Combining the GM&N and
M&O into GM&O, 1938-40
proposed company which would emerge from the combination of the Mobile
and Ohio and the Gulf, Mobile and Northern would be a much stronger road
than either of the two roads ever could hope to be alone.
By aggressive management, the GM&N had been able to improve
wonderfully, but its possibilities for the future were definitely
limited. The M&O
had been in receivership so long that it was suffering greatly from lack
of a coordinated development policy.
The merger plan offered a quick solution to these and many other
problems of the two lines.
to the Coverdale and Colpitts study, the biggest advantage the new
company would have would be its chance to reduce expenses.
Under the plan of consolidation, the new company could expect to
save approximately $700,000 per year.
The report listed seven major areas of savings.
These were: (1) elimination of trackage payments from Jackson,
Tennessee, to Paducah; (2) elimination of some freight train miles by
concentration of through traffic on one route; (3) reduction of
maintenance costs by relieving some parts of line of its heaviest
traffic; (4) coordination of station, yard, and other terminal
operations at Mobile, Meridian, and Jackson, Tennessee; (5)
consolidation of traffic departments; (6) consolidation of general
office forces; and (7) consolidation of general supervisory forces.
estimates were based on operating all of the mileage of both companies.
It was assumed, however, that certain parts of the new system
would be used only for local service.
The route most favored for through freight service was the
M&O from Mobile to Meridian, Mississippi, and the GM&N from
Meridian to Union, Mississippi, then north to Jackson, Tennessee.
Beyond Jackson, the M&O line would, of course, be used.
This arrangement was preferred because it would allow the New
Orleans and Mobile business to be combined north of Union; it would also
keep Meridian on the route to and from Mobile.
This arrangement would not be obligatory, however, as the
operation could go either way with little loss in mileage.
addition to these savings from reductions in expenses, the new company
could expect to add about $800,000 in new revenues.
The report predicted that the new company would have a longer
haul on a substantial part of its freight tonnage.
Some tonnage which was being delivered to the IC at Jackson,
Tennessee, could be kept by the merged company and hauled on to St.
Louis. Also, some of
the business which had gone to the Chicago, Burlington and Quincy at
Paducah would now be taken on to St. Louis.
Another source of new revenue would be traffic bound for New
Orleans which the M&O had formerly hauled to Meridian, Mississippi
and there turned over to the New Orleans and Northeastern.
Under the new set-up, all freight destined for New Orleans which
the new company could control would go south from Jackson, Tennessee, on
the old GM&N line to Union and Jackson, Mississippi, then to New
report also discussed the physical properties of the two roads.
The M&O line north of the Ohio River had been built as narrow
gauge, and it still showed signs of this in 1938.
It had sharp curves and steep grades in many places.
Correction of these defects had been started in 1927 but was
stopped in 1928 with the task far from completed.
The worst spot on the entire line was Alto Pass Hill, where the
maximum grade was a little over 2 per cent and the maximum curvature was
over 8 per cent. The M&O line just south of the Ohio River was
exposed to the waters of the Mississippi River, and it was subject to
washing at flood stages.
of Jackson, Tennessee, the M&O was reported to be in somewhat better
condition as to grades and curvature than the GM&N.
The M&O line below Meridian was found to be superior in
respect to grades and curves to the GM&N line below Union.
The best section of the entire line from the standpoint of grade
and curvature was the old New Orleans Great Northern below Jackson,
on the GM&N lines was superior to that on the M&O, according to
the report. Fills
were found to be wider, and cuts were wider and better ditched.
Timber bridges on the GM&N were of creosoted materials and of
solid, deck-type construction.
Ballast on the M&O was found to be deficient, but the
GM&N was in good condition in this respect.
and tie plates on the GM&N were found to be superior to those on the
M&O. The GM&N
used treated ties with tie plates almost exclusively, however, the
M&O used few treated ties and fewer tie plates.
Rail standards on both roads were reported to be similar, with
each using 90-pound rail in replacement.
The rail on the M&O was older on the average than that on the
GM&N because of deferred replacement on the M&O.
