One of the fastest moving and most interesting corporate control battles in many years just unfolded before our very eyes in Jacksonville, Florida, home to railroad giant CSX. On January 18, Hunter Harrison, the storied railroader announced his retirement from Canadian Pacific Railway. Harrison, who had previously captained the Illinois Central and Canadian National, but had been most recently rebuffed by both CSX and Norfolk Southern in a merger attempt, suddenly announced his retirement, six months before he was scheduled to leave CP. By leaving early, it appeared that Harrison was giving up a roughly $80 million retirement package. At that same time, Harrison announced that he was teaming with Paul Hilal, the founder of Mantle Ridge an activist investor group, to take over CSX. Hilal had previously partnered with Bill Ackman and Pershing Square Capital Management who ran a successful proxy campaign to install Harrison as CEO at CP.
About three weeks ago, it was learned that Mantle Ridge had acquired 4.9% of the outstanding common stock of CSX, and was working with other institutional CSX investors to put Harrison in the CEO chair. The date by which a proxy to propose an alternative slate of board members came and went as CSX extended the date twice as negotiations proceeded. In an unusual move, CSX decided to make the matter public, indicating that Harrison was demanding a $300 million compensation package, including reimbursement of the $80 million retirement package which Mantle Ridge had paid Harrison. In addition, Harrison was demanding five board seats on the 14 seat CSX Board which would turn into a majority in about a year. CSX announced on February 15 that it was asking its shareholders for a non-binding vote on these two issues at a special meeting. Both the package and demand for control, according to CSX management, created serious governance issues as well as a non-market compensation package.
The following Tuesday, February 22, CSX announced that its long-time CEO, Michael Ward and President, Clarence Gooden would retire at the end of May and appointed a new President. Within 30 minutes of that announcement, CSX announced a massive involuntary separation program, with the goal of eliminating 1,000 of approximately 3,600 management jobs, with the goal of completing the program by the end of March. The program is far more generous than the prescribed corporate severance plan, and appeared to be an attempt by CSX management to take care of its long time employees.
Before the program could even be completed, it was announced on March 6 that CSX, Harrison and Mantle Ridge had reached a deal. With this fast-moving process, CSX expedited its separation program and last week made the remaining employment cuts that were originally intended to take another few weeks.
CSX is a highly profitable and successful railroad. However, it was lagging as compared with other U.S. railroads in its operating ratio and service metrics. Its succession planning at the senior leadership level was moving relatively slowly, and it appears that Harrison and Hilal sensed an opening. That a hostile takeover of a well-established company could occur this quickly when the shareholder owned only 4.9% of the stock is remarkable and without a vote is even more so.
Harrison is known as a straight talking, “old school” railroader. He recently had encountered some medical issues but refused to turn over his medical records as part of the negotiations with CSX. He is 72 years old and is known for “precision railroading,” slashing costs quickly and consolidating non-producing assets. The CSX separation program may challenge Harrison’s plans to implement change since many of the most experienced employees will be off the property before he arrives. But a $10 billion rise in stock value since Harrison and Mantle Ridge first announced their intentions was too much for shareholders to resist.
DISCLAIMER: The opinions expressed in this article are the author’s own and do not reflect the views of Consolidated Rail Corporation, CSX, or Norfolk Southern
Jonathon Broder is Vice President and Chief Legal Officer of Conrail.