he could be really human and down to earth, but as John pointed out, you did not go in to him unless you knew what you were talking about, and if you didn’t know, you should tell him you didn’t know.

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MH: I’ll give you one more quick story about his accessibility.  Everybody knew that at 6:00 in the morning he was at Bishop’s Cafeteria having breakfast.  But I was told, at least, that everybody also knew he would entertain anyone at his table to talk – dispatchers, trainmen.  I decided I would go talk to him at 6:00 in the morning  one morning about some merger question involving operations.  He was quite happy to have me come and sit, talk to him, and gave me his advice.  Phenomenal, that I wasn’t even an employee, but he would allow that to happen.

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BB: But his work habits were, “Start early, work late” and work, oftentimes, at least if not through the weekend, at least through parts of the weekend, right?

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JR: He came in the office seven days a week and even, as you pointed out, in retirement he was the only person that I’m aware of that’s ever had an office in the building after they retired, and he came in seven days a week.  Interesting story here, if I may digress, after he retired, one Sunday morning – and Kenefick always wore a suit and tie.

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BB: Even on the weekends?

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JR: Yeah, and one Sunday morning, after he retired, he’s walking around the house, just fidgeting around, and his wife said, “John, what are you going to do with yourself now?”  And he said, “Aw, hell, I might as well go to mass.” (Laughs.)  So, he went off to church, but I mean, he was so into the railroad and into the company, it was this seven day focus for him, and it wasn’t so much that he demanded others come in seven days a week, but if you had something you wanted to talk with him about, a lot of times the best time to talk to him was on the weekend .

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BB: Less formal, even though he was in a suit and tie.

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JR: Yeah, he, like Paul said, he would, a lot of times, he’d just wander down to my office, and if he wanted something or if he just wanted to talk about what’s going on.

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BB: There’s a number of unique aspects to the merger team, one of which is the relationship with outside counsel, Covington and Burling, and I think there were a couple of points that you made last night about how knowledgeable the law firm got about the railroad and the railroad business as opposed to some other firms that were supporting other carriers.  I think it’d be instructive if you, both of you, would comment on how that relationship evolved, how it began, how it evolved.  Because they weren’t the in-house counsel, at one point, right?  There was another firm that was there, and I think that’s an interesting story about how that evolved and where it stands today.

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MH: Well, as I said, Barry and Paul came to hire Covington and Burling.  We heard the story, I don’t know if it’s true, that we were their fifth choice, but the other law firms that knew more about railroads were already engaged in some way.  Barry immediately set about educating us about Union Pacific.  A couple of us knew something about railroads, but we didn’t really know Union Pacific, and Barry would teach us from 8:00 in the morning until 10:00, 10:30 at night.

I remember being – I love railroads, and I was exhausted by all of this information.  He took us on a train trip, an inspection train trip, out to North Platte, down to Kansas City, over to St. Louis, and he really made sure that we understood the strategy that he had in mind and that we understood at least the basics of rail operation.  Then what happened over coming years, at least from my perspective, Paul, is that UP integrated us into this merger team.  That was a strategic advantage for us as lawyers because we could always reach people who knew the answers to our questions. We were involved in helping to develop those answers, but we were significantly better informed than, I think, many of the other outside counsel were who were really being treated more as contractors, as John said.

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PC: At some points, Arvid didn’t have an official office in the law department, but he had an unofficial office in the law department.  I mean, he would be in one of our conference rooms and have all his stuff in there and that was his room.

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JR: [It] was the same thing with Mike.  Particularly, I remember on the Southern Pacific merger, that you basically were living out here.

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MH: Right.  And we wanted to be responsible about this, but Paul, whom Arvid always described as the best client in the world, would allow us to just hop on a plane and go to Omaha and talk to whoever we needed to about whatever we needed to.  We didn’t abuse that privilege, but it was immensely valuable to have that contact.

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PC: Yeah, I think when you talk about the integration of them into the law department, yeah, they didn’t need to call me up and say, “Hey, can we go talk to Jerry Davis?” or “Can we talk to Dick?”  They could just do that.

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BB: That’s a high vote of confidence and teamwork spirit that you don’t see often times between clients.

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MH: It also enabled us; we were able to serve the company better than we could have otherwise.