A suggestion was made that both sections of the proposed company
should change to 112-pound rail on any tracks which might be used as
main freight lines.
report found that the new road would be adequately supplied with
locomotives, thus eliminating the need to buy new power units at this
time. The total
number of freight cars was not very far below those needed, but many of
the M&Oís cars were too short to hold some types of load.
The cubic content was too small for best use.
It was suggested that the new company should buy 800 box cars,
each 40 feet long, and 200 steel hopper coal cars, at the same time
salvaging many of the M&Oís smaller cars.
study concluded that it would take approximately $2,000,000 to rebuild
the M&O to GM&N operating standards.
The final pages of the report contained a statement as to the
efficiency of past operations on the M&O.
Since this fact was of special importance in reaching a basis of
agreement for the merger, this concluding statement is repeated in full:
It is difficult to know, in the absence of previous
inspection, what part of the present condition of the Mobile and Ohio is
due to poor original standards and what part attributable to deferment
of maintenance in recent years.
Our opinion is, however, that if the physical standards
prevailing in 1929 had been better, this property could have been
maintained and perhaps have been improved at an annual average
maintenance cost no greater than the average expenditure of recent
years. The matter of
tie renewals is a specific example in support of this reasoning, since
it costs only about 25 per cent more to install a treated, tie plated
tie, and yet the normal expectancy of life for the treated tie is
between twice and three times that of the untreated tie.
Likewise, the deficiency in ballast has undoubtedly rendered the
labor cost of keeping track in line and surface exceedingly high, as
compared with that of a road which has adequate support for its track.
GM&N had reached, prior to July 14, 1938, an acceptable trading
point with the Southern Railway for the M&O first mortgage bonds
which the Southern held.
A price of about 93 cents on the dollar was offered by the
GM&N, and it was accepted.
The Southern, by this arrangement, gave an option to sell at the
stipulated price. It
also agreed to assist the GM&N in its traffic connection with the
M&O. The receiver
of the M&O was in accord, and the Reconstruction Finance Corporation
was ready to pursue the matter further.
problem of reaching an agreement with the holders of the other M&O
securities still remained. Some
agreement on a program for these securities was the next essential step
in the whole merger effort. Accordingly,
Mr. Tigrett and Mr. Brown, as the committee from the Board, proceeded to
get in contact with the chairman of the Mobile and Ohio Refunding
Bondholdersí Protective Committee, Mr. F. W. Ecker, Vice-President of
the Metropolitan Life Insurance Company.
This committee had been formed to represent holders of all of the
M&O bond issues other than the first mortgage bonds, which were held
almost entirely by the Southern.
Ecker and his committee were interested in the GM&N proposal, and
they began active study of the problem almost at once. Two experts in railroad financial matters, Mr. J. S.
Pyeatt and Mr. E. D. Scruggs, were employed by the committee to examine
all of the phases of the merger proposal.
After Mr. Pyeatt and Mr. Scruggs had made an extensive trip to
Mobile, where they conducted a thorough study, they approved the merger
idea. Once this
approval was given, it was relatively easy for the two groups to
negotiate a tentative agreement to trade.
preliminary trading proposal was to reduce the face amount of the
M&Oís bonded debt from about $32,000,000 to about
M&O bonds except the first mortgage bonds would be reduced about 50
per cent. In
addition, all unpaid interest on these bonds, which by 1939 amounted to
about $6,000,000, was to be ignored.
The holders of these depreciated M&O bonds were to get about
a 50 per cent stock control of the new company as a partial
reimbursement for their losses.
GM&Nís Board met again on October 13, 1938, to hear the report of
the negotiations with Mr. Eckerís Bondholdersí Committee.
Since Mr. Budd felt that better terms could be arranged, no
action was taken at this time.
Mr. Budd was
authorized to contact Mr. Ecker personally in an effort to secure lower
terms. On October 26, however, Mr. Budd reported that no better terms were available, and the Board
of the GM&N formally voted to continue the merger proposal in
conformance with the tentative Tigrett-Brown-Ecker agreements.
