JAMES M.
DALEY
HOLDING COMPANIES,
COMMON CARRIERS,
AND PUBLIC POLICY
INTRODUCTION
The Amencan economy has experienced
three distinct merger periods during the
twentieth century * The first period,
approximately 1895-1905, resulted in many
large firms with concentrated markets, such
as A T.&T and U S Steel The second
interval occurred around 1920-1933, and
was characterized by horizontal mergers re-
sulting m large firms in the areas of petro-
leum, food products, and primary metals
The Uiird and present penoid began around
1950, and, as the data contained in Table I
indicates, is primarily charactenzed by the
shift from horizontal to conglomerate merg-
ers
Included in this third interval are a num-
ber of transportation companies Several rail
firms have organized holding companies,
using their railroad name and adding the
term "industries " Stock m the holding
company is offered to owners of the railroad
stock, and the railroad usually becomes an
operating subsidiary of the holding com-
pany ^ Such activities were cnticized as far
back as 1913, when the ICC stated in the
New Haven case that
Mr Daley u Assiatunt Professor o/Tnuisporlation,
Department of Marketing and Transportation, Au-
burn University
67
no student of the railroad problem can doubt
that a most prohfic source of financial disaster
and complication to railroads has been the desire
and ability of railroad managers to engage in
enterprises outside the legitimate operation of
their railroads
More recently. Hearing Examiner Darm-
stadter urged the Commission to "make a
complete investigation of the conglomerate
question," in his conclusions on the
C!&NW-Milwaukee merger case *
The purpose of this paper is to review the
questions concermng (1) holdin company/
conglomerate^ activity in transportation,
and (2) public policy toward such ownership
of regulated earners
CONGLOMEKATES IN TRANSPORTATION
"Inherent in the diversification contro-
versy IS the dualistic status of the rail-
roads."* They are regulated as public utih-
ties and yet are considered independent
businesses in a free enterprise system
Therefore, conglomerates present a
serious problem for public policy in transport
organization because of the impact on mvest-
ment, and because of the effect on carriers
ovmed by the conglomerate m the event that the
latter encountersfinancialproblems
While some individuals have reservations
as to even the manageability of some of
these conglomerates,^ others believe that
the m^or problem lies elsewhere
68 TRANSPORTATION JOURNAL
TABLE I
Mergers 1972-1977 (Concerns with Assets of $10 Million and Over)
Year TOTAL HORIZONTAL AND VERTICAL
1972 60
1973 64
1974 62
1975 59
1976 81
1977* 99
*Preliminary data
Source The Statistical A bstract of the U S, Bureau of the Census, 1978
the potential redistnbution of the resources
of the transportation company presents a danger
to the earner as well as to the pubhc, smce re-
sources tend to flow mto areas with highest po-
tential return After the conglomerate has
siphoned off the earner's resources and assets,
reduced its economic base, and created heavier
long-term debt obligations, the transportation
company is still expected to provide service to
the Dubhc and satisfy the need for transporta-
tion'
A congressional study of the Peim Central
debacle found that a
specialized aspect of fiscal policy, diversification,
resulted m a net cash dram which, while relative-
ly small, could be ill afforded at the time As part
of the overall fiscal policy, it contributed to the
company's illusory credit standing '"
An ICC investigation of possible detrimen-
tal effects of railroad conglomerates m 1970
found
1 Payment of special dividends to the
holding company, thus depleting the
resources of the carrier;
2 The transfer of nonrailroad property
held by the railroad to the holding
company at less than its market value,
3 Loans by the holding company to the
railroad to enable it to pay dividends to
the holding company, thus "bleeding
the railroad company for the benefits
of the holding company "^*
The controversy concermng conglomer-
ates m transportation has pnmanly centered
on the railroads, the mam reasons being the
relative importance of those carriers so
involved and the relative lack of diversifica-
tion by other modes, more specifically, mo-
tor earners While there has been relatively
Winter
CONGLOMERATE
24 36
25 39
24 38
7 52
18 63
30 69
little motor carrier activity in non-
transportation markets, non-carriers are
buying motor carriers Because Burdick
concluded that earner-based conglomerate
growth would be limited, but non-earner
acquisitions of earners would continue, he
considered non-camer control the potential
problem '^
CONGLOMERATES IN GENERAL
There are numerous causes of conglom-
