Always on Track
By engineering the nation’s biggest transportation M&A deal in 2021, Pat Ottensmeyer positions the new Canadian Pacific Kansas City for the next era in rail.
Patrick Ottensmeyer tells the story of an early fling with entrepreneurship when he was still in high school, after his father ceded him a couple of acres from the family’s farm near Vincennes, Indiana. “I wanted to make some money,” Ottensmeyer recalls, and his younger self soon settled on strawberries.
They’re perennials, he figured, so once they were established, you just “sit back and watch the money come in.” He quickly learned the relationship between business inputs and outputs—in this case, soil conditions and crop yield. The land, inhospitable to strawberry plants, “wasn’t the cash bonanza I was hoping for,” Ottensmeyer says, “But it was a lesson.” The lesson—that farming is a choice not everyone should make—set him on a different track in life, one with stops in banking, venture capital, teaching and railroad finance.
His combined experiences eventually made him CEO of Kansas City Southern and put him in a position to shape America’s biggest business deal of 2021. Years of record-setting revenues for the railroad, the company’s continued influence in regional and national rail policy, and last month’s completion of a $31.2 billion merger with Calgary-based Canadian Pacific Railway all combined to make Ottensmeyer the choice as Ingram’s 2022 Executive of the Year.
Steeped in Work Ethic
The fifth of six children, Pat Ottensmeyer would follow the example of his four older siblings, leave Vincennes for college, secure a degree in finance (with a large helping of economics included), then head into the world of banking, and eventually, into executive leadership roles in the railroad sector.
All along the way, he carried with him some other lessons from back home.
“Even though my dad was a farmer, he always had a second job—for the health benefits and other things with a family of six kids,” Ottensmeyer recalls. When the Indiana highway department imposed its will by grabbing most of the farmstead for a new interchange, his father started a new career in real-estate development and brokerage.
That determination, and the ability to identify and seize opportunities, also left a mark on Ottensmeyer. “Definitely, that work ethic was very strong in my family and parents,” he says. It helped set the foundation for a successful run in the banking industry—successful enough to set aside his brief consideration of law school.
Fate eventually intervened, courtesy of a railroad-company client that became entangled in a years-long merger back in the 1980s. That case, involving the Atchison, Topeka and Santa Fe and the Southern Pacific railroads, immersed him deeply in the financial fundamentals of steel wheels and steel rails. His experience with that deal, which briefly introduced him to a Santa Fe executive named one Mike Haverty, would one day take him to the zenith of rail-company leadership.
When the former Interstate Commerce Commission, after roughly five years, decided to kill the Santa Fe-Southern Pacific merger, it put the AT&SF in play for a hostile takeover. That led to a multi-year series of restructurings, IPOs and spinoffs that, “to be honest, was kind of a banker’s dream,” Ottensmeyer says. All of that eventually led to the creation of Burlington Northern Santa Fe, where opportunity knocked with a key retirement in finance administration in 1993, and “I jumped at it,” Ottensmeyer says.
He stayed there for a few years, then left to test the waters of venture capital and other finance disciplines. In 2006, he received a call from a former colleague that put him on a path to reconnect with Haverty, who had become president and CEO of Kansas City Southern Railway Company in 1995.
Haverty was a visionary who saw KC Southern as uniquely positioned to change the nature of rail shipping not just in the United States, but North America. Most rail lines in the U.S. run east-west; KCS had a network that ran up the nation’s spine, all the way to the Gulf of Mexico. Haverty and his predecessor, Landon Rowland, saw greater opportunities to the south. They did something that few in the sector believed would ever happen: They acquired control of what is now Kansas City Southern de México.
That created a cross-border network with lines that ran to both the Gulf and the Pacific. Kansas City Southern was founded in 1887, but for all practical purposes, the company that just united with Canadian Pacific, he says, was born in 2006. The Mexican acquisition, says Ottensmeyer, “dramatically changed the strategic significance of the company that we are today.”
Haverty turned the show over to David Starling in 2010, as the true impact of the Great Recession was being felt. Starling’s deep background in operations would soon be tested. “I remember the first budget cycle that Dave was here, our business had collapsed and Dave’s intense focus on literally almost every nickel we were spending was … uncomfortable,” Ottensmeyer says with a carefully chosen word. “But it’s what we needed at the time.”
An aggressive push with cost reduction and capital efficiency carried the day, and within several quarters, operational profitability was restored. As it became clear that Starling himself was barreling toward retirement, Ottensmeyer, by then president, sensed that it could soon be his own time to lead. In 2016, that dream was fulfilled when he was named CEO.
In one sense, he’d be standing on the shoulders of giants who envisioned and saved a growing company. But Ottensmeyer wouldn’t be content to rest on their achievements. “Mike had the vision; he put the pieces together. Dave came in and brought a kind of operational focus and discipline that was his strength,” Ottensmeyer says. “I’m not an operating guy; I’m a finance guy. I’d been in the industry long enough to understand operations, but never worked in the field.” But he knew the industry well enough, and understood Haverty’s vision for eventually combining with a Canadian partner, to move KC Southern ahead.
After Ottensmeyer became CEO, the company posted three successive years of record revenues, derailed briefly by the pandemic in 2020. Once the numbers for the fourth quarter of 2021 are in place, it’s likely that KC Southern logged yet another record year.
An Industry in Transition
That organizational progress has come during a time of continuing—and profound—change and innovation in the railroad industry. While the base technology of steel wheel on steel rail is close to 200 years old, rail systems today are models of previously unimagined efficiency driven by the digital age.