Mr. Coverdale was absent from this meeting, but he sent a
telegram to the Board suggesting that the merger program go forward
without any further delay. After
this meeting, all of the GM&Nís energies were directed toward
executing the plans then drawn up.
Certain revisions were to be made, but there was no further Board
discussion concerning the basic objectives for the merger program.
the basis of this tentative agreement, the Refunding Bondholdersí
Protective Committee was revised into a Bondholdersí Reorganization
Committee. The plan
of action was to reorganize the M&O through bankruptcy proceedings
under Section 77 of the Bankruptcy Act and to merge the reorganized
company with the GM&N to form the permanent operating corporation.
Ecker was made chairman of the organization committee, and he was to be
actively associated with the whole transaction until it was consummated.
He was also to be one of the GM&Nís best witnesses for the
merger at the hearings of the Interstate Commerce Commission on the
getting these steps well under way, the GM&N felt it was finally in
a position to seek ICC approval of the merger proposal. On December 27, 1938, formal application was made to
the Commission for its permission to complete the transactions which had
to be performed in order to create the new Gulf, Mobile and Ohio.
ICC hearings were set for April, 1939, which seems a long time from the
December, 1938, application date.
Much remained to be done before the hearings, however, and the
GM&Nís management was kept quite busy with the preparation of its
case and with other matters which had to be settled.
of the most vital of these problems was the attitude of the railway
brotherhoods toward the merger.
After much discussion and study of the proposal, all of the labor
organizations decided that their interests demanded that they intervene
in the proceedings and oppose the merger.
This, of course, would have been a most damaging, if not a fatal,
action against the merger. The
record does not show whether management had made plans for this
eventuality or not. Presumably,
it would have been advantageous from a short-run cost standpoint for
management to have a free hand in deciding which employees would be kept
and which would be dispensed with.
It is not at all clear, however, that a policy of wholesale
dismissal would have been in the best interests of the company in the
long run. In any
event, the whole matter was amicably settled in January, long before the
hearings got under way. The
Company announced that both the GM&N and its potential successor,
the GM&O, would henceforth abide by the Washington Job Protection
Agreement in handling employees who might lose their jobs under the
proposed consolidation. With
this action, the company stilled all labor opposition to the proposal.
civic organizations also raised questions about the effects of the
merger. Mr. Tigrett
and others of the management group tried to answer these questions as
soon as they were raised. Mobile
was assured that it would not suffer any appreciable loss in employees,
and other communities were assured that service would not be curtailed
on either of the two parallel main lines.
The effect of these assurances can best be measured by the fact
that no civic or community groups from any locality opposed the merger
before the Commission. In
fact it was stated at the hearings and picked up in the ICC decision
that ďthe Public Service Commission of Mississippi approves the plan
in principle and the Alabama Public Service Commission states that it is
informed that the general public affected by the proposed unification is
unanimously in favor of it.Ē
case for the merger of the GM&N and the M&O into the new
GM&O had been well prepared by the time the hearings took place in
April. The outcome
was so important that everyone connected with the plan was very anxious
concerning the outcome. The
Illinois Central, two of its subsidiary companies, and a group of
minority stockholders of the M&O opposed the plan.
The minority stockholders had little chance of influencing the
proposal because the Southern, the majority stockholder, was getting
nothing for its stock and was not seeking any adjustment on that basis.
opposition of the IC was both real and strenuous, however.
Its position was that if the GM&N and the M&O were
allowed to merge the IC would suffer losses in revenue which it could
not afford. Because
the IC could afford no more losses, the merger should not be allowed.
In fact, the IC suggested that ďsomedayĒ the IC would buy up
these two lines and merge them into one major system.
