CANADIAN PACIFIC’S STRUGGLE TO REINVENT ITSELF MIRRORS THAT OF THE ENTIRE CANADIAN ECONOMY
CANADIAN PACIFIC’S STRUGGLE TO REINVENT ITSELF MIRRORS THAT OF THE ENTIRE CANADIAN ECONOMY
Thousands of Canadians take William Stinson’s job very personally. As chairman and chief executive officer of Montreal-based Canadian Pacific Ltd., Stinson, 59, is responsible for much more than Canada’s fifth-largest company: he is also the custodian of some of the country’s best-known and most-cherished corporate assets. In 1885, Canadian Pacific (CP) completed construction of the national railway that first transformed Canada into a united nation. Later, the company constructed a grand hotel in almost every major city it served by rail. As a result of CP’s place in Canadian history, Stinson says, he regularly receives letters from people commenting on everything from CP’s share price to the color of a new carpet installed in one of its historic hotels. In fact, after restoration of the 78-year-old, 198-room Hotel Macdonald in Edmonton was completed in May, 1991, more than 30,000 people toured through it in just three weeks. Said general manager Tony Cary-Barnard: ‘There seemed to be a real sense of public ownership in the hotel. It was quite astonishing.” For his part, author and railway historian Pierre Berton told Maclean’s that CP is “an integral part of the national consciousness.”
The fascination with CP is not limited to Canadians. For years, foreign investors have used the conglomerate as a proxy for Canada because its widely diversified holdings offer exposure to the key sectors of the economy. And like Canada’s currency and debt issues, a strong reliance on foreign capital
has made the company’s stock especially prone to volatile swings, based on investor perceptions. During the recession, CP’s financial performance—and its share price—suffered a devastating slump. Between 1990 and 1992, the company posted a loss of $1.5 billion and its long-term debt soared to $7.9 billion by the end of last year. Still, as domestic economic prospects have brightened recently, CP’s market performance has reflected growing investor optimism. As well, in the first three months of this year CP reported a profit of $22 million, compared with a loss of $40 million in the first quarter of 1992.
But just as the convergence of a severe economic downturn and the pressures of greater North American trade have wrought fundamental changes in the Canadian economy over the past three years, CP has also been forced to undertake some profound parallel measures. With the exception of its 48-per-cent stake in a telecommunications company, Unitel Communications Inc. of Toronto, the company’s assets are heavily weighted to the cyclical resources industries, which represent Canada’s traditional “old” economy. But they are the same segments that have suffered from depressed demand, increased global competition and capital-intensive technology. In order to reinvent CP as a more responsive, efficient operation, Stinson is trying to restructure CP and to replace its centralized, hierarchical management with a scaled-down team approach.
Now, Stinson is dividing his sprawling company into smaller, more autonomous units where employees have more direct responsibility—and rewards—for financial performance and productivity. CP is selling assets that managers identify as uncompetitive, including several of CP Forest Products’ container companies. And several CP operations have implemented so-called total quality management programs, which ensure that all employees are responsible for a product’s quality at all points in its production. “Ifs more than motherhood and buzzwords,” Stinson told Maclean’s. “It’s an essential part of survival in current markets.”
Despite CP’s strong Canadian corporate heritage, it is also being forced to contend with the relentless globalization of markets. At the same time as it is working to reduce its domestic west-east rail service, the company has purchased two U.S. railroads. Those acquisitions have allowed CP to provide uninterrupted north-south service without interconnecting with another rail company as trade with the United States increases under the Free Trade Agreement. In the telecommunications sector, which is the modem equivalent of a national rail infrastructure, CP and Rogers Communications Inc. of Toronto, who control Unitel, have joined forces with the U.S. giant AT&T to increase the pace of its new product development and to make connection with U.S. long-distance services easier. In the energy business, Calgary-based PanCanadian Petroleum Ltd., which is 87-percent owned by CP, introduced an international exploration program in 1992.
Yet another area where CP’s corporate challenges reflect broader trends in the Canadian economy is deregulation. In transportation, natural gas and telecommunications, CPowned companies have struggled to come to terms with more open competition. And although Stinson said that rail deregulation has been deeply flawed and long-distance telephone deregulation should occur more gradually, he added that, at heart, he roundly endorses the principle. “Deregulation has been painful for many companies,” he noted, “but it’s also been very positive for the country in terms of shaping up for global competition.” Despite the elaborate restructuring plans hatched at CP’s head office, however, the chances of success remain limited because the company is so widely diversified. While corporate conglomerates were extremely popular with the investment community in the 1960s and 1970s, their lack of focus has cast them into extreme disfavor during the past five years. Now, large pension fund and investment portfolio managers say that they
prefer so-called pure plays—companies whose employees are extremely knowledgeable and competitive in a specific area. If mon-
ey managers want to diversify their holdings, they expect to set the menu themselves by assembling stocks from among a fist of such pure plays. Last week at CP’s annual meeting,
Stinson stated that the company is finally contemplating the sale of some of its holdings to focus more narrowly on fewer industries. “We’re responding to the fact that the company is complicated to analyse—we acknowledge that,” he said. But even more importantly, according to Stinson, is the need to “put our muscle behind the businesses where we have competitive advantages.” He said that because of the large amount of capital required to modernize and expand Canadian companies to a size where they can compete in North America or the world, CP must now concentrate on a narrower range of businesses. And the receding recession means that the demand—and price— for corporate assets is gradually rebounding. “A recession can help a restructuring by forcing the acceptance of tough decisions and improving productivity,” said Stinson. “But it slows things down enormously when there is a need to sell assets.”
