Pat Ottensmeyer likes to say that many of his contemporaries in the rail industry are “ugly-handed guys.”
Kansas City Southern CEO – a company coveted by Canada’s two largest railroads – talks about his peers who broke their fingers while working on early freight trains their career. Mr. Ottensmeyer points out their scars with respect. Folded digits and swollen knuckles testify to operational expertise.
However, the 63-year-old CEO also brings up this image of ugly hands diplomatically hitting the old railroad guard, including the revered Hunter Harrison. A lifelong railroader who died in 2017, Mr. Harrison championed an approach known as “precision-timed railway” (PSR) during his tenure as CEO at four companies, including the Company. Canadian National Railways and Canadian Pacific Railway Ltd.
In lectures and interviews, Mr. Ottensmeyer gently criticizes his industry and its legends for being too interior-centric, to put efficiency before customers. As he enlists two former colleagues of Mr Harrison to instill KCS’s version of precision railroading, the CEO wants the railroad culture to be customer-centric. He recently opened a session with management consultant Korn Ferry stating: “We are not in the train traffic business. We are at the service of customers. “
KCS also has a mission to connect Mexican factories and farms to the rest of North America. Cross-border traffic on its 11,000-kilometer network is growing at double-digit rates – well above weak single-digit growth in rail shipments to the United States – as manufacturers look to “nearshoring” to shorten supply chains that until then extended to Asia. . The prospect of owning the only continental railroad, stretching from Mexico to the heart of the United States and the Atlantic and Pacific coasts of Canada, made KCS the target of a high-stakes bidding war this spring.
CN and CP donate huge sums to Kansas City Southern, but history suggests return on investment will be solid
The unfolding of the Kansas City Southern takeover saga
KCS concluded a US $ 25.2 billion friendly merger in March with CP Rail. The offer was supplemented the following month with a US $ 30 billion offer from CN Rail. Late Thursday, KCS broke hearts in Calgary, home of CP Rail, by changing horses to approve the offer from Montreal-based CN Rail. CP Rail now has four business days to raise the bar, although in a press release on Thursday the company said, “As we have said on several occasions, we are not going to enter a bidding war.
Mr. Ottensmeyer and the executives of KCS, CP Rail and CN Rail declined to be interviewed, due to the continuing battle for takeovers.
The KCS bidding war values the railroad more than three times what it was worth when Mr Ottensmeyer was appointed CEO five years ago. The price tag is an endorsement from a leader who never broke his fingers working in a rail yard.
Mr. Ottensmeyer grew up on a farm in Indiana. He received a finance degree from Indiana University and had a successful first career in banking before one of his railroad clients – Burlington Northern Santa Fe Corp. – recruits him in his thirties. In an industry that tends to reward lifelong commitment, this CEO left Burlington Northern, mid-career, rather than accept a move to Texas and uproot his Chicago-based family. He has three daughters.
The future Railway Age “Railroader of the Year” then spent five years as an executive at a pharmaceutical company, teaching finance part-time at DePaul University and enjoying Chicago Cubs baseball; he reserved a box this year to celebrate Father’s Day in June. In 2006, KCS lured him away from Chicago and got back on track as CFO. Two years later he applied to become a sales and marketing manager, with an eye towards earn the best job. In 2016, KCS appointed Mr. Ottensmeyer as its CEO.
Mr. Ottensmeyer’s willingness to take a different route allowed the smallest of North America’s seven major Class 1 railways to expand south to Mexico. In recent years, KCS has spent more than US $ 5 billion in Mexico, connecting a massive terminal on the Pacific coast and 12 ports from the Gulf of Mexico to the heart of the United States.
For its Canadian contenders, KCS’s appeal also includes the company’s success with a smoother, smoother version of the Precision Railroad. Over the past three years, Mr. Ottensmeyer has hired two Executive Vice Presidents who worked closely with Mr. Harrison at CN – Sameh Fahmy and John Orr – to implement KCS ‘own RPS strategy.
