Thursday, January 30, 2014

How Bill Ackman and Hunter Harrison are destroying CP Rail

Financial media in Canada and beyond are singing the praises of CP Rail CEO Hunter "Hitman" Harrison after the stellar Q4 results posted yesterday.

And while the results may be stellar, the overall tone of unbridled adulation is unwarranted. Spend five minutes with a pencil and a scratch-pad and you'll see there are essentially two factors that account for Harrison's stellar results.

One is that Harrison is running the railroad with roughly 4,500 fewer employees. That's an annual payroll saving of somewhere north of $300m/year.

Harrison isn't the first business leader to come up with the idea of making fewer people do more work. What was quintessentially Canadian about previous CEO Fred Green was that he could have done the same thing but chose not to. I don't want to over-generalize and make this a contrast between US and Canadian management philosophies; there are certainly American entrepreneurs who have stopped short of squeezing the very last nickel out of every employee, just as there are Canadians who do, but on the whole, the slash and burn mentality is more American than it is Canadian.

The other factor is the exponential rise in crude-by-rail. Crude traffic has absolutely exploded for CP Rail, pun intended. That scratch pad should tell you that at 700 barrels of crude in a tank wagon at ten bucks a barrel for the average trip times the increase in crude traffic is good for another half billion or so per year.

You just solved the Ackman-Harrison miracle.

So Canada has 4,500 fewer well-paying jobs and CP Rail has a record cash hoard on hand of about $500 millions. Judging by the stories out there, the Ackman-Harrison management team intends to solve that problem with either a share buy-back or a special dividend. Either way, it's a gift the shareholders are giving themselves, and the biggest shareholder is Ackman's Pershing Square hedge fund.

While they're looting the cash reserves, Canada's rail infrastructure needs tens of billions of dollars in upgrades. A responsible corporate citizen would be investing the surplus in upgrading the infrastructure, not lining its own pockets.

Instead, Harrison, the guy who got a $50 million signing bonus for agreeing to do Ackman's dirty work, and Ackman, who was permitted by the government to rape this iconic Canadian company with a mere 14% shareholding, are roundly applauded by the sycophantic business media.

It'll be a great success story till one of those exploding crude trains takes out the downtown of a major city.


  1. It's a small smoke screen, but Joe public can't see through it, anyone in the know can see where this will go. Good article.

  2. Thanks. You can't blame Hunter or Ackman for the system that allows them to loot this iconic Canadian institution. They are just playing by the rules the ruling class has established, and by golly, that seems to be working out for them!
    But we can hold them and their flunkies in Ottawa accountable.