The IC could not predict, however, when it could or would make
any effort to secure these other lines if the current merger plan were
prevented. The main
points from the IC brief opposing the merger are given in Figure 14.
arguments for the merger were presented by the GM&N officials and by
the representatives of the M&O securities holders. Mr. Tigrett opened the case for the GM&N, but he
spoke only of the general events leading up to the merger plan. The basic case for the consolidation was made by
Vice-President Frank Hicks. His
plea for the unification program is contained, in large measure, in the
The Mobile and Ohio traffic is quite similar in character
to that of the Gulf, Mobile and Northern especially as to its origin and
combination of the two lines will permit all of the traffic to move
together still farther north to East St. Louis and insofar as the
traffic to New Orleans is concerned, it will move over one line to that
point. The two lines
really supplement each other especially in that they together assemble
at Jackson, Tennessee, the traffic they will both receive at the Gulf
Ports and at Montgomery, Birmingham and Memphis and carry it over the
one line to East St. Louis
and as to the southbound traffic they will bring it over one line to
Jackson, Tennessee, thence over one or both lines to points of
destination or for delivery to connecting carriers.
The two lines are so located in relation to each other and can so
supplement each other in the performance of service that the two
operated together could support the two properties with the financial
set up proposed and furnish permanent service to the territory dependent
upon them whereas, separately operated, handling the same traffic the
future of each would be uncertain and as I have said before our
conclusion as to the success of the operation of the combined properties
does not contemplate the taking away of traffic from any other railroad
except to the extent that the movement of traffic may be diverted to
give the combined lines their maximum haul.
Certainly they are entitled to this.
The unification of these two lines will result in much
benefit to the patrons of the lines and in the first place certain
shippers will receive the benefit of single line rates instead of joint
line rates under the separate operation.
That is of particular importance in
the movement of pulpwood and other forest products, an important item of
traffic each line handles. The
shippers will receive benefits in having a more permanent and more
dependable transportation agency available.
The towns and communities along both lines will suffer if these
railroads are not merged not only in inferior service being provided but
they will not be able to attract industries particularly at local points
unless assurance can be made to prospective industries that permanent
and dependable railroad service will be available.
The merger of these two lines should make possible a showing of
that sort to industries seeking locations.
Uncertainty as to future of the railroad retards the development
of the territory dependent upon it.
Other forms of transportation may be used extensively but in the
eyes of permanent shippers good railroad transportation remains
indispensable, and ff they cannot find it at one place they will go
where they can find it. No
inducements to the establishment of industries are sufficient that do
not include adequate, dependable and permanent railroad transportation. This is the case of two relatively weak lines asking
authority to combine their operations on a showing that as a combination
they can succeed and adequately serve the public.
No representative of the public, even in the territory between
Jackson, Tennessee, and Mobile, Alabama, which is directly affected,
has, as far as we know, voiced any protest or objection to the proposal,
but on the other hand as far as we know or have heard the press and the
entire public affected is in favor of the unification of these
EXCERPTS FROM BRIEF FILED BY THE ILLINOIS CENTRAL IN ICC
DOCKET NUMBER 12272, et al.
The problem that confronts the Commission today is not so
much the preservation of the short and weak lines but the preservation
of the great trunk lines upon which the Nation is so largely dependent
for transportation service.
The Gulf, Mobile and Northern and its predecessors were
originally constructed as local railroads to serve local needs. Its essential place in a national system of rail
transportation is that of a local carrier.
The Gulf, Mobile and Northern has long recognized that it
must find new sources of traffic to replace its lumber traffic.
These new sources can be found only in through traffic moving
between the north and the south over the Illinois Central.
A condition of the success of this merger is the
diversion from the Illinois Central System of a very substantial
volume of freight, resulting in revenue loss to the Illinois Central
System of hundreds of thousands of dollars annually.
It cannot possibly be in the public interest to establish
a new trunk line between the Gulf ports and the north which must
depend for its existence upon the diversion of an ever-increasing
volume of traffic from the Illinois Central System, the indispensable
artery of rail transportation in the Mississippi Valley Territory.
The Illinois Central System has far greater
responsibilities to the public in the Mississippi Valley Territory
than the Mobile and Ohio, or the Gulf, Mobile & Northern or both.
In passing upon the question of the public interest, these
responsibilities and the extent to which the Illinois Central System
has met them should be given substantial and controlling weight.