“In what I would call PSR version 1.0, you improve your operating ratio, but you annoy stakeholders,” said Anthony Hatch, analyst at New York-based ABH Consulting. “The best approach to PSR, version 2.0, uses efficiency to improve service. Pat quickly understood this, to use PSR to deliver a consistent experience for customers. “
Over the past decade, KCS revenues have grown by an average of 4 percent per year, reflecting a relatively mature rail industry. However, the company’s earnings per share grew 12 percent per year as KCS became much more efficient. “Pat has done a terrific job, and whoever wins KCS gets a gem of a railroad,” said Mr. Hatch, who has dealt with the boss of KCS as an analyst and consultant for over 20 years.
KCS is also a takeover target because Mr. Ottensmeyer has proven to be a competent lobbyist. The morning after Donald Trump presidential Election victory in 2016, KCS’s stock price fell 12 percent, on Republican expectations would tear apart the North American Free Trade Agreement and decimate KCS cross-border business. Traffic to and from Mexico accounts for nearly 40 percent of the company’s sales, and half of KCS’s workforce lives south of the US border.
Prior to the 2016 election, Mr Ottensmeyer had avoided politics. But after Mr. Trump was elected, Mr. Ottensmeyer pledged in a letter to KCS employees to do whatever it takes to ensure the seamless and free flow of goods across the border. He became the US president of the United States-Mexico Economic Council and began touring Washington, DC.
“Pat’s priority was to be the best possible advocate for trade with Mexico and Canada,” said Neil Herrington, senior vice president of the United States Chamber of Commerce, who has spent the past six years at working closely with the CEO of KCS, considers him a friend and says he still does not know which party is supporting Mr Ottensmeyer. “Pat’s approach was to represent the heart of the United States, the automakers, the farmers, the steelmakers who were essential to the Republican Party and who benefited from NAFTA,” Herrington said.
Mr Ottensmeyer convinced the Trump administration with old-fashioned tactics, Mr Herrington said. The CEO tenaciously held face-to-face meetings with key officials such as Secretary of Commerce Wilbur Ross and Secretary of Agriculture Sonny Perdue, then convinced them that US industry and voters benefited from cross-border trade. . In 2018, Mr. Trump signed the new US-Mexico-Canada trade deal.
“Whoever wins the KCS will own the only railroad in the USMCA, and that railroad will be a tribute to what Pat has achieved in the United States and Mexico,” Herrington said.
Once you have successfully concluded the art of the deal with the Trump administration, complete the sale of a company to one of two Canadian railways who wish to pay money to the shareholders of KCS n is not a major challenge. Mr Ottensmeyer can also rely on KCS chairman Robert Druten, who is used to making deals under pressure.
Mr. Druten, a retired executive at Hallmark Cards Inc., joined the board of directors of American Italian Pasta Co. in 2007 to help clean up governance after an accounting scandal. He ended up leading the board’s audit committee. Three years after Mr. Druten arrived, a rival food producer bought the pasta business for US $ 1.2 billion.
One Canadian railway will win the KCS in the coming months, while the other will find itself at a significant competitive disadvantage. The losing bidder will be smaller than its North American rivals – in an industry where scale drives efficiency – and is likely destined to stay that way. The U.S. industry regulator, the Surface Transportation Board (STB), has imposed a moratorium on takeovers between Class 1 railways over the past two decades due to competition concerns. Approval of the KCS takeover would be a notable exception to the rules, and analysts say the STB is unlikely to approve further mergers.
KSC’s sale is expected to take more than a year to close, with the railway being placed in trust and run by Mr Ottensmeyer until the STB approves the acquisition in 2022. Colleagues say this gives the CEOs the opportunity to be a part of one of his favorite rail traditions for at least another year.
Every Christmas, KCS employees transform retired wagons into Holiday Express, featuring a decorated locomotive, a flatcar carrying Santa’s sleigh, a gingerbread covered wagon, an elf workshop, a horse stable. reindeer and a small red caboose. The train travels through cities on the US KCS network, with children boarding to meet Santa Claus, and has raised more than US $ 2 million for charity.
In recent years, Mr. Ottensmeyer and his family have been the biggest donors. Last year, the fundraiser was canceled due to the pandemic. This year, the CEO can expect to take one last ride on the Holiday Express before handing over his business to a Canadian buyer.
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