One Man Wrecking Crew:
Ben Heineman and the RI-UP Merger
Gregory L. Schneider
gschneid@emporia.edu
Rock Island—1970s
Why Did the Rock Island Fail?
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--Conventional Wisdom:
– Rock Island management was incompetent and allowed the
railroad to decline;
– Selfish Rock Island bondholders (Henry Crown) refused to
reinvest in the property once merger was under way with UP;
– Rock Island looked to UP and SP to save the property;
– Interstate Commerce Commission (ICC) killed the railroad;
– Judge Frank McGarr killed the railroad in 1980 by his decision to
liquidate the property (Fred Frailey in Trains magazine-2011)
– Rock Island could have been saved—some 5,000 miles of system
still in use;
– Labor Unions helped kill the Rock Island—strike in 1979 was
death knell
Challenges to Conventional Wisdom
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--Rock Island story should be seen as a part of
railroad problem:
– Regulation was a serious issue and impacted what
management could do (or not do) and issues
regarding wages and rates
– Merger was opportunity for corporate diplomacy and
UP was isolationist
– Could the Rock Island survive a changed
transportation economy (highways, barges, airlines)?
– Government failure to bring prosperity to passenger
system and to northeastern railroads leads to only
solution: deregulation and rationalization of system
Merge or Die
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1. Railroads were hamstrung by regulations and inability
to attract enough capital investment—average rate of
return of around 4% in 1950s; 2% in 1970s
2. merger was one solution and beginning in 1959 the
merger era begins
3. Rock Island’s board seeks merger and studies begin
to merge with Milwaukee Road—rejected after several
studies—why?
4. In 1962 the Union Pacific becomes the partner—
Southern Pacific joins—roads file necessary paperwork
with ICC in 1963—stock buyout of RI by UP—what was
UP’s interest?
One Man Wrecking Crew
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--Heineman’s strategy:
– Ruin the Rock Island merger with UP by offering stock swap and
exchange offer (hostile takeover)—more attractive than UP offer
initially and UP had to renegotiate terms of the deal
– Once in ICC’s hands, show how RI-UP merger would alter
regional rail map and propose instead a “merge a trois” between
RI, CNW and Milwaukee Road
– Delay, delay, delay—keep the merger before ICC and prevent
collapse of CNW in process—one railroad would survive and it
would be the CNW
– Diversification—Heineman diversifies into Northwest Corporation
and sells railroad to employees—Larry Provo continues as
intervener in Rock Island merger
Part One: Hostile Takeover
1. Heineman’s strategy—save CNW by offering
to buy out Rock Island stockholders—what was
offer and impact?
 2. Counter UP in press and with offer which
looked attractive on surface
 3. Argue that midwestern regional system was
better than UP-RI merger—merger with CGW,
Milwaukee Road and Rock Island
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Impact
1. Heineman fails to impact stockholders—but,
end result is improved UP stock offer to
purchase Rock Island
 2. Keeps up pressure to focus on regional
solution
 3. Proceeds with acquisition of CGW, merger
discussions with Milwaukee Road
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Part Two: ICC Intervention
1. How did Heineman intervene in the ICC
hearings?
 2. Has allies with railroads like ATSF (split of
Rock Island into south/north)—Santa Fe offers
$100 million for southern lines
 3. Convinces other railroads that Midwest
solution is superior
 4. Ally with ICC ? Nathan Klitenic and his report
winds up agreeing with Heineman
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Bleak House
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1. Intervention by other railroads—5 railroads initially
oppose merger, joined by 7 others—why?
2. hearings delayed until 1966—finish in 1968—then . . .
A waiting game (48,000 pages of testimony, 200,000
pages of evidence, 247 days of hearings in total)—
longest and biggest case in ICC history
3. use of Rock Island to remake western railroad map—
Nathan Klitenac—report released in 3 volumes (final
volume in 1974 recommends merger with conditions)
Rock’s Worsening Condition
1964—last profitable year--$3.8 million net income
 1965—(1.4 million)--loss
 1966—(2.6 million)
 1967—(18 million)
 1968—(9.8 million)
 1969—(11.3 million)
 1971—(6.7 million)
 1972—(6.1 million)
 1973—(14.9 million)
 1974—(23 million)
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Langdon and Crown
Diversification
1. Heineman pursues diversification and
creates Northwest Industries in 1968
 2. Larry Provo takes over as CEO of CNW
and sells railroad to employees
 3. Provo continues strategy of rejecting
RI-UP combination—urges Rock Island
liquidation in 1975
 4. Has an “affair” with UP and John
Kenefick
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Provo and Kenefick
Impact of CNW Strategy
1. CNW survives and eventually merges with
Union Pacific in 1996
 2. Diversification strategy is something Rock
Island could not do in 1970s
 3. CNW purchases spine line from Rock Island
after bidding war with Soo Line (for $100
million)
 4. CNW pared mileage under deregulation and
relied on UP for trackage rights to coal fields in
Wyoming
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Impact on Rock Island
1. Is Heineman the main culprit in the Rock
Island’s failure? In a way, yes!
 2. Heineman outwits RI-UP (Langdon realizes
this and urges a deal, but UP refuses—”leave it
to the lawyers”)
 3. UP diversification helps in establishment of
relationship with CNW to detriment of merger
partner
 4. Rock could not withstand continued pressure
of CNW in bankruptcy
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