“I don’t think the degree of innovation and the technology that’s used in the rail industry is widely understood and appreciated,” Ottensmeyer says. “Yes, it looks very similar, steel wheel on steel rail, but if you think about the digitization and things like Positive Train Control, it’s not similar at all. Locomotives today are literally rolling data centers. There is so much data collected, and even more that could be collected, when a locomotive runs across the network.”
Positive Train Control was primarily developed as a safety innovation, helping reduce train and vehicle collisions and derailments. But “it is a very useful springboard to make additional investments, to be able to run a more autonomous rail network,” Ottensmeyer says. “I’m not saying driverless trains; that’s not where the payoff is going to be.”
There may be some labor and productivity payoff as a result of moving toward running a more automated rail network, he says, but the Holy Grail of these tech advances is the potential to unleash vast amounts of additional system capacity—without spending billions on additional track or ballast. That, he says, would allow rail companies “to make significant breakthroughs in terms of market-share gains and take more traffic.”
“We’ll never be as fast as FedEx or UPS or some of the super-fast trucking services,” he says. “But we don’t have to be.” In effective supply-chain operations, he says, the key elements are consistency, reliability and resiliency. “If we can be highly consistent and highly reliable, we can win and take market share from the highways, even if we’re slower,” Ottensmeyer says.
The deal with Canadian Pacific positions the new entity to capitalize on all of that.
Years of solid financial performance and the proven value of the fixed assets running into Mexico made KC Southern an attractive acquisition—but for whom? Rumors had long persisted that the company would eventually be in play. And there were indeed a few tentative courtships, but nothing came close to being consummated.
“Before we said ‘yes’ to Canadian Pacific,” Ottensmeyer says, “we said no 11 other times.”
Late last winter, word broke of Canadian Pacific’s tender for KCS. It was soon topped by a bigger one from the CP’s larger northern rival, Canadian National, before eventually swinging back the other way.
The transformative deal with Canadian Pacific is a $31.2 billion capstone on Ottensmeyer’s career in railroad administration, but his impact on the broader industry—and the economies of the three North American nations—ranks right up there in achievements.
In January 2017, the U.S. Chamber of Commerce turned to Ottensmeyer to serve as chairman of its U.S.-Mexico Economic Council. That gave him a high-visibility role in formulating policy recommendations for Congress as NAFTA was being renegotiated. So it’s a point of personal pride that his work helped produce the United States-Mexico-Canada Agreement, which replaced NAFTA in 2020.
Railway Age, an industry publication, recognized that work when it named him its 2020 Railroader of the Year—then again for 2022, along with Canadian Pacific’s CEO Keith Creel, who won it in 2021.
The role he played with the NAFTA-to-USMCA transition is a point of pride in his career. That new agreement will help leverage the claim that Missouri and Kansas have as a national center for logistics.
It was not a role he sought out, but certain events in 2016—and a certain high-profile hostility to our southern neighbor—compelled his involvement.
“I’d been CEO for less than six months in 2016 when Donald Trump became president,” Ottensmeyer says. “Our stock was under a lot of pressure. The day after the election, we literally lost $1 billion of market value in the first few minutes of trading.”
The company was closely associated with NAFTA and Mexico, so it faced a great many questions, including whether KC Southern would even survive under a Trump administration.
“I got engaged; I came to work the day after the election, not intending to write a letter that started with ‘Dear KCS Colleagues,’ but I was trying to calm people down, because I was hearing a lot of anxiety: ‘What does this mean for the company? For Mexico? Are we going to be OK?’”
In that letter, Ottensmeyer vowed to be involved. “I’m not going to sit by as a spectator, I’m going to try to be helpful in influencing the outcome,” he remembers writing. “I had, at the time, no earthly idea what that meant, or what I needed to do.”
He turned to company insiders with government connections—particularly legislative liaison Warren Erdman and KCS de Mexico president Jose Zozaya—for guidance. And to outside counselors who knew Washington and Mexico City. “They had the relationships, opened the doors and put me to work,” Ottensmeyer says. “I got engaged, I got involved. I’d never spent that much time in government relations or politics, but what I learned out of that is, it’s really important for people, for corporations, to speak up and let their legislators at every level—state, local, federal/national—know how important some of these things are. I was, quite frankly, surprised that some of the policymakers that I engaged with did not know some of the facts about our business and what we export and move across the border.”
When he received a call from a U.S. senator before the USMCA vote, it came with a couple of key questions: Is this good for our region? Is his good for your company? That his opinion would be so valued, at such a critical juncture in trade history, was extremely gratifying, Ottensmeyer says.
At 64, he’ll stay on at the new Canadian Pacific Kansas City for a while, he says, as the company repositions itself a bit. CP will shutter its Minneapolis administrative office and dispatching center and move employees to Kansas City. And the new brand itself is testament to what CP’s chief executive, 52-year-old Creel, sees with its ties to Kansas City.
“It was Keith’s idea to change the name to Canadian Pacific Kansas City—that was his suggestion and he was the first one to bring that up,” Ottensmeyer says. “I’ll caveat that by saying we would have put our foot down on some of these things, but we didn’t have to. They really wanted to position this as a partnership, and Keith understands the importance of this partnership to Kansas City.”
When the time does come to wrap things up, Ottensmeyer is confident that he’ll hand off a company poised to do great things not just for this region, but rail service nationwide and the global supply chain.
For now, though, “I’m still running Kansas City Southern,” Ottensmeyer says. “And for the most part, in terms of day-to-day operations, in terms of capital-investment decisions, personnel decisions, all these kinds of other things, I’m going to run the company as I have for the last six years.”