The Illinois Central System has dealt with the Mobile
& Ohio and the Gulf, Mobile & Northern as
complementary and supplementary to the Illinois Central rather
than as strictly competitive railroads.
It will not be in the public interest to change this
The proposed merger will not result in any shorter
routes, in any better service, or in any lower rates and will not
create any new traffic.
There presently exist in the Mississippi Valley Territory
all the trunk lines and all the competition required in the public
No application for a merger of railroads has ever beení
presented to this Commission that failed so completely to meet the
test of the public interest as does the present one.
The proposal in essence is to merge these two weak lines into a
permanent trunk line. In
view of the existing competitive conditions in this territory, there
is no need for the creation of a new trunk line between the south and
the north. These two lines should remain as feeders to the trunk
lines in this territory. The
merger if approved will weaken the national system of rail
transportation at a time when that system, which still constitutes the
only common-carrier system of transportation, ought to be
Applicant says in its brief (p.
63) that if a territory has a population and production of
traffic and needs for railroad facilities sufficient to support a
railroad having proper and reasonable fixed charges, then the public
in that territory and the owners of that railroad should be authorized
to take the steps necessary to preserve its independence and insure
its efficiency. Applicant
offered no testimony to show that the local territory served by the
Gulf, Mobile and Northern has a population and production of traffic
sufficient to support the Gulf, Mobile and Northern. The necessity and usefulness of the Gulf, Mobile and
Northern in the general network of the railroads was a factor largely
ignored by the applicant in the presentation of its case.
The merger which the applicant here asks the Commission
to approve will not promote the public interest.
The prime purpose of the merger is to save the Gulf, Mobile and
Illinois Central System submits that the proposal is opposed to the
public interest in every respect and that the Commission should so
those who testified in behalf of the merger, no man outside of
professional railroad circles helped the case more than Mr. Ecker. He presented a strong argument both in his direct
testimony and in his cross-examination by Mr.
Smith, attorney for the IC.
The most important part of Mr. Eckerís direct testimony
The result of this investigation confirmed the views
preliminarily expressed by the representatives of the Gulf, Mobile and
Northern. In fact,
they were somewhat more optimistic than they had originally expressed in
As a consequence, we proceeded from that point to see
what type of deal could be worked out between the Gulf, Mobile and
Northern on the one hand and the Mobile and Ohio securities holders on
the other. The plan
which has been submitted at this hearing is the result of those
negotiations . . . We furthermore desired that full publicity be given to the
entire subject at the appropriate time, so that it could be considered
from all angles. Our
one other desire on our part was to bring these negotiations to a
conclusion as rapidly as possible so that our Mobile and Ohio security
holders might again receive a return on their property . . .
I have applied various tests to satisfy myself that this plan is
a reasonable one, a fair one and one that is the most-well it is the
best plan that we have been able to work out . . .
in addition to that is reasonable and appropriate as a capital
In his cross-examination by Mr. Smith, Mr. Ecker gave an
excellent rebuttal to the arguments against the merger.
The more important points in this exchange are repeated in Figure
FROM TESTIMONY OF F. W. ECKER IN
ICC FINANCE DOCKET NUMBER 12272 et al.
Q-(By Mr. Smith) Mr. Ecker, do you think in considering
plans for consolidations today some consideration must be given to the
oversupply of transportation facilities of all kinds in the country?
A-Well, it would seem to be that consolidation was
beneficial along that line, if there is an oversupply, and I
wouldnít be surprised that there was, why, that is an advantage of
Q-Well, then when you get to the consolidation of
particular lines would you give any consideration to the effect of
that consolidation upon existing established trunk lines?
A-Well, you mean do I feel that a consolidation of this
character is apt to have an important effect on the Illinois Central,
Q-Yes, as a concrete case.
A-Well, of course, it is a little difficult to determine
just what the effect will be.
In the first place, the principal way in which the Illinois
Central has been affected is the rerouting of the Gulf, Mobile and
Northernís traffic from Paducah to over the Mobile and Ohio lines,
but that is an established fact.
