Canadian National Railway Corporation

CNR

Canadian National Railway is in the logistics business, focused on railways. The company operates over 20,000 kilometers of track across North America. The company is at presently almost entirely focused on the railroad business. There are a couple of options for a merger or acquisition. One is to expand within the railroad business. This would allow CNR to maintain its core competencies in the industry, but increase its ability to comprehensively serve the customers. There are a number of railway companies available, including direct competitor Canadian Pacific and a number of U.S.-based railways that would help CNR to expand its presence south of the border.

Another option for CNR would be to expand into other areas of logistics. Rail is somewhat limited in that the freight is fixed to the rail lines. Customers not located on the rail line must then take the freight from the rail yard and put it onto trucks for final delivery. In addition, a substantial amount of freight comes from the ports to the railway. As such, there is substantial room for horizontal integration into other logistics businesses, by taking over trucking or shipping companies.

There are two compelling reasons, however, to invest in rail. The first is that rail is where CNR's core competencies lie. The company would only gain marketing synergies from expanding into other areas of logistics, and would not be able to make any operational improvements to industries in which is has no experience. The second reason is that the company has already undertaken an expansion strategy into the United States in recent years, as means of controlling more North America-wide trade. CNR is aiming to grow its share of the rail market. Aside from buying CP, which would lead to significant duplication of routes. Most other railways in Canada are small, and would offer little strategic benefit. However, expanding south of the border does have strategic benefit to CNR.

It is recommended that CNR attempt to merge with or otherwise acquire Kansas City Southern Railway Co. This company has an extensive network that extends into Mexico and beyond to the Panama Canal. This acquisition would therefore give CNR control over rail trade in much of North America. Trade with Latin America is growing, and NAFTA has meant in influx of trade with Mexico. A rail corridor between Mexico and Canada would allow for an increase in trade between the two nations. The current southern extent of CNR's track network runs into central Illinois and both meet in St. Louis. There may be only minimal work needed to link the two networks.

Kansas City Southern is affordable for CNR. KSU trades on the New York Stock Exchange and has a market cap of $4.96 billion (MSN Moneycentral, 2010), compared with the $30.77 billion market cap of CNR. Thus, an equity-based purchase can be made. Although CNR does not have an unusual amount of debt for a railroad, it may wish to mix a heavy portion of equity into the purchase price. For its part, KSU is relatively healthy financially, although it is facing declining earnings and income.