erate mergers Achievement of "diversified
growth" IS a commonly mentioned reason
for conglomerate combinations The
involvement of a firm in a wider range of
markets or industries is seen as a means for
spreading stockholders' risk and achieving
greater stability of earnings through
involvement in businesses with different
cyclical patterns Antitrust policies hostile
to horizontal and vertical mergers have also
been cited as encouraging conglomerate
acquisitions by forcing acquisition-minded
firms to look beyond their existing lines of
business for growth
Other factors encouraging conglomerate
mergers include tax laws that allow loss
carry-overs, availability of firms due to
death, illness, or age of dominant
shareholders and executives, excess cash
assets, need for raw materials, technical ex-
pertise, and/or new forms of managerial
skill, desire for income stability, and escape
from dependence upon products in declin-
ing phases of their life cycles Thus, firms
with inept or about-to-retire management,
excessive liquidity, unused borrowing pow-
1979 HOLDING COMPANIES AND PUBLIC POLICY
er, unusable tax shields, cash fiow imbal-
ances, substantial depreciation charges,
and/or unattractive internal reinvestment
conditions are potential targets for takeover
by conglomerates '^ '* "
Evidence of the results of conglomerate
mergers is mixed Increases in earnings per
share and common stock value have been
found by some researchers to occur in the
wake of conglomerate mergers '^ Others
have reported that conglomerates do not
possess favorable rates of growth in earn-
ings when compared with earnings growth
rates experienced during non-conglomerate
or pre-conglomerate periods of opera-
tion '71819 Jt ]^2& been reported that inferior
economic performance by conglomerates
can stem from causes such as
1 Distortion of corporate goals (l e ,
growth, size, etc)
2 Non-economic product mix
3 Limited cross-industry transferability
of managenal ability
4 Imperfect profit center decentraliza-
tion
5 Excessive size
6 Excessive preoccupation with growth
7 Top-heavy capital structure
8 Impaired managerial incentives ^^
Some studies have lnd cated that
conglomerate mergers may reduce risk by
reducing the variance or standard deviation
of profit rates ^' Conglomerates also tend to
perform better than other firms when
measured in terms of sales volume and
asset growth, but that tendency appears to
result from merger activity Markets
entered via merger usually are characterized
by rapid growth rates and high rates of tech-
nological change Likewise, a positive cor-
relation has been found to exist between
stock market prices and the number of
mergers, which serves as a mutual stimu-
lus ^^
TRANSPORT POLICY AND CONGLOMERATES
A miyor conglomerate-related transport
policy issue stems from the potential for
confiict between common-carrier service
obligations and the need to compete in the
money and capital markets on the basis of
an adequate rate of profitability ^' The Na-
tional Industnal Traffic League has ques-
69
tioned whether conglomerates with trans-
port subsidiaries might divert resources
fi-om their transport activities to their more
profitable non-transport ventures—to the
detnment of service to shippers ^* In the
same vein, ICC Admimstrative Law Judge
Henry C Darmstadter, in a report mvolving
a merger application between the conglom-
erate-based (l e , at the time that it was part
of Northwest Industnes) Chicago & North
Western Railway and the Milwaukee Road,
warned that problems for the shipping pub-
lic would arise if the railroad portion of the
conglomerate were to become unprofitable
and/or to be perceived by the conglomer-
ate's management as having unfavorable
prospects for profitability over the longer
run"
However, some railroad executives argue
that conglomerates will help stabilize the
rail lndustry,^^ and their views are paralleled
by similar contentions among executives of
conglomerate-based earners in other modes
of transport For example, Robert J Ber-
nard, Vice President of the Greyhound Cor-
poration, has stated
We at Greyhound are convmced that diversifica-
tion has given us a broader base from which to
function and hopefully this base will enable us to
continue to perform reliable transportation
Nevertheless, "resources can be and are
shifted to any part of the conglomerate
where the long-run profit opportumties are
greatest "^* As Roland W Donnem of the
Justice Department's Antitrust Division
has noted, "investment flows out of a trans-
portation mode which is relatively unprof-
itable "^' Former Penn Central president
Alfred E Perlman has agreed
We should not be expected to put the earnings of
our profitable diversified subsidiaries mto sup-
portmg railroad operations which we are forced
