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Santa Fe Southern Hopes to Get Back on Track : Scrambles to Salvage Merger of 2 Railroads

November 09, 1986|NANCY RIVERA BROOKS | Times Staff Writer

John Schmidt's spirits were high as he sat in a crowded Interstate Commerce Commission hearing room July 24 waiting for the green light to merge his company's two railroads, the Southern Pacific and the Santa Fe.

The chairman and chief executive of Santa Fe Southern Pacific was confident, as were most observers, that the commission would ultimately approve the combination after wrestling with objections from competitors and others.

After all, the railroads' parent companies had merged in 1983 and the Reagan Administration line seemed to be that mergers were all right, although some conditions might be required to soften the blow to competition.

As he waited for the hearing to begin, Schmidt chatted about the combined railroad's new red-and-yellow color scheme, which already graced more than 500 locomotives. He doodled on a piece of paper, showing a financial analyst how the railroads' routes would mesh.

But after little more than 10 minutes of discussion in a meeting that was scheduled to last the entire day, the ICC rejected by a 4-1 vote the proposed merger of Southern Pacific Railroad and the Atchison, Topeka & Santa Fe Railway, calling it "anti-competitive."

Barely hiding his anger during a hastily called news conference, Schmidt branded the decision "a horrible mistake based on a lack of understanding of the evidence" that would harm shippers in the Western and Southwestern United States. Schmidt declined to be interviewed for this article, although he agreed to supply written answers to a few questions submitted by The Times.

When the smoke clears, Santa Fe Southern Pacific may become known as the big engine that couldn't. The ICC's rejection could mean the dismemberment of the two archrival railroads, which were critical to the development of California and the West.

Santa Fe Southern officials had warned in earlier testimony before the ICC that the Southern Pacific, which has had to be operated independently under a voting trust, could face bankruptcy if the merger were not approved. And the Santa Fe was not in much better shape, they said.

The Chicago company has until Dec. 9 to submit a petition asking the ICC to reopen the case. It is racing to negotiate costly settlements with competitors that oppose the merger to grant them various concessions, such as the use of certain Southern Pacific and Santa Fe track, in order to defuse the opposition.

Victim of Changes

If the ICC does not allow the two railroads to merge, Santa Fe Southern has said it will have to sell one or both of them, leaving the company with its considerable real estate, oil and gas and leasing businesses.

How did these two once-mighty railroads get into this fix?

These were the railroads that built the West, but they fell victim to economic changes in the territories they helped carve from empty deserts. The rise of the trucking industry after World War II cost the railroads dearly, and mega-mergers forced weak competitors to combine or die.

For San Francisco-based Southern Pacific, nicknamed the Espee, it all began in 1856 when civil engineer Theodore D. Judah built the 23-mile Sacramento Valley Railroad, the first steam railroad in the Far West. Judah gained the backing of four Sacramento merchants in his search for a route over the Sierra Nevada toward the first transcontinental railroad.

Those merchants became known as the Big Four--but back then Leland Stanford was a grocer, Charles Crocker owned a dry goods store, and Mark Hopkins and Collis P. Huntington were partners in a hardware business.

With a new name, Central Pacific, the railroad broke ground for the western end of the transcontinental line in January, 1863. It hooked up with the Union Pacific on May 10, 1869, with the driving of the famous golden spike at Promontory, Utah.

Central Pacific--and its successor, Southern Pacific--promoted its territory heavily to attract residents and businesses. It also started Sunset magazine in 1898 for that purpose, but sold it in 1914.

The 1982 book "Everybody's Business," edited by Milton Moskowitz, Michael Katz and Robert Levering, called the Espee "one of the 19th Century's most avaricious monopolies," adding that the Big Four "turned their railroad into the prototypical American monopoly through the time-honored techniques of graft, bribery, fraud and outright mendacity."

But railroad historian Don L. Hofsommer contends that the company's power, although substantial, has probably been exaggerated over time.

"That doesn't say that the Southern Pacific was without power," said Hofsommer, who recently published a book on Southern Pacific in the 20th Century. "But if the Southern Pacific was that powerful, how do these people explain that the Santa Fe got to the Bay Area?" the heart of SP country.

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