Patrick Ottensmeyer, president and CEO of Kansas City Southern railway, in Kansas City, Missouri, in Dec. 2019.ROY INMAN
Pat Ottensmeyer likes to say many of his contemporaries in the railroad industry are “guys with ugly hands.”
The chief executive at Kansas City Southern – a company coveted by Canada’s two largest railroads – is talking about peers who busted fingers while working on freight trains early in their careers. Mr. Ottensmeyer highlights their scars with some respect. Bent digits and swollen knuckles speak to operational expertise.
However, the 63-year-old CEO also conjures up that image of ugly hands to diplomatically poke at rail’s old guard, including the revered Hunter Harrison. A lifetime railroader who passed away in 2017, Mr. Harrison championed an approach known as “precision scheduled railroading” (PSR) during CEO stints at four companies, including Canadian National Railway Co. and Canadian Pacific Railway Ltd.
At conferences and in interviews, Mr. Ottensmeyer critiques his industry and its legends, gently, for being too inwardly focused, for putting efficiency ahead of clients. While he recruited a pair of Mr. Harrison’s former colleagues to instill KCS’s version of precision railroading, the CEO wants the railroad’s culture to be centred on clients. He opened a recent session with management consultant Korn Ferry by saying: “We are not in the business of running trains. We are in the business of servicing customers.”
KCS is also in the business of linking Mexico’s factories and farms to the rest of North America. Cross-border traffic on its 11,000-kilometre network is increasing at a double-digit pace – well above the low-single-digit growth in U.S. rail shipments – as manufacturers shift to “nearshoring” to shorten supply chains that used to stretch to Asia. The prospect of owning the only continental railroad, stretching from Mexico to the U.S. heartland and Canada’s Atlantic and Pacific coasts, made KCS the target of a high-stakes bidding war this spring.
The unfolding of the Kansas City Southern takeover saga
KCS struck a friendly, US$25.2-billion merger in March with CP Rail. The bid was topped the following month by a US$30-billion bid from CN Rail. Late Thursday, KCS broke hearts in Calgary, home to CP Rail, by switching horses to endorse the offer from Montreal-based CN Rail. CP Rail now has four business days to up the ante, although in a news release on Thursday, the company said: “As we’ve said repeatedly, we are not going to enter into a bidding war.”
Mr. Ottensmeyer and executives at KCS, CP Rail and CN Rail declined to be interviewed, owing to the continuing takeover battle.
The KCS bidding war values the railroad at more than three times what it was worth when Mr. Ottensmeyer was named CEO five years ago. The price tag is an endorsement of a leader who never broke his fingers working in a rail yard.
Mr. Ottensmeyer grew up on an Indiana farm. He earned a finance degree at Indiana University and had a successful first career in banking before one of his railroad clients – Burlington Northern Santa Fe Corp. – recruited him in his mid-30s. In an industry that tends to reward lifelong commitment, this CEO walked away from Burlington Northern, mid-career, rather than accept a transfer to Texas and uproot his Chicago-based family. He has three daughters.
Railway Age magazine’s future “railroader of the year” then spent five years as an executive at a pharmaceutical firm, teaching finance part time at DePaul University and enjoying Chicago Cubs baseball; he has a box reserved this year to celebrate Father’s Day in June. In 2006, KCS lured him away from Chicago and back to the rails as its chief financial officer. Two years later, he asked to move to head of sales and marketing, with an eye toward winning the top job. In 2016, KCS named Mr. Ottensmeyer its CEO.
Mr. Ottensmeyer’s willingness to follow a different track saw the smallest of North America’s seven major Class 1 railroads expand south into Mexico. In recent years, KCS spent more than US$5-billion in Mexico, linking a massive terminal on the Pacific coast and 12 ports on the Gulf of Mexico to the U.S. heartland.
For its Canadian suitors, the appeal of KCS also includes the company’s success with a kinder, gentler version of precision railroading. In the past three years, Mr. Ottensmeyer hired two executive vice-presidents who worked closely with Mr. Harrison at CN Rail – Sameh Fahmy and John Orr – to roll out KCS’s own PSR strategy.
“In what I would call PSR version 1.0, you improve your operating ratio but annoy stakeholders,” said analyst Anthony Hatch at New York-based ABH Consulting. “The better approach to PSR, version 2.0, uses efficiency to improve service. Pat was quick to grasp this, to use PSR to drive a consistent experience for customers.”