to maintam even though they are known to be
loss-producing '"
REGULATIONS AFFECTING TRANSPORT-
RELATED CONGLOMERATES
ICC permission is not necessary for di-
versification when the non-regulated parent
holding company makes the investment
The owners of a transportation company
can trade their stock for ownership of an-
other company, thus, "only the anti-trust
laws apply to the non-regulated sectors of
70 TRANSPOR TA TION JOURNAL
the economy and provide the only present
basis for control of the activities "^' A great
deal of conglomerate growth was accofn-
phshed by the issuance of stock which was
traded to the stockholders of the firms
merged mto the conglomerate enterprise ^^
Section 5 of the Interstate Commerce Act
prohibited poohng of traffic of different and
competing railroads, or any division of their
earnings The Panama Canal Act of 1912
prohibited railroads from owmng, leasing,
operating, controlling, or having any inter-
est whatsoever in any common carrier by
water which does or may compete with the
railroad for traffic ^^
In 1920 Congress gave the ICC power
over a railroad's issuance of securities or the
assumption of obligations and debts If
approval is given, the Commission must
find that the transaction is "necessary or
appropnate for or consistent with the proper
performance by the earner of service to the
public as a common earner, and which will
not impair its [the earner's] abihty to per-
form that service "'*
The Transportation Act of 1933 placed
acquisition of earners by holding companies
within thejunsdiction of the Commission
Section 5(2) (a) of the Interstate Commerce Act
makes it lawful, with the approval and author-
ization of the Commission for a person
which IS not a earner to acquire control of two or
more carriers through ownership of their stock
or otherwise, or for a person which is not a car-
rier and which has control of one or more earn-
ers to acquire control of another earner through
ownership of its stock or otherwise ^'
Section 5(11) of the Interstate Com-
merce Act provides that earners and others
participating in a transaction approved or
authorized under Section 5 are
relieved from the operation of the anti-trust laws
and of all other restramts, hrmtations, and pro-
hibitions of law [insofar as is] necessary to enable
them to carry into effect the transaction so
approved or provided for in aecordanee with the
terms and c(^ditions, if any, imposed by the
Commission ^
Therefore, the antitrust laws apply unless
the administrative procedure for the grant-
ing of immunity is stnctly followed
Rulings concerning antitrust provisions
include the McLean Trucking Co v United
States cas& which showed
Winter
that quite apart from provisions relieving
participants in mergers from anti-trust restric-
tions, the emphasis of the regulatory legislation
since the Act of 1920 has been on the achieve-
ment of an adequate, efTicient, and economical
system of transportation rather than on the pres-
ervation of free competition among carriers ^'
In short, the existence of regulation does not of
Itself repeal the anti-trust laws or exempt the
regulated industries, the agency is required to
accommodate the sometimes conflicting policies
of the two enactments ^*
The first modem transportation conglom-
erate holding company was the Bangor Pun-
ta Company, formed from the Bangor &
Aroostook Railroad and the Punta Algre
Sugar Company More than one carrier
must be involved for the ICC to have juris-
diction Yet even though Bangor Punta
Company has another earner—the Van Bu-
ren Bndge Company—as a subsidiary, the
Commission did not assert jurisdiction be-
cause It claimed that the two carriers "are
constituents of a single integrated sys-
tem " "
Another possible example is that of
Northwest Industries, former owner of The
Chicago and North Western Railway In
1969, Northwest attempted to purchase B
F Goodrich In turn, Goodrich allegedly
attempted to evade the purchase by acquir-
ing a truck line, which required an ICC rul-
ing The Justice Department filed a com-
plaint that identified specified "markets in
which opportunities for reciprocity existed
and in which reciprocity effect was likely to
occur "^
Reciprocity was alleged to be a significant
factor influencing routing decisions by large
shippers by rail, thus Northwest would
benefit by reason of Goodrich's purchasing
power Goodrich would benefit from North-
west's purchases of equipment and fuel
from firms that use tires *' The proposed
acquisition collapsed
The ICC can compel transportation hold-
ing companies to be subject to the reporting
and securities portions of the Interstate
Commerce Act according to Section 5(b) if
the control of a carrier or carriers was
obtained under Section 5(2) authority
However, if there is only a single earner.