The Illinois Central is no longer going to be - I mean that
isnít something by which Illinois Central is going to be affected in
the future, thatís done, and I believe it has been so testified to
Q-But if this merger fails for one reason or other that
would very likely change that situation, wouldnít it?
A-I have been advised that would not both from the Mobile
and Ohio standpoint and the Gulf, Mobile and Northern standpoint, we
believe that it is our interest to work together and we anticipate
Q-Even though the merger for any reason or other may not
A-Even though the merger is not consummated.
Q-Well, you have got a very substantial interest in the
Illinois Central securities, havenít you?
A-That is correct.
A-If you are now speaking of the Metropolitan Life
Q-Yes, the Metropolitan Life Insurance Company.
A-Yes, a little over $30,000,000.
Q-And then I understand that in working this out, you
gave no consideration to the effect of this merger upon the Illinois
A-Mr. Smith, since you have asked me this question I will
tell you. The
Metropolitan has investments in practically all of the major railroad
situations of the country and a large number of the others as well.
In other words, we have a very broad stake in this railroad
picture. We have
long since adopted the policy of considering each situation as it came
up on the merits of that particular case.
If we endeavored to protect a selfish interest on a certain
principle here it would come back to bite us over there, but
irrespective of that, that is our policy. Now, it so happens that in this railroad picture there
seem to be two schools of thought or managements.
One is the school of thought that has been going on for a great
many years,, namely, to fight everybody else that you come in contact
with. The other
school of thought is to see what under the present circumstances can
two managements do that will be beneficial to both of their roads.
It just so happens that Metropolitan favors the second school
Q-Then your course is a rather opportunist course, that
A-I donít believe it is opportunist for one minute.
I think because of our very vital interest in this railroad
situation that we are anxious to see them stop fighting each other and
get together and work in harmony and work for the interest of
strengthening the properties themselves and when you have got a sound
industry itís a better condition for labor, it is better for the
individuals that live along your lines and it certainly is better for
your security holders.
Q-Well, you said you didnít think that we should look
too far into the future-?
A-I say in these times it is pretty hard to know what the
market is going to do tomorrow morning, let alone six months or five
years from now. In
other words, we may have a war tomorrow or not.
Q-1 thought you had reference, Mr. Ecker, to matters
other than the market.
A-Well, Mr. Smith,
this is a pretty small situation in comparison with the Illinois
Centralís net earnings that might be affected in this picture at
all, it seems to me, but thatís a matter of opinion, of course.
Q-Well, you have made a study of the net earnings that
the Illinois Central has had left in the past eight or nine years to
maintain itself as a solvent corporation, havenít you?
A-We are familiar in our organizations with the reported
Q-Have you made any intensive study of the competitive
situation in the Mississippi Valley for the purpose of developing what
the prospects are of railroads in that territory over the next decade
A-I am generally speaking familiar with the competitive
situation in the territory but I have made no such study.
someone suggest that they can be abandoned, Mr. Smith?
I think some of them.
Q-(by Mr. Smith) But donít you think, Mr. Ecker, as a
sound transportation standpoint more consideration must be given to
determining the lines that must be maintained as essential trunk lines
and those that are essentially feeder lines to those trunk lines in
matters affecting consolidation?
A-Mr. Smith, I would like to see something done.
The railroad situation is the only industry in this country
which has practically speaking not recovered from the depression.
Now, one thing, there are savings involved in these
consolidations and if one is brought to me I am exceedingly interested
in it . . .
Q-(by Mr. Smith) Now, Mr. Ecker, on general principles a
proposal that might wipe out the net of a corporation that had
$700,000,000 in assets might wipe out the net applicable after paying
interest? When a proposal
like that is presented wouldnít you consider a management would be
derelict in its duty to all of its security holders unless it placed
the facts before the body that in the end should determine whether
that erosion in its revenue should take place?
A-Well, again since you ask, I believe that a management
is just as derelict in its duty if it spends money unnecessarily in
advocating a case where it canít get anywhere, as if it fails to
spend money in something that is really to its benefit.
Q-Donít you think that in looking at the railroad plan
over the years and from a broad standpoint and under existing
competitive conditions more and more consideration must be given to
the question of what lines can be abandoned?
