Southern Pacific Transportation Company
List of Deals
Southern Pacific Transportation Company originated with the efforts of Theodore D. Judah to build an earlier railroad, the Central Pacific. Together with Collis P. Huntington, Leland Stanford, Charles Crocker, Mark Hopkins, and other investors, he created the Central Pacific Railroad of California in 1861. The majority of the funds used to build the railroad were provided by the U.S. government, which agreed to loan a varying amount of government bonds for every mile of road built, depending on the difficulty of terrain traversed, and to grant the company a checkerboard pattern of land on alternate sides of the railroad. An important caveat deprived the railroad of most mineral rights to this land, a category generally interpreted by the courts to include oil.
The company attempted to raise capital by selling its stocks and bonds, but few buyers could be found in the early years of the industry. To ease its chronic financial burden, Central Pacific persuaded municipalities to buy its bonds, threatening bluntly that if such support were not forthcoming the railroad would simply be built around the town in question, destroying its economic viability. Further blackening Central Pacific's reputation was the widespread belief that the promoters of the road were skimming profits. They awarded lucrative contracts to construction companies owned by themselves, contracts calling for payments in the form of both cash and Central Pacific stock and so liberal in terms that by the time the road was completed in 1869 the construction company was, in effect, its owner. The net result was that a railroad had been built over the Sierra Mountains to Ogden, Utah, with government funds, but was now owned by four individuals.
The promoters decided to remain in the railroad business after the road was finished. Central Pacific's attention was drawn to a new government railroad venture known as the Southern Pacific, chartered by Congress in 1866 to build rail lines from the San Francisco Bay area to San Diego, California, then eastward to California's eastern boundary. The Central Pacific promoters gained control of this new road in 1868. During the following fifteen years, Southern Pacific spread its lines from Sacramento to New Orleans, having effected a number of mergers in the process. By 1877 the Central Pacific-Southern Pacific combination controlled 85 percent of all rail traffic in the state of California. That year, the companies had sales of $22.2 million and a capital of $225 million.
By 1884 the three remaining promoters had sold the bulk of their holdings in Central Pacific and formed a new corporation, Southern Pacific Company of Kentucky, with which they acquired all of the stock of the old Southern Pacific and its subsidiaries while agreeing to lease the use of Central Pacific's roads. Southern Pacific and its owners remained extremely unpopular for many years. The railroad's early bullying of municipalities, its discriminatory pricing, suspected trafficking in legislative votes by means of bribery, and monopoly power fueled popular resentment. In the 1890s the federal government became increasingly involved in the regulations of railroads. The transcontinental railroads owed the U.S. government a great deal of money in the form of the thirty-year bonds they had borrowed for construction and that were due to mature in the mid-1890s. None of the railroads, including Southern Pacific, had made provision for the repayment of these huge debts. Partly in response to this crisis, the Interstate Commerce Commission (ICC) was created in 1887 as a federal agency charged with general regulation of the railroads. So unpopular was Southern Pacific in California that a San Francisco newspaper gathered 195,000 signatures (more than 10 percent of the state population) on a petition asking the government to foreclose on the railway and to run it as a public service. The government refunded the company's debt until 1909; by that time, the company was able to pay off debt and then became financially independent of the government.
In 1901 Southern Pacific's rival Union Pacific bought a controlling interest in the road and, in effect, merged the two great western rail systems. An ICC investigation was followed in 1911 by a federal antitrust suit against the Union Pacific-Southern Pacific combination. In 1913 the Supreme Court ordered the sale of Southern Pacific stock, much of which ended up in the hands of the Pennsylvania Railroad. As of that date, then, the Southern Pacific Railroad was restored to the general configuration it had had before the 1901 merger, its three principal routes being those between San Francisco and Portland, San Francisco and Ogden, Utah, and San Francisco and New Orleans. A second antitrust action deprived Southern Pacific of its Ogden lines for a number of years, but these were eventually restored. Other litigation forced Southern Pacific to give up most of the oil-producing land included in its original grants, oil falling under the rubric of mineral rights, as well as its timberland.
Southern Pacific survived and enjoyed a decade of unbroken prosperity in the 1920s. Southern's net income steadily rose to its 1929 peak of $48 million, despite having lost to the ICC the right to fix its own freight rates. Truck and auto traffic increased threefold during the 1920s, and along with the airplane would soon wrest from the railroads most long-distance passenger service and many types of freight, except those bulk items for which rail transport is ideal. The impact of these changes was not really felt by Southern Pacific until the Depression brought to an end the era of plentiful business for all. Reeling from these double blows, Southern Pacific watched its net decline to $4 million in 1931 and then disappear altogether for the next four years. Southern Pacific began to respond more to the needs of its customers, offering a much more flexible schedule of service and the use of the railroad's own short-haul trucking company, Pacific Motor Trucking Company. Southern Pacific also fought a well-publicized if losing battle for passenger business, offering low-priced tickets on a number of famous routes between California and the East. It ultimately proved to be impossible to move passengers by rail as cheaply and directly as by car and airplane.
Despite such problems, Southern Pacific remained a giant among U.S. corporations. Its 1936 assets of $1.95 billion were exceeded by only two other U.S. industrial corporations. With $200 million in annual sales, Southern Pacific was among the three largest U.S. railroads. When World War II erupted, the railroad industry boomed along with many other industrial segments, and Southern Pacific's net income reached an all-time high of $80 million in 1942.
Revenue rose from $650 million to $840 million through the 1950s and mid-1960s, and the company expanded its trucking service and added a profitable oil pipeline along a segment of its track in the Southwest. The company spent liberally on maintenance of track and rolling stock, and Southern Pacific built a reputation as one of the country's soundest railroads. The tremendous growth of California's population and agricultural production, along with the rapid increase in intermodal (rail-to-truck and truck-to-rail) transport and a booming oil business in Texas and Louisiana, kept Southern Pacific healthy. By 1969 the entire railroad was under the guidance of a computerized information system that helped to cut down on idle cars and switching delays. By means of such changes, Southern Pacific was able to reduce its labor force from 76,000 in the mid-1950s to 45,000 by 1970, while substantially increasing its volume of rail traffic. In 1972 Southern Pacific diversified into telecommunications. Using its existing network of microwave transmitters, the company became a carrier of long-distance telephone and data communications, first to large corporate users and later to the general public under the Sprint name.