Section 5(2) authority is not required A
"single carrier" may include more than one
transportation subsidiary as long as all com-
1979 HOLDING COMPANIES AND PUBLIC POLICY
prise a single system '^^ When Woods Indus-
tries proposed to issue stock to purchase
United States Transports, Inc, the Com-
mission ruled that since it did not have jur-
isdiction under Section 5 of the Act, it did
not have junsdiction under Section 214 to
prescribe or approve the securities issued ^^
Thus a non-carrier easily obtained a carrier
In the case of United States v Marshall
Transportation the U S Supreme Court sup-
ported the Commission when it contended
that the agency lacked authonty over a non-
carrier control if the non-carrier fails to file
an application with the Commission Yet
the Court ruled that non-earners seeking
control of carriers are supposed to make an
application with the Commission Commis-
sion authorization is not required for a non-
carrier to control a single carrier or an estab-
lished system ""
The ICC has required more information
concerning dealings between railroads and
their holding companies The agency has
asked for "power to control the acquisition
of carriers by non-carriers and to exercise
some degree of control over such holding
companies '"•' No enabling legislative
action has been taken Nevertheless,
application of securities and reporting provi-
sions of Sections 20 and 20a has been al-
leged to destroy the benefits of diversifica-
tion simply from the delay inherent to such
proceedings •**
In the later New Haven case, the Inter-
state Commerce Commission held that
investments in outside activities should be
"a proper use" and "terms of the transac-
tion be reasonable, and in the public
interest '"*^ In 1962, the ICC indicated that
it might sanction true diversification (not
merely investments) by transport com-
panies The Commission allowed Grey-
hound Corporation to issue securities to
implement an acquisition because the pro-
gram was "designed to stabilize and
increase the earnings, and thereby improve
Its ability to provide the public with com-
mon carrier service ""^ Greyhound Cor-
poration was later able to acquire a sizeable
interest in Armour & Company, financed
by two revolving credit loans totaling $155
million, with the buses and equipment serv-
71
ing as first hen The ICC did not exercise
jurisdiction because securities were not
issued '•'
The question of what constitutes securi-
ties was raised by the ICC in 1971 under Ex
Parte 275, Expanded Definition of the
Term "Secunties " Pnor to that time, the
Commission had generally construed Sec-
tion 20a of the Interstate Commerce Act to
be limited in application to stocks, bonds,
notes, and similar instruments The new
definition would have expanded the types of
transactions considered to be securities to
include conditional sales contracts, chattel
mortgages, security agreements, mort-
gages, deeds of trust, loan agreements,
credit agreements, and advances ^^ Opposi-
tion from the motor carrier industry was co-
gent, with the basic arguments that such a
definition would have placed "a hardship
on the industry," and would have required
"a mammoth ICC task force at a very
considerable expense "^'
Ex Parte 275 was but one manifestation
of the ICC's attempts to control diversifica-
tion in the transportation industry Since
1969 the Commission has often warned of
potential danger to the public interest and
made several proposals before Congress to
give the Commission authority to regulate
"acquisition and control of carriers by non-
carriers and the common control of carriers
and non-carrier enterprises "^^ The Com-
mission has been particularly concerned
with diversion of transportation assets and
resources to the non-transportation holding
companies ^^
CONCLUSION
This paper has reviewed the conglomer-
ate trend with respect to transportation in
the United States Arguments for and
against conglomerates controlling common
carriers were discussed Basically, those
opposed to conglomerate control fear po-
tential anticompetitive effects and insuffici-
ent allocation of resources within the trans-
portation industry With respect to the rail-
roads and the Penn Central debacle, such an
argument would appear to have merit With
respect to motor carriers, such an argument
would become relevant //trucking should
cease to be perceived as an activity with
72 TRANSPOR TA TION JOURNAL
long-run profit and growth potential If so.
