The Wreck of the Penn Central
The largest US bankruptcy of its era and a merger-integration failure.
Summary
Joseph Daughen and Peter Binzen, both Philadelphia journalists, reconstructed the collapse of the Penn Central Transportation Company, which filed for bankruptcy in June 1970 in what was then the largest corporate failure in American history.
The company was created by the 1968 merger of the Pennsylvania Railroad and the New York Central, two long-standing competitors whose managements did not merge with them. The authors document the operational consequences: incompatible computer systems and accounting, freight cars lost for weeks, yards congested, customers leaving, and two management groups that continued to work as rivals inside one company. Stuart Saunders from the Pennsylvania and Alfred Perlman from the Central occupied positions that gave neither the authority to resolve it.
The financial material covers the diversification into real estate, pipelines, hotels and other businesses, funded by borrowing against the railroad; the accounting that reported profits and paid dividends while the operating business consumed cash; the reliance on commercial paper that could not be rolled once the position became apparent; and the political dimension, including the government support sought and the questions about what directors and executives knew and when. The bankruptcy led eventually to Conrail and to the restructuring of American freight railways. The book is thorough journalism and remains the standard account.
Key takeaways 7
- The Pennsylvania and New York Central merged as corporations while their managements continued to operate as rivals inside the combined company.
- Incompatible operating and accounting systems produced freight service failures that drove customers away within months of the merger.
- The company diversified into real estate and other businesses funded by borrowing against a railroad that was consuming cash.
- Reported profits and continued dividend payments concealed an operating business that was losing money throughout.
- Reliance on commercial paper meant the company failed as soon as lenders declined to roll short-term borrowing.
- Neither of the two senior executives had the authority to resolve the conflict between the merged organisations.
- Merger accounting and diversification concealed the operating deterioration from directors as well as from investors.
Who should read it
Investors and operators studying merger integration failure and the concealment of operating deterioration behind reported earnings.
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Where it sits in the reference 2
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