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BB: Yeah, and the relationship goes on to this day, correct?

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MH: Yeah.

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BB: That’s fairly amazing in these days and impressive.  So, the merger approval process – it’s more convoluted today, and we’ll get into that, but describe how it evolved in those times. What process did you go through?  I think what you were describing yesterday was a different approach than some carriers had taken to get mergers approved and that was instrumental, I think, in helping you in the cause.

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PC: Well, I can maybe start with that, because what we were looking at is putting together the merger application that was going to get filed with the, initially, the Interstate Commerce Commission.  And we put together basically a team to do that which was Covington, John’s outfit, the operating department.  We had every department involved in it.  And we actually hired a guy, his name was Stan Pierce, he was a retired Air Force Lieutenant Colonel, and we made him the merger administrative officer, and his job was to deal with printing, delivering the application.  The UP/MOP/WP application, we actually put - Mike described it, I mean the box was what, this big (holds his arms up to show the size)?  They were big.  We put them all on a company jet, and Stan flew them to Washington and got them filed.

We had an office in Washington for the merger people.  We had pretty much unfettered use of the company jet if we needed it.  Stan would arrange – we had a van that took people back and forth between the ICC and our office during the hearings.  So, we had a big organization to support this. But maybe even more significant is that we had a weekly meeting with the department heads at UP, and we kept them informed, and that’s why I think it was easier to get what we needed from the people that reported to them.

I will never forget, one of the things we were working on was [that] we wanted shipper support.  And I went to Dick Hautzinger who was at the time vice president of sales, and I explained to him what we needed and that we wanted statements from shippers in support of the merger.  And he just looked at me, he goes, “How many you want?”  So, he put his whole organization to work getting those statements, and I mean it was just – it would go that way with everything.  I mean, Mike, you could talk about the operating plan, because Mike did all the operating work.  Arvid did the competitive stuff, but - you want to talk a little bit about that?

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MH: I remember the first time I sat down in a UP operating planning session regarding the UP/MP/WP merger, and – well, first it was as a kid who had loved trains being exposed to this kind of level of thinking and this level of expertise was quite a rush.  But they took the planning for the merged system extremely seriously.  They were deciding how they were going to run the railroad.  And we would influence that to some extent by saying, “Look, you can have more public benefits if you do it this way and that’ll help us get approved.”  It was a very sophisticated operation.

If I may, let me talk about the Washinton, DC, perspective. So, the Union Pacific proposed acquisition of Rock Island was the poster child for regulatory excess and ineffectiveness.  It went on forever…

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BB: Ten years, right?

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MH: …and the railroad, the ICC’s primary concern seemed to be, “Would anybody’s feelings get hurt.” And they wanted everybody to feel okay and do something for every railroad.  Well, that couldn’t happen, and in the end, Union Pacific wisely decided to let it go.  In about the 1980-time frame, there were some pieces of federal legislation that were passed that basically made it clear to the ICC, “No, we expect you to decide these things and not worry about whether a railroad is adversely affected.  We care about competition.” 

So, from roughly 1980 onward, the agency would say, “We will be looking at the balance between public benefits, cost savings, which were often passed on to shippers; better service, single line service...” so you avoid 113 different railroads commenting on your rate.  I’m exaggerating, but it was a significant improvement, versus the competitive harms that the merger would cause.

Well, at Union Pacific, the policy, essentially never stated, was, “We’re going to solve the competitive harms first.”  And so, we presented applications to the agency that already addressed competitive problems and also had significant public benefits.  So, we essentially had a case for approval right at the beginning.  Now, the big battles that would go on for months and months and months were over whether our competitive fixes were good enough, and “How do you define competition” and “Is reducing the number of carriers serving a particular plant from three to two, is that a loss of competition or is it not?”  Those kinds of battles raged all the way through UP/SP. But essentially that’s what we were focused on is those benefits and those losses.

 

Part Two: Union Pacific Mergers

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BB: So, if we look at the timeline, Project Manhattan sort of got the ball rolling.  You talked some about it.  Is there anything else you want to add before we move on to the Rock Island merger?

