Merging to Build New Empires

By Charles P. Alexander

Smokestack America seeks strength through size

Only a decade ago such big deals would never have been seriously considered for fear that Government antitrust officials would stop them dead. But the merger plans announced last week by two pairs of leaders in the railroad and steel industries have a good chance of winning Washington's approval. With Smokestack America in a period of decline and retrenchment, the Reagan Administration tends to look favorably on consolidations that could make weak companies stronger. In addition, stiff competition from abroad has made the antitrust laws increasingly irrelevant for many important industries.

Trying to Survive in Steel

No part of Smokestack America is sicker than the steel industry, which lost $3.2 billion last year. Since the late 1970s, the number of blue-collar workers in the industry has plunged from 340,000 to 173,000. Formidable foreign competitors, led by the Japanese, have captured nearly 20% of the U.S. market. Doubts are rising as never before about America's ability to remain a major steelmaking power.

Two of the industry's biggest companies have decided that the only way to survive the slide is to get together and streamline their operations. Through a swap of stocks valued at $770 million, Republic Steel of Cleveland, the fourth largest U.S. producer, intends to merge with Pittsburgh's Jones & Laughlin, which ranks third in the industry and is a subsidiary of LTV Corp., a Dallas-based corporation that also manufactures aircraft parts and rockets for the military. Together, Republic and Jones & Laughlin control 15.9% of the steel market, and the combined company, to be called LTV Steel, will stand second only to U.S. Steel, which has 17.2%. The new firm will be particularly powerful in the market for steel used in oil-drilling equipment.

In a joint statement, LTV Chairman Raymond Hay and Republic Chairman Bradley Jones said that no antitrust problems should arise from Washington because the merger would create "a stronger, more efficient steel company, better able to compete in a new world-market environment." Jones will head LTV Steel, which will be headquartered in Cleveland. Some Republic employees suggested in jest that the new company be called Bradley Jones & Laughlin.

The marriage proposal is a triumph of hope over experience. Republic lost $239 million last year on sales of $2.7 billion, while Jones & Laughlin dropped $299 million on sales of $3 billion. In the first six months of this year, the two firms lost an additional $219 million. The new company will undoubtedly cut back and consolidate overlapping operations to save money. In Cleveland, for example, both Republic and Jones & Laughlin have plants that turn out flat rolled steel for cars and appliances, but LTV Steel will not need all the production capability of those two mills. Some industry experts estimate that 20% or more of the company's potential annual steelmaking capacity of 24.6 million tons could be shut down. Observed William Stephens, an analyst who follows LTV for the Rauscher Pierce Refsnes securities firm in Dallas: "This merger won't be one plus one equals two. It will be one plus one equals ll/2 or 1%." Stephens predicted, however, that a slimmed-down company would be able to return to profitability.

Plant closings would threaten 64,500 employees at Republic and Jones & Laughlin, of whom 17,000 are already on layoff. United Steelworkers President Lloyd McBride said that his union might oppose the merger if "adequate provisions" were not made for the "job security and wellbeing" of the workers. But many employees were feeling at least a temporary sense of relief, particularly at Republic, where rumors had been swirling for a year that the firm could fold at any time. Said one Republic worker last week: "If we don't merge, maybe there won't be any jobs at all." U.S. antitrust officials may come to the same conclusion when they review the deal in the coming weeks.

Working on a Bigger Railroad

The Santa Fe and Southern Pacific railroads have been rough-and-tumble competitors since the 1880s, when they hauled carloads of cattle, sheep, grain and fortune-seeking passengers across the vast expanses of the American Southwest. Last week the two old rivals said that they would join forces to form the third largest railroad in the U.S., with 26,200 miles of track. If the $6.3 billion merger is completed as planned by the end of the year, only the Burlington Northern railroad (28,900 miles) and CSX (26,400) will be bigger. The combined Santa Fe-Southern Pacific network will stretch from Chicago in the North to New Orleans in the South to Portland in the West.

The new company will be not just a railroad, but a business empire. Over the years 30th lines have aggressively diversified. Chicago-based Santa Fe Industries (1982 -evenues: $3.16 billion) has gas wells, coal and uranium mines and a forest-products division. The company is one of the largest U.S. producers of heavy crude oil. San Francisco-based Southern Pacific (198_ revenues: $3.1 billion) operates petroleum pipelines and leases executive aircraft truck fleets, computers, mining machinery and communications equipment. With huge holdings of farm land, timberland and urban real estate, Southern Pacific is the largest private landlord in California.

The company also owns the nation's only operational coal-slurry pipeline, which runs 273 miles between Arizona and Nevada. The pipeline allows coal that has been mixed with water to be transported swiftly and cheaply. Though Southern Pacific and other companies have wanted to build numerous slurry pipelines, most railroads have opposed the projects as a threat to the lucrative business of shipping coal by train. Lobbying efforts by the railroads, along with rail labor unions and farmers, helped persuade the House to defeat last week, by a vote of 235 to 182, a bill that would have allowed slurry companies to build pipelines across private property if the landowners were compensated. The decision was a severe blow to the future of the pipelines.

Santa Fe and Southern Pacific see their union as the best way to compete with two other big Western railroads that were built up through mergers: Burlington Northern and Union Pacific. Says Southern Pacific Chairman Benjamin Biaggini: "It looks as if there isn't going to be a place in the West for smaller systems that don't go everywhere and do everything." Santa Fe and Southern Pacific intend to become more efficient by abandoning duplicate routes and pooling equipment. The combined 57,000-member work force of the two railroads will shrink, but probably through attrition rather than layoffs.

Santa Fe tried to take over Southern Pacific in 1980, but doubts about getting Government approval and disputes over who would run the company caused the deal to collapse. New talks began a few months ago between Biaggini and Santa Fe Chairman John Schmidt, who says that "negotiations suddenly got hot last Friday, and we worked it out over the weekend." Biaggini, 67, conceding that "it's time now for me to go," intends to retire, and Schmidt will run the new corporation from Chicago. An ambitious executive who grew up in a blighted Chicago neighborhood and once sold peanuts, baby pictures and encyclopedias, Schmidt is considering an effort to buy Conrail, the big Government-owned Eastern system, and link it to the Southern Pacific and the Santa Fe. That grand plan would put Schmidt in charge of the largest U.S. railroad and the first transcontinental line owned by a single company. --By Charles P. Alexander. Reported by Lee Griggs/Chicago and Russell Leavitt/Los Angeles

With reporting by Lee Griggs, Russell Leavitt This file is automatically generated by a robot program, so viewer discretion is required.