The KC Southern - Canadian Pacific Merger

Patrick Ottensmeyer wore the flags of Canada, Mexico and the United States when he spoke at ACG’s May 5 breakfast meeting.

Ottensmeyer is the former Kansas City Southern president and CEO. He and Robert Druten, the company’s former board chairman, told the story of KC Southern’s merger with Canadian Pacific, which created Canadian Pacific Kansas City, the first and only single-line railroad connecting the U.S., Mexico and Canada. They also discussed the merger’s effects on the railroad industry and on Kansas City.

Ottensmeyer has been working for the past seven years promoting relationships between the three countries and especially between Mexico and the U.S., he said. He became KC Southern’s CEO in July 2016.

“We once branded ourselves the NAFTA railroad,” he said. “Any way you looked at our company, we were 50 percent Mexican.”

When former President Donald Trump became president-elect in November 2016, KC Southern officials figured a rough stretch of track lay ahead. As news coverage unfolded on election night, Jim Cramer, host of CNBC’s “Mad Money,” said in an interview that KC Southern ranked No. 1 among the top 10 U.S. publicly traded companies that would be “smashed to smithereens” by Trump’s victory because of its connection to NAFTA and Mexico, Ottensmeyer said.

Within a few minutes of the stock market’s opening the next day, railroads generally rose as did industrials, but KC Southern lost 15% of its market capitalization—over $1 billion.

Ottensmeyer started a letter to his KC Southern colleagues “to try to calm people down” and make clear “that nothing had changed about our company” and that he would be involved in the outcome of the renegotiated NAFTA.

“I had no idea but I had people who did,” he said, on KC Southern’s board and elsewhere. NAFTA was renegotiated and all three countries approved the United States-Mexico-Canada Agreement “by overwhelming legislative majorities, and that was a critical element of the timing of the transaction we went through.”

More than 500 railroads in the U.S. account for nearly 95% of railroad activity, whether measured by miles of track, number of employees, carloads or revenue, Ottensmeyer said. KC Southern was by far the smallest of the biggest and therefore vulnerable to takeover.

Canadian Pacific is about three times the size of KC Southern, which doesn’t overlap with Canadian Pacific “by a single mile,” he said. Canadian National made a higher offer, but KC Southern “pursued the deal we thought made the most sense, managing risk to value” and that was most likely to be approved.

In 2020, despite KC Southern’s size among the biggest U.S. railroads, its board was “thrilled with our company,” Druten said.

“We were strapped to a rocket,” he said, with the country’s highest-performing stock. An offer of $200 a share for the company in late 2020 “opened the eyes of other railroads.”

The KC Southern-Canadian Pacific merger got final approval in April. Canadian Pacific is based in Calgary. KC Southern remains based in Kansas City and operates independently.

Ottensmeyer said “mergers are tough” and he has been through three of them in his career.

“A lot is still being sorted out,” he said. “We did integration planning, but we couldn’t start integrating until April 14. Three of my executive reports remain. In three levels below that, 99 of 100 employees were offered jobs. … I believe it’s a good transaction for Kansas City.”

During a question-and-answer period after the main presentation, an audience member asked about the integration of KC Southern’s culture with Canadian Pacific’s.

“It’s going to be different,” Ottensmeyer said. “There’s no doubt about it. The companies have different styles. Canadian Pacific is a much bigger company. … Safety, growth, service and customer orientation overlap with the two companies. This transaction won’t shift the balance of power in the industry.”