Over the weekend, the Wall Street Journal reported that Canadian Pacific Railway Ltd. (TSX: CP)(NYSE: CP) had approached CSX Corp. (NYSE: CSX) about merging operations. CSX rebuffed this approach, but it’s only a matter of time before some sort of an agreement comes to fruition. And while that’s happening, there’s a good chance that both companies will see their stock prices rise.
All things considered, the acquisition makes perfect sense. The market cap of the two companies would be $62 billion. More so, it would result in annual revenue of $18 billion. When the CEO of Canadian Pacific promised to double revenues, I don’t think investors had this in mind.
Looking at it from another perspective, this would allow Canadian Pacific and CSX to get from the oil fields to the oil refineries in one trip. That would cut the time it would take to get the precious resource to refineries on the east coast and allow the combined company to save on costs.
The ghost of BNSF Railway Past
On December 20, 1999, BNSF and Canadian National Railway Company (TSX: CNR)(NYSE: CNI) announced a merger which would result in the creation of a new company, the North American Railways. This would result in a giant 50,000-mile long track company that would dominate North America.
Unfortunately, the Surface Transportation Board (STB) of the United States intervened and said that it would require a 15-month moratorium on the merger. After fighting in court, the two companies called off the merger. In 2011, the STB issued a rule that said that any merger between two Class I railroads would have to demonstrate that competition would be preserved.
No mergers of Class I railways have occurred since.
Canadian Pacific won’t be able to prove healthy competition
The simple fact is that merger would likely hurt competition amongst railways. The combination of these companies is the perfect opportunity because there is no overlap. Where Canadian Pacific ends, CSX begins, so the companies do complement each other.
Unfortunately, I believe the STB is going to come down and say this merger won’t be able to happen. As an investor in either company, it is important not to get caught up in the hopeful excitement that will come from this large merger. Two companies of this caliber won’t be able to merge. But that doesn’t mean Canadian Pacific will not buy other railroads. No one knows the future.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.