Stinson acknowledges that CP’s role in Canadian history, especially the rail and hotel divisions, makes it especially difficult to curtail operations. In many cases, including Stin-
son’s, generations of the same family have worked at CP. But, he said, the
luxury of unprofitable “sacred cows” is not possible in the current economic envi-
The struggle to transform CP into smaller, more competitive units has also encountered considerable resistance from the labor move ment. In 1985, the company negotiated a se ries of so-called employment security contracts with its rail employees. And the process of phasing out about 4,000 rail workers over the next several years has already cost the company $434 million in severance-related payments in the past two years. Still, Stinson said that union leaders have grasped the urgency of the rail rationalization initiative and have become increasingly co-operative.
Although CP management has not yet indicated which assets it will sell or what the
timetable for those sales may be, it is clear that both energy and rail divisions are viewed as core holdings. For its part, PanCanadian provides CP with strong growth from its increased production of oil and gas and with solid revenue from its recently increased dividend payments to shareholders, including CP. And although Stinson describes the rail division, CP’s largest single business, as the company’s biggest challenge, there appears to be a long-term commitment to restore it to profitability. Said Frederick Larkin, an investment analyst with the securities firm of Bunting Warburg Inc. in Toronto: “U.S. rail companies
are the model for all rail turnarounds. And in the United States, they have done very well with a combination of rail and energy assets.”
In Canada, however, the prospects for a profitable railroad currently appear to be far in the distance. The toll of the recession has greatly eroded its base of manufacturing clients who have either gone bankrupt or moved south. In the resources sector, several coal mines, the biggest domestic users of rail service, have recently suffered from protracted strikes or bankruptcies. As well, Stinson noted that the knowledge-based high-technology businesses that define this new economy don’t exactly need much rail service.
Still, Stinson expressed confidence that the modification of certain regulations and taxa-
tion policies, both recommended in the National Transportation Act Review Commission report in March, will improve the rail division’s profitability. Currently, Canadian rail companies pay much higher fuel and municipal taxes than their U.S. counterparts and, even more significantly, they are not allowed to abandon uneconomic portions of their rail lines without an elaborate federal review process.
Unlike the Canadian airline industry, which shares similar problems, CP Rail and its principal competitor, CN Rail, seem to prefer co-operation to blood feuds. Last year, the two com-
panies agreed to combine their operations in the Ottawa Valley and they are now jointly conducting a study of their duplicate services with an eye to further rationalization. Although CN’s privatization, which the commission recommended, could
heighten competition between the two companies, Stinson insisted that he is in favor of it. “There is no room for Crown corporations in this new economy,” he said.
But rail is not CP’s only problem child. After spending more than $1 billion to streamline and upgrade CP Forest Products over the past three years, the company posted another first-quarter loss—$64.8 million in 1993. Those results, due to the company’s heavy exposure to depressed global pulp and paper markets, have led some industry analysts to suggest that it may not survive when CP reviews its assets for sale. CP allowed its investment in CP Forest Products to
drop to 61 per cent from 70 per cent through an equity issue in March. Said Ross Hay-Roe, a forest products analyst with Research Capital Ltd. in Vancouver: ‘They tried to fix it ac-
cording to the textbook, but there are no results yet. It’s a question of how patient CP’s money is at this point in the market.”
An equally uncertain investment is a waste management company, Laidlaw Inc. In 1988, at the height of the bull stock market, CP paid $499.3 million for a 47.2-per-cent voting interest
in the company. The rationale was that Laidlaw would provide CP with a solid, recessionproof addition to its stable of companies. Still, a slower industrial pace, combined with greater general emphasis on reusing and re cycling, diminished Laidlaw’s profitability during the recession. “The latest recession has proven that there really is no such thing as a recession-proof company,” said Stinson. But if he intends to follow through on such lessons from the recession and transform CP into a flexible, profitable participant in its chosen businesses, he will have to advance rapidly from refurbishing historic hotels to renovating an archaic conglomerate.
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