New Board at Canadian Pacific Wastes No Time

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The 16-member board of directors of Canadian Pacific Railway Ltd. (NYSE: CP) today includes 7 new members nominated by William Ackman and his hedge fund, Pershing Square Capital Management. The new board wasted no time appointing one of Ackman’s designees as interim CEO and establishing a search committee to find a permanent CEO for the company. Previous CEO Fred Green resigned yesterday, along with five other board members following a losing battle with Ackman for control of the company.

Ackman had pushed for replacing Green with Hunter Harrison, former CEO of Canadian National Railway Co. (NYSE: CNI), but following the coup Ackman now said not to expect a coronation, “We’re going to do a proper job, we’re going to meet all the candidates and do it the right way.”

Canadian Pacific’s problems, at least according to Ackman, are due to high operating costs and he wants to reduce those costs. Ackman’s stated goal is to lower CP’s operating ratio — that is cost as a percentage of revenue — from around 80% to 66%. That would match the operating ratio at Canadian National, Harrison’s former company. Most of the credit for CN’s success, however, is attributed to Harrison’s predecessor.

CP’s main problem is that it operates mainly in western Canada in a nasty climate with difficult topography. The company hauls mainly commodity minerals and is captive to swings in the market for those minerals. Lowering costs won’t be easy once the workforce is trimmed.

CP’s ability to compete with the likes of Union Pacific Corp. (NYSE: UNP), CSX Corp. (NYSE: CSX), Burlington Northern Santa Fe (BNSF), owned by Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A), and Norfolk Southern Corp. (NYSE: NSC) is dubious, given that CP is much smaller than any of these and that the only likely merger possibility is Kansas City Southern (NYSE: KSU). A potential merger between Canadian National and BNSF was squashed by regulators in 1999, so a tie-up with one of the larger railroads is unlikely.

What is likely is that Ackman has shaken up sleepy Canadian companies and shareholders. This was Canada’s first big, public battle over corporate direction and many observers believe that it’s just the beginning.

Who could be next? A good bet might by phone maker Research in Motion Ltd. (NASDAQ: RIMM) whose recent struggles are well documented.

CP did not get much of a share price boost yesterday, closing at $75.07 in a 52-week range of $44.74-$79.91. The stock is inactive in pre-market trading this morning.

Paul Ausick