A-I think probably, but a lot of improvement can be had
in the railroad situation without actual abandonments by taking
advantage of rerouting the through traffic and still giving service to
lines that are not the through lines.
After all of the oral testimony and arguments had been
completed, the lawyers of both sides prepared their briefs for the
on October 13, 1939, the Commission announced its decision, which was in
complete support of the merger plan.
The main points in its statement were as follows:
The Gulf, Mobile and Northern
parallels the Mobile and Ohio from Mobile to Jackson, Tennessee at
distances from 17 to 39 miles.
The record indicates that unification would result in
much benefit to the patrons of the lines . . .
This is a case of two relatively weak lines asking authority to
combine their operations on a showing that as a combination they can
succeed and adequately serve the public.
No witnesses representing the Mobile and Ohio, its receivers, or
the public appeared at the hearing ...
Regardless of the road selected for main-line operation, local
territory will continue to receive service as good as or better than at
present, through coordination of schedules of local trains with the
schedules of through trains.
The Mobile and Ohio in reaching East St. Louis and having
connections there with noncompeting lines, is able to make rates on its
own account, while the Gulf, Mobile and Northern is compelled to secure
the concurrence of competing fines in making of rates. The line in a position to make rates it is contended
for the applicants, has a decided advantage in securing and retaining
additional points would be reached through union of the Mobile and Ohio
and the Gulf, Mobile and Northern, nor is any change to be made in
existing routes or gateways.
The applicants conclusions as to successful joint
operation do not take into account taking traffic away from any other
railroad except to the extent that the movement of traffic may be
diverted to give the combined lines their maximum haul, including
traffic expected to be diverted from the St. Louis, San Francisco at New
Albany, the Louisville and Nashville at Bells and the Southern at
the Gulf, Mobile and Ohio would be in a better position to solicit
through traffic between the Gulf ports and the north, and its
solicitation would be as vigorous as possible.
The record impresses us that, if the applicants are
successful in the equity proceedings before the Court, consummation of
the proposals presented to us will promote the public interest generally
by terminating the long receivership of the Mobile and Ohio and by
giving stronger assurance of preservation of essential parts of both
systems to the territory which they serve, through operating economies
and other benefits which union of the Gulf, Mobile and Northern and the
Mobile and Ohio will make possible.
Commissionís decision in favor of the GM&N/M&O merger did not,
unfortunately, close the issue.
It merely gave the green light to much of the work of the final
the Commissionís approval was received, it was possible to begin
pressure for settlement of the other problems blocking the move.
The Reconstruction Finance Corporation loan was approved by the
Commission at the same time, and the details connected with this could
be prosecuted vigorously.
The proceedings in the various court tests and settlements of
M&O affairs could be pushed. In December, 1939, the whole plan was submitted to the
stockholders of the GM&N and to the debentures holders of the New
Orleans Great Northern for their approval or rejection. At a stockholders meeting on December 29, the
GM&Nís owners ratified the proposals made by their Board of
Directors. The New
Orleans Great Northern security holders did not have to approve the
proposal since the new company would continue its lease with certain
relatively minor alterations.
It was desired, however, that New Orleans Great Northern
debentures be exchanged for stock in the new GM&O.
first quarter of 1940 passed, and still the merger was far from
completed. The legal
tangles of claims against the M&O and the problems of reorganization
were more difficult and time-consuming than had been expected.
The option to buy the M&Oís first mortgage bonds was
extended from March 1, 1940, to July 1.
At this point the Southern indicated that the purchase must be
completed or the option would not be renewed.
Because of the delay in negotiations for the merger, the GM&N
annual stockholders meeting, set for April 8, was not held.
A Board of Directors meeting was called for April 29, however, to
discuss the need for action in order to prevent the lapse of the M&O
this meeting a new plan was presented which called for the GM&N to
borrow $7,500,000 from the Reconstruction Finance Corporation and to buy
the M&O bonds before the merger was completed.