So, the Rock Island merger, which you talked about, as I recall went for something like 10 years, and I don’t remember the page count, but somebody calculated there were like a million pages of testimony or something like that.  But do you want to talk a little bit about what was the notion behind the approach to the Rock Island and how was it going to fit in the operation and, you know, why was it thought to be a good thing and - the condition of the company was vastly different at that [time] when it began versus what it was in the end.

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JR: I worked for the Rock Island in the [early-] to mid-60’s, and my first year in the Engineering Department - I’ll never forget this - one night we were in Atlantic, Iowa, in the roadmaster’s office in the station.  And he had this, what we called yellow clip, which was a telex message on his desk.  It was turned upside down, and he turns this thing over, and he said, “This is what’s coming.” And what the message said was, “We, the Rock Island, have initiated discussions with the Union Pacific about a merger and expect you will see teams of Union Pacific people that are coming out to look at the railroad.”  

The railroad at that time was in so-so shape. I mean, the Rock Island was always kind of a marginal granger operation, but in the next 10-year period there was significant deterioration of the railroad.  When the decision finally came down after, I think it was, 12 years that the ICC mulled it over, John Kenefick called me one day and he said, “I want you to take a look at the Rock Island, as it exists today, and I want you to tell me what we should do.  Should we go ahead and pursue the merger?” 

So, I assembled a small team to analytically look at the various options involving the Rock Island.  We were assisted by a major engineering effort that involved the chief engineers and their staffs that went out - the chief engineers and the staffs of all of the Union Pacific, the Southern Pacific, and the Rock Island.  

Of course, I should have mentioned that the original Rock Island plan was that the Southern Pacific would buy everything south of Kansas City and the Union Pacific would take everything north of Kansas City.  So, these engineering teams went out [and] physically went over every inch of the railroad and determined what had to be done to bring this up to acceptable operating standards for UP and SP.  That was the primary input to our analysis.

So, we finally got that done and Kenefick called me up one Saturday morning, and I went up to his office and I had a huge sheet of white paper that I had laid out a decision tree, and I don’t know, it had something like 48 end points on it.  I walked in and I laid that on his desk, which was as you would expect, a large desk for a CEO of a company, and it was usually pretty clean.  There was nothing on it. 

And I started talking about this thing, and I didn’t get very far, and he took his little finger, pushed it off the desk, and it went off the desk just like that, went up into the air, back down, landed in the middle of the room.  And you could always tell when he was getting upset because he would - the red would start coming up his neck and you’d just see it going up to the top of his head, and when it got to the top of his head, he blew up.  And he blew up when I was up there.  And he looked at me and he said, “I need to know if we should buy the Rock Island.  I want one number.  Do we or do we not buy the Rock Island? One number.”  So, with that, I knew this meeting was over.  I got up and picked up my decision tree and went back to my office, and... 

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BB: Somewhat chastened.

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JR: I tucked my tail between my legs, and he called me on Monday morning and said, “Come on up, let’s talk about the Rock Island,” just like nothing ever happened.  I went in, I gave him one number and that was the end of the Rock Island merger, and the company decided that we were going to terminate the discussion.

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BB: Interesting story and a lesson in executive presentation.

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JR: He taught me in very few seconds how you communicate to a CEO, and that is something that stayed with me for the rest of my career with UP, to good advantage.

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BB: Now, how old were you at that time, just for context?

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JR: I had just turned 30 years old and had been with the corporation and the railroad at that time for four years.  It was a lot of responsibility.  I mean, I will say I think he knew in his mind that we couldn’t do it…

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BB: Yeah.

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JR: …but he wanted to have the evidence that he could take to the corporation and to the board that would withstand any scrutiny, and that’s why we went through the analysis that we did.

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BB: Maybe it would be a good time to just talk a little bit about the corporate structure, because there was Union Pacific Railroad.  Then the corporation was created to hold the railroad, and there was good reason for that at the time.

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JR: The Union Pacific, until 1969, the company was the Union Pacific Railroad Company.  And the Union Pacific Railroad Company had a lot of non-railroad assets, much of which derived from the land grants when the railroad was originally built in the 1860’s.  And in those land grants were significant mineral resources, significant land.  And because of the situation involving Penn Central, the question is starting to be asked, “Should railroads be privately owned?”  And there was a lot of talk about nationalization of the industry.  The Union Pacific board was very concerned about that, and they decided -- and this is one of the things that the consulting firm worked on (my first job with UP was with that firm) -- that they had to split the resources out – the oil, the mineral resources, and the land – so that the railroad was basically a railroad operating company, and if there was nationalization, those non-railroad assets were protected.