Over the past decade, KCS’s revenues rose by an average of 4 per cent annually, reflecting a relatively mature rail industry. However, the company’s earnings per share increased by 12 per cent a year, as KCS grew far more efficient. “Pat’s done a terrific job, and whoever wins KCS is getting a jewel of a railroad,” said Mr. Hatch, who has been dealing with KCS’s boss as an analyst and consultant for more than 20 years.
KCS is also a takeover target because Mr. Ottensmeyer proved a skilled lobbyist. The morning after Donald Trump’s presidential election victory in 2016, KCS’s stock price dropped 12 per cent, on expectations the Republican would tear up the North American Free Trade Agreement and decimate KCS’s cross-border business. Traffic to and from Mexico accounts for almost 40 per cent of the company’s sales, and half the KCS workforce lives south of the U.S. border.
Prior to the 2016 election, Mr. Ottensmeyer had steered clear of politics. But after Mr. Trump was elected, Mr. Ottensmeyer pledged in a letter to KCS employees to do whatever it took to ensure a continued, free flow of goods across the border. He became the American chair of the U.S.-Mexico Economic Council and started making the rounds in Washington, D.C.
“Pat’s priority was to be the best possible advocate for trade with Mexico and Canada,” said U.S. Chamber of Commerce senior vice-president Neil Herrington, who spent the past six years working closely with the KCS CEO, considers him a friend, and says he still doesn’t know which party Mr. Ottensmeyer supports. “Pat’s approach was to represent the U.S. heartland, the automakers, the farmers, the steel makers who were critical to the Republican party, and who were benefitting from NAFTA,” Mr. Herrington said.
Mr. Ottensmeyer won over the Trump administration with old-fashioned tactics, Mr. Herrington said. The CEO tenaciously landed face-to-face meetings with key officials such as commerce secretary Wilbur Ross and agriculture secretary Sonny Perdue, then convinced them that American industry and voters benefitted from cross-border trade. In 2018, Mr. Trump signed the new U.S.-Mexico-Canada trade deal.
“Whoever wins KCS will own the only USMCA railway, and that railway will be a tribute to what Pat has achieved in the U.S. and Mexico,” Mr. Herrington said.
When you’ve successfully concluded the art of the deal with the Trump administration, closing the sale of a company to one of two Canadian railroads that want to throw money at KCS shareholders isn’t a major challenge. Mr. Ottensmeyer can also lean on KCS chairman Robert Druten, who is accustomed to making deals under pressure.
Mr. Druten, a retired executive at Hallmark Cards Inc., joined the board of American Italian Pasta Co. in 2007 to help clean up governance after an accounting scandal. He ended up running the board’s audit committee. Three years after Mr. Druten arrived, a rival food producer snapped up the pasta company for US$1.2-billion.
One Canadian railroad is going to win KCS in coming months, while the other will be left at a significant competitive disadvantage. The losing bidder will be smaller than North American rivals – in an industry where scale drives efficiency – and likely destined to stay that way. The industry’s U.S. regulator, the Surface Transportation Board (STB), imposed a moratorium on takeovers among Class 1 railroads over the past two decades owing to competition concerns. Approving the KCS takeover would be a notable exception to the rules, and analysts say the STB is unlikely to approve any more mergers.
Closing the KSC sale is expected to take more than a year, with the railroad put in a trust and led by Mr. Ottensmeyer until the STB signs off on the acquisition sometime in 2022. Colleagues say that gives the CEO an opportunity to be part of one of his favourite railroad traditions for at least one more year.
Every Christmas, KCS employees transform retired rail cars into the Holiday Express, with a decorated locomotive, a flatcar carrying Santa’s sleigh, a gingerbread boxcar, workshop of elves, a reindeer stable and a little red caboose. The train tours cities on KCS’s U.S. network, with kids climbing aboard to meet Santa, and has raised more than US$2-million for charity.
In recent years, Mr. Ottensmeyer and his family were the largest single donors. Last year, the fundraiser was cancelled because of the pandemic. This year, the CEO can look forward to final ride on the Holiday Express before handing his company to a Canadian buyer.
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Andrew Willis