Congress might opt for limitations upon
ownership links between carriers and other
forms of business
Legislative history provides a precedent
in conglomerate restrictions—the Public
Utility Holding Act of 1935 The gas and
electric holding companies of the 1920s
combined non-competing monopolies, the
net effect of which was considered detri-
mental to the "public interest " These
chains were broken up "not as to achieve
competition among the pieces, but so as to
reduce the concentration of economic pow-
er under the control of one person or
groups "^^ The Act limits each system "to a
single integrated public utility system, and
such other businesses as are reasonably
incidental " ** Abuses found included
1 Operating companies overloaded with
debt and fixed charges
2 Operating companies imposed with
excessive charges for such services as
management, etc *^
The similanty of these abuses to those
found in the study of the Penn Central
debacle would indicate that a comparable
policy toward conglomerates in transporta-
tion might be needed Certain diversified
activities, specifically those directly related
to transportation or supporting services,
could be of high value to the public interest
Complete denial of such actions would dis-
allow the positive aspects that could result
However, the Interstate Commerce Com-
mission should have the authority to
investigate and control financial transac-
tions found to be contrary to the public in-
terest
FOOTNOTES
' James V Koch, Industrial Organization and Prices
(EngelwoodQifrs Prentice-Hall, 1974), p 208
^ Roy J Sampson and Martin T Fams, Domestic Transpor-
tation, Fourth Edition (Boston Houghton Mifflin, 1979), p
418
3 NewEngUimiInvestigation.211CC 560(1913)
* Colin Barrett, "Conglomerates and Public Responsibili-
ty," Trifffk World, 137 (March 1,1%9), p 89
^ The tefms holding company and conglomerate will be
used interchangeably A conglomerate is a firm that is in more
than one Ime of busmess A holding company is a single firm
that owns other companies that retain their indentities There-
fore, a firm that owns a earner and other identifiable non-
earner flrms IS both a conglomerate and a holding company
* Barrett, "Conglomerates," p 87
Winter
^ Dudley F Pegrum, "Restnictunng the Transport Sys-
tem," The Future of American Transportation (Englewood
Qiffs Prenuce-Hall, 1971), p 77
' Perry M Shoemaker, "Should Railroads Diversify for
Growth and Profits'" Transportation Journal 9 (Fall 1%9), p
8
' Conway L Lackman, "Implication of Conglomerates for
Transportation in the 197O's," Transportation Journal, 14 (Fall
1974), pp 34,39
•' The Penn Central and Other Railroads, A Report to the
Senate Committee on Commerce (Washington V S Govern-
ment PnntmgOfTice, 1973), p IS
11 D Phillip Locklm, fconofflfcso/rranqwital/on. Seventh
EdiUon (Homewood, ni Richard D Irwin, 1972), p 577
'^ Robert W Burdick, "A Study of Diversification in the
Motor Camer Industry," Transportation Journal, 9 (Summer
1970), p 22
'^ Joel Dean, "Causes and Consequences of Growth by
Conglomerate Merger An Introduction," St John s Law Re-
view. 44, Special EdiUon(Spnng 1970), pp 15-27