So, that’s why the corporation was set up in 1969, and they had - it wasn’t a large staff at the corporate level, but they grew, and as we acquired other companies in the 1970’s to help us develop the non-railroad assets.  For example, we acquired a refining company, we acquired a petroleum marketing company, and you had to fund those investments, not only purchasing the companies but ongoing capital, because they were not generating enough capital to meet their needs.

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BB: Um, 1976, there’s a thing called the Palm Springs Conference that related to the SP.  Do you want to launch into that?

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JR: Yeah.  Southern Pacific, in the early- to mid-‘70’s, was doing merger studies also, and had - I knew from my counterpart at SP at the time, that their preferred merger partner was Union Pacific.  In 1975, I think it was, ’75/’76, there was a recession, a pretty severe recession, and railroad earnings went into the tank. Ben Biaggini, of the Southern Pacific, called John Kenefick one morning, and the conversation - very to the point, Biaggini said, “What’s your number?”  So, Kenefick told him what our number was.  You couldn’t do that today.  You could at that time.  And Kenefick said, “What’s your number?” and Biaggini said, “such and such.” And Kenefick said, “Is it red or black?”, and Biaggini says, “It’s red.”

That led to a discussion where Biaggini asked Kenefick directly if UP would be interested in either buying the Southern Pacific or selling the railroad to the Southern Pacific, and that resulted in an analytical effort that was conducted by the corporate office in New York and myself in Omaha to determine whether we really had any interest in the SP.  

A lot of that focus was to look at the SP’s business base, and that was very revealing because at that time, Southern Pacific’s major commodity movements were on a downhill slope, particularly perishables out of California.  You had owner-operator truckers making significant inroads. Pacific Northwest lumber and paper was starting to be heavily impacted by competition from Canada and southern pine in the US.  The West Coast auto assembly plants, all the major auto assembly – Ford, GM, and Chrysler – had plants on the West Coast, shipped auto parts out there.  That was prime business for the railroads, and then the other was the copper business in Arizona, which was up and down, but at that point it was down.

So, Kenefick came to the conclusion, as only he could say directly, “The bloom is off the rose of the SP”, which was true.  They met in Palm Springs, I think it was because of Ben Biaggini, I believe, had a home in Palm Springs.  And we told the Southern Pacific in that meeting that we were not interested in merging with the SP.  

That led to some things that happened then later in the 1970s, one of which was a proposal to merge with Seaboard Coast Line.  Seaboard Coast Line wasn’t interested in it.  But more significantly for Union Pacific, it led to the Southern Pacific’s purchase of the so-called Tucumcari Line, the Golden State line from El Paso to Kansas City.  And that reduced Southern Pacific’s mileage on a move from Central and Northern California to Kansas City by about 400 miles.  What that meant to UP was they were going to take more business away from us at the Ogden Gateway, and that led to some studies that we did later in what was known as XYZ to determine, “Ok, what are we going to do now that they are in Kansas City?”
 

BB: Ok, why don’t we move right across into XYZ because that followed close on the heels of this.
 

JR: In 1975, Kenefick had talked to Barry Schaefer about initiating an effort to take a look at where we should be positioning ourselves in terms of potential acquisitions.  Barry, of course, had this template that we developed in Manhattan on how we should go about it.  Essentially it involved setting up marketing teams that would look at the markets, not only the railroad commodity markets, but where was the growth occurring in the country as you looked forward.  

We had an operating team that looked at the operating condition of the various railroads and competitively what either of them could bring to Union Pacific. I had a finance team that pulled the numbers together.  That turned out to be a major – oh, let me back up.  There was also an outside consultant by the name of Dick Barber that was involved in that and was very, very helpful.  Dick Barber had worked at DOT and was very familiar with how things like this would be looked upon in Washington.  