The members of the Board agreed to this proposal as the only
available alternative to collapse of the entire project. Mr. Budd, who was absent, sent a telegram to the
meeting signifying his approval of this plan.
other matters of importance came before this same Board meeting.
It was stated that the Wheeler-Lea Bill for the further control
of United States transportation was likely to be passed at the current
session of Congress. If
this bin were to pass and become law, the whole two-year effort to merge
the M&O and the GM&N might collapse.
This big seriously restricted, if it did not completely prevent,
Reconstruction Finance Corporation financing of railroad mergers.
The only apparent defense that the GM&N-M&O had was to
get the merger completed before final approval of the big.
other matter was the problem of office space in Mobile.
The officers of the GM&N wanted to have a home office built
which the railroad could purchase at a later date.
If the merger failed, however, the need for space would not be
nearly so great. The
Directors took no positive action on this plan at this time, but they
did approve the idea in principle.
the middle of May, all was in readiness for the GM&N to buy the
M&O bonds from the Southern.
The Reconstruction Finance Corporation had agreed to lend
$7,500,000 at 4 per cent for a period of 10 years, instead of for 6
months as the original proposal had stated.
The GM&N was to put up substantial collateral to protect this
Reconstruction Finance Corporation had agreed that, if the merger did
not go through as planned, the money would not be demanded promptly on
the date due. Also,
the additional money up to the original $9,500,000 would be forthcoming
if the merger did go through.
On this basis the GM&N went ahead and bought the M&O
bonds which the Southern was ready to sell.
to this action, as had been the case before every important step in the
past, the GM&N had asked Coverdale and Colpitts to study this move.
Their report was received on May 10.
The report stated that the purchase of $7,839,500 face amount of
M&O first mortgage bonds (total claim value $10,803,160) for
$7,295,465 plus 2 per cent interest from September 1, 1938, was an
excellent defensive move for the GM&N. The following reasons were given for this advice: (1)
bonds are on 493 miles of line from Mobile to the Ohio River plus all
the branches in Mississippi, this section of the M&O more than
earning its interest under receivers; (2) the M&O could earn more if
the GM&N owned bonds and if the Southern were out of the picture;
(3) the M&O and the GM&N could, by friendly agreement, save each
other money without merging; (4) if the M&O were controlled longer
by Southern, the GM&N would revert to its 1916 status, except that
it will be heavily in debt for building up a road with no traffic to
May the Company also decided to go ahead with plans for the new office
building in Mobile. Arrangements
were completed with the receiver of the M&O so that if the merger
plan fell through, the M&O would jointly share the space of the new
building. This was another
bit of evidence that the GM&N was correct in deciding to buy the
M&O first mortgage bonds.
As the M&Oís principal creditor, the GM&N would, be
able to influence M&O policy before the merger was completed.
example of this fact was the plan of the M&O receiver to set up an
equipment trust to purchase new equipment.
Under this program, the M&O ordered 1,000 steel box cars of
40-ton capacity, 250 steel hopper cars of 50-ton capacity and 2 Diesel
passenger engines of 2,000 H.P. each.
These two new locomotives were to be put on the rebuilt and
refurbished Mobile-St. Louis passenger run.
Originally it had been thought that new coach equipment would be
necessary, but it was decided to rebuild other equipment instead.
Even though the merger had not been completed, the GM&Nís
management was making every possible move in keeping with the idea of
the merger. Again the
road was ďgoing onĒ as best it could in its determination to grow
and render better service to the territory through which the road ran.
everything else, there had to be an end to the effort to merge the
M&O and the GM&N. Finally
the courts advertised that the M&O properties would be sold at
foreclosure proceedings on August 1 and that the final hearings would be
held on August 21 and 22. The
sale went off as planned, and the title to the M&O properties passed
to the representatives of the Mobile and Ohio Reorganization Committee.
On September 10 it was announced that when the deeds to this
M&O property had been made out to the GM&O, the agreement of
consolidation would be fulfilled.
After this action, the final consolidation papers would be
accordance with this arrangement, the merger was officially consummated
on September 13, 1940, more than 28 months after the first agreement
between the GM&N and the Southern.