CHAPTER XII

Combining the GM&N and M&O into GM&O, 1938-40

1938

The 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.

 According 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. 

These 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.

In 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 Orleans.

The 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.

South 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, Mississippi.

Maintenance 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.

Ties 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.

The 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&O’s 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&O’s smaller cars.

The 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.

The 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.

The 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 Bondholders’ 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.

Mr. 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.

This preliminary trading proposal was to reduce the face amount of the M&O’s bonded debt from about $32,000,000 to about  $18,000,000.   All 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.

The GM&N’s Board met again on October 13, 1938, to hear the report of the negotiations with Mr. Ecker’s Bondholders’ 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&N’s 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.

On the basis of this tentative agreement, the Refunding Bondholders’ Protective Committee was revised into a Bondholders’ 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.

Mr. 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&N’s best witnesses for the merger at the hearings of the Interstate Commerce Commission on the proposal.

After 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.  

1939

The 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&N’s management was kept quite busy with the preparation of its case and with other matters which had to be settled. 

One 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.

Certain 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 “the 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.”

The 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.

The 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 “someday” 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.

The 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 following statement:

The Mobile and Ohio traffic is quite similar in character to that of the Gulf, Mobile and Northern especially as to its origin and destination.   The 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 properties.

Of 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. Ecker’s direct testimony follows:

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 my office.

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 structure.

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 15.

After all of the oral testimony and arguments had been completed, the lawyers of both sides prepared their briefs for the Commission.   Finally, 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 traffic.   No 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 Middleton.   However, 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. 

1940

The 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&O’s 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 bond option.

At 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.

Two 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.

The 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.

By 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 loan.   The 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.

Prior 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 haul.

In 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&O’s principal creditor, the GM&N would, be able to influence M&O policy before the merger was completed.

Another 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&N’s management was making every possible move in keeping with the idea of the merger.   Again the road was “going on” as best it could in its determination to grow and render better service to the territory through which the road ran.

Like 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 completed.   In 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.