What came out of XYZ was 13 volumes.  If you stacked them side by side (holds his hands apart to show a length about 3 feet wide), it would cover about this much of a shelf, and it was one of the most thorough studies that I’ve ever seen done within the railroad.   But what was more important was the conclusions that came out of it, because historically Union Pacific always said, “We need to get into Chicago,” which was the eastern extension of the Overland Route.

What project XYZ told us was [that] the growth isn’t East/West. The growth is going to be in the South and on the Gulf Coast, and we, Union Pacific, need to position ourselves to tap into that growth.  That led to looking at the Missouri Pacific and looking at what was referred to as the “rag bag,” which was nothing negative intended about the other railroads, but it was a combination of the Frisco, the Katy, and KCS that might give you the same access that Missouri Pacific did to the Gulf Coast and to the South.

We determined it did not give us the same access, and we determined that instead of going east, which would involve the Chicago & North Western, we needed to go south – Missouri Pacific - and that’s when the decision was made [that] if we’re going to merge with anyone, the first merger is going to be with Missouri Pacific.

About that same time, because of the diversion over the Ogden Gateway by the Southern Pacific to their long haul, we were starting to ask, “How do we protect our access to the Bay Area in Northern California?”  Western Pacific had been bought out by a conglomerate.  It was Mickey Newman, I forget the name of it right now, but they were spun out about six months earlier from the conglomerate.  And Mike Flannery, who was a friend of Kenefick’s from the New York Central days, was interested in potentially selling the WP.  So, we decided, given what we see happening with the SP, and given that SP is, as we felt, “the bloom is off the rose,” we should also acquire the WP.  And that’s precisely what we did in late 1979.
 

BB: So, how involved were the legal teams in the strategy formulation?  Because obviously there’s legal consequences with the regulators and the public and so forth.
 

PC: Well, I was not.  I think, you know, Barry was, obviously. You know when I got involved it was presented as, “Here’s what we’re going to do, now make it happen.”
 

JR: Yeah, Brooks, the primary focus, as I indicated earlier, was the marketing, finance, planning organizations, operating organizations.  Once the decision was made, “This is where we have to go,” that’s when the law department was jumped into the discussion.  But as Paul pointed out, Barry was actually in charge of Project XYZ.  I mean he initiated it and stayed heavily involved in it.

Let me comment on one other thing about XYZ, because this says something about Kenefick. Kenefick was a history buff, amongst other things, and I believe Barry is the one that said, “We’re going to call this Project XYZ.”  Kenefick comes in, and he tells us Project XYZ was an effort on the part of the French to funnel weapons to the revolutionaries in 17--, in the Revolutionary War.  And they were coming through Canada.  One of the revolutionaries who was most instrumental in this was a gentleman by the name of Elbridge T. Gerry, who if you look at the Declaration of Independence, is one of the prominent signatures at the bottom.

Well, it just so happened that on the Union Pacific board was a gentleman by the name of Elbridge T. Gerry who was the great, great grandson of the Elbridge T. Gerry in what was known as the XYZ Affair during the Revolutionary War. Only Kenefick would know that (laughter), but we all thought this was fascinating.
 

BB: Yeah. In the interview I did with Jim Hagen, while he was at the Southern Railway, he worked very hard, very diligently, to put together a merger with the Missouri Pacific, and they were on the cusp of getting that deal done when in jumped John Rebensdorf and the merger team (laughs).  So, you might want to comment how that unfolded because it’s sort of a, you know, Hail Mary.
 

JR: John Kenefick and Downing Jenks, who was the chairman of the Missouri Pacific Corporation, parent company of the railroad at that time, were good friends.  And Kenefick would go on inspection trips on the MoPac, and Jenks would come out here on inspection trips on the UP.  And we found out in late ’79, through Barry Schaefer’s father-in-law who was on the board of the Missouri Pacific Corporation, that they were talking to the Southern and were very close to a merger.

About that same time, Downing Jenks called Kenefick and said, “Look, if you want to do a merger with the Missouri Pacific, you better put an offer in.  Otherwise, we’re going to end up with the Southern.”  So, Kenefick immediately shot off a letter to the corporation in New York, a letter which came to be known as “The jig is up” letter because he used the term “The jig is up,” meaning the corporation and the railroad have got to make a decision and the time is now.  

