Railroad-Based Conglomerates

Abstract

The first railroad-based conglomerate got the show on the road only ten years ago, and within as short a period as the past three years, the securities of railroad holding companies have become the larger part of the rail group of shares. Rail assets of the holding companies represent over half of the assets of the industry, while over 120,000 miles of rail lines of the nation's 200,000 miles are under the control of holding companies. Railroad managements are as strongly for as against the holding company concept. Even among those carriers that have not created a holding company, many are involved in non-transportation activities in one form or another. The Interstate Commerce Commission and other regulatory bodies are questioning the effect of conglomerate activity on national transportation policy. Yet the ICC in its statement entitled, Diversification and Conglomerates says in effect that it is possible that affiliation (of railroads) within a large community of enterprises could be beneficial to a carrier in several ways. For example, the transportation firm might gain easier access to capital necessary to modernize, innovate and expand. Then too, the collapse of Penn Central has focused the attention of Congress on the railroad industry and, particularly, the railroad holding company concept. After a year-long investigation of the diversification activities of Penn Central as a holding company, Wright Patman, as head of the powerful House Committee on Banking and Currency, has concluded that diversification contributed significantly to Penn Central's ultimate financial collapse. Notwithstanding Mr. Patman's view, there are rail managements that believe diversification is the only route to their railroad's survival. The heart of the controversy is whether or not the interest of shareholders can be reconciled with the public interest demands of the Interstate Commerce Act. These interests are not mutually exclusive but the question is, to what extent should shareholders' interests be considered in managing properties providing common carrier services?