** The Conglomerate Merger tax Proposal H R 7489 By
Rep Mills (Washington American Enterprise Institute,
1969), pp 9-11
1^ James N Lone and Paul Halpem, "Conglomerates The
Rhetonc and the Evidence," Journal of Law A Economics 13
(Apnll970),p 150
"• Koch,p 212
'^ Robert L Conn, "Performance of Conglomerate Firms
Cotamtat," Journal of Finance 27 (June 1973), p 156
" Thomas F Hogarty, "The ProfiUbility of Corporate
Mergers," Journal of Business 43 (July 1970), pp 317-27
1' J Fred Weston and Searenda K Mansinghka, "Tests of
the EfTiaency Performance of Conglomerate Firms," Journal
of Finance, 26 (September 1971), p 251
20 Dean, pp 27-34
" Koch,p 213
22 Koch,pp 216-223
23 Burdick, p 22
2^ Joseph S Coyle, "Conglomerates Sprout a New Wing
Transportation,"/>^<ca/X>is(W6ur/on/'omm,ed JackW Far-
rell, Lowell E Pemne, and Stephen Tinghitella (Boston Cah-
nero Books, 1972), p 178
25 Coyle, p 180
2* Coyle, p 181
27 "Panel Discussion Pros and Cons of Conglomerates as
They Affect Transportation," (L L Waters, Moderator)
ICC Practitioners'Journal, 37 (September-October 1970), p
980
2' John C Narver, Conglomerate Mergers and Market Com-
petition (Berkeley and Los Angeles University of California
Press, 1967), p 137
29 "Panel Discussion," p 971
'^ As quoted m Coyle, p 184
31 Sampson, p 419
32 Sampson, p 338
33 24Stat 380and37Stat 566
3* 49 U S C Section 20a(2) untU October 17,1978, when it
became recodified by Public Law 95-473 as 49 U S C 11301
35 4 9 U S C 11343,formerly49USC 5(2)(a)
3* 4 9 U S C 11343,fonnerly49USC 5(11)
3^ Mergers and Concentration in the Trucking Industry, 85
Cong, 2nd Sess , Senate Report 1441 (1958), p 13
3' Staff Report to the Anti-Trust Subcommittee of the
Committee on the Judiciary, House of Representatives,
Judicial Doctrine qf Primary Jurisdiction as Applied in Anti-Trust
Smts 84th Cong , 2nd Sess (Washington, U S Government
PnntingOfTice, 1956), p 2
3» Barrett, "Conglomerates," p 90
*> Douglas V Rigler, "Conglomerate Mergers—Reciproci-
ty Real and Potential, as a Basis for Attack," St John s Law
Review, 44, Special Edition (Spnng 1970), 0 581
^1 Rigler
1979 HOLDING COMPANIES AND PUBLIC POLICY
^2 Colin Barrett, "Diversificauon-or Scatteration," ICC
Practitioners'Journal, 37 (January-February 1970), p 202 See
note43, 49 u s e 10706, fonnerly 49 U S C 5(b), 4 9 U S C
11343,formerly49USC 5(2)
43 Lackman, p 35
** Lackman, p 35
•5 Locklin,p 577
**'Barrett, "Diversification," p 203
4' New York, New Haven d Hartford Railroad Co, Investiga-
tion, 2201CC 505(1937)
** Barrett, "DiversificaUon," p 200
** Lackman,p 34
50 Oliver Patton, "I C C Expands Definition of Secun-
ties," Tnnvort TopJaNo 2096 (October 13, 1975), p 1, see
73
note 43
51 "Banker Views Ex Parte 275 as 'Threat' to Transport,"
TrtMc World, 167 (July 12,1976), p 10
52 See for example. Interstate Commerce Commission,
Eighty-Fifth Annual Report (Washington U S Government
PrmUngOffice, 1971), p 95
53 "Congress Told $3 Billion in Railroad Assets Were
Drained by Conglomerate," TrtOfic World, 166 (March 15,
1976), p 42
54 Paul J Garfield and Wallace F Lovqoy, Public Utility
Economics (Englewood a i i f s Prenbce-Hall, Inc, 1964), p
463
55 Barrett, "Diversification," p 205
5* Barrett, "Diversification," p 205