Over a matter of not more than a couple of weeks, Jenks came into New York, we negotiated an agreement, and announced we were merging with the Missouri Pacific.  As my good friend Jim McClellan, who was my counterpart at Southern Railway at the time never ceased to remind me, we blew up his deal at the 11th hour 59th minute, which unfortunately was true.  We did.
 

BB: And they didn’t respond to make a counteroffer?
 

JR: No. No, no, they did not.
 

BB: Do you know why?
 

JR: No.
 

BB: [It would] be interesting.  It’s too bad we can’t ask Jim that question, but it’s interesting that you were able to scoop in there.
 

JR: One other thing that I might point out, that is kind of a humorous aside in terms of Southern Pacific’s reaction to our merger with the MOP and the WP.  Kenefick, right after or the day that we announced the Missouri Pacific merger, he called Ben Biaggini at 6:00 a.m. Omaha time in the morning.  He did this because he knew Biaggini would still be at home at 4:00, of course, in San Francisco.  And he told Biaggini we were merging with the Missouri Pacific, and Biaggini made the comment, “This is the most traitorous act since Benedict Arnold tried to sell West Point to the British.”  And with that, he hung up on Kenefick.

So, two weeks later, Kenefick, when we announced the Western Pacific acquisition, again he calls Ben at 6:00 Omaha time, 4:00 San Francisco time, and he says, “Ben, I’ve got a little surprise for you.”  And Ben Biaggini said, “What’s that John?”  He said, “We’re merging with the Missouri Pacific [correcting himself] or with the Western Pacific.” I’m sorry. So that resulted in another…
 

BB: Hangup?
 

JR: …comment similar to the traitorous act.
 

PC: Corporate treachery of the highest order.
 

JR: Corporate treachery of the highest order. Yeah, that’s what it was. (laughter) But he didn’t hang up that time. Kenefick said he cooled off and that he just simply said, “We’re going to fight you as hard as we can to just defeat your mergers.” And they did.  They were really tough in the ICC proceeding.  I know because during cross-examination, the SP’s, I believe it was - it was one of the SP lawyers, we got into constant fights.  And the administrative law judge took us offline five times…
 

BB: To admonish you?
 

JR: …and said, “You guys better figure out a way to do this.”

Finally, our lawyer Stuart Stock from Covington and Burling grabs me, and he says, “They’ve got you figured out; they know how to press your button, and that’s exactly what they’re doing.”  So, he said, “Don’t take the bait.” And it worked out, but it was tough.  The transcript was about that thick [indicates several inches with his fingers].

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BB: How long did it go on?

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JR: About two years? (Questioningly, looks at Mike)

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MH: Your cross examination, though?

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BB: Well, both. First of all, how long were you being grilled?

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JR: Oh, it took all afternoon.

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BB: And then the proceeding went for two years?

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MH: (Nods) Yeah.

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BB: Interesting.

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PC: One of the things that the SP said about the merger was that we were making, trying to make, a silk purse out of a sow’s ear.  And to talk about Barry Schaefer and his sense of humor, he actually had somebody get a sow’s ear from the Omaha stock yards and had a taxidermist mount it.  So, we had that as kind of a little symbol...

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BB: Memento.

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PC: …of what we were fighting, (laughter) and we would use it sometimes in presentations.

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BB: (Laughs) That’s great.

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Okay, so back to the Missouri Pacific merger.  Interesting story – last minute, grabbing the iron out of the fire and putting the two companies together.  You had a couple of stories, I think, that add local color to this that I wish you would regale us with.

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JR: Yeah, there are a couple of stories that I think give you a sense for the relationship that Kenefick had with Downing Jenks.  When the eastbound hump was built at North Platte, Union Pacific built a large flyover to get the locomotives from the westbound yard to the diesel shop which was on the eastbound yard side.  And shortly after the yard opened, Kenefick took Downing Jenks on an inspection trip on the UP.  They stopped at North Platte and Jenks saw that and he said, “Oh, that’s interesting because in Switzerland they have these all over and they call them sheep jumps.”

So, Kenefick has a sign made to hang on this bridge, and that sign still is out there today and it’s in French.  I don’t speak French, but it’s something like “Les moutons sautent dans le nord de platte", which translated means, "the sheep jump at