Ancora, a family wealth investment advisory firm with $9 billion in assets under management, has recently emerged as an activist investor in Norfolk Southern (NSC), a Class I railroad company in the United States. With a stake of approximately $1 billion in NSC, Ancora aims to make significant changes to the company’s board and management team through a proxy fight. This article examines Ancora’s activist strategy and the potential impact it may have on Norfolk Southern’s future.

Railroad companies have consistently been targeted by activist investors due to their relatively simple business models and potential for improvement. Railroads, like Norfolk Southern, rely heavily on their operating ratio, which measures operating expenses as a percentage of revenue, to drive profitability and shareholder returns. Successful activist campaigns at companies such as Canadian Pacific and CSX have demonstrated the potential for significant improvements in operating ratios through strategies like precision scheduled railroading (PSR). Ancora aims to bring a similar approach to Norfolk Southern.

Norfolk Southern has underperformed both the market and its peers over the past one, three, and five years. With an operating ratio of nearly 69%, there is ample room for improvement at the company. A successful implementation of the PSR strategy could bring the operating ratio close to 60% and significantly enhance Norfolk Southern’s profitability.

Precision scheduled railroading is a strategy that focuses on consistent, reliable, and predictable service through scheduling and running fewer trains. By reducing switching costs and minimizing safety risks, this strategy has proven effective in improving operating ratios and overall performance. Canadian Pacific and CSX have successfully implemented PSR, leading to substantial improvements in their respective operating ratios. Ancora aims to bring this proven strategy to Norfolk Southern to drive similar improvements in performance.

Ancora intends to execute its activist plan in two key steps. Firstly, it aims to secure a majority or close to a majority of seats on Norfolk Southern’s board. By nominating a majority slate of directors, including notable figures like former Ohio governor John Kasich and former Kansas City Southern executive Sameh Fahmy, Ancora seeks to establish a strong presence on the board. Secondly, Ancora plans to bring in a CEO with experience in successfully implementing the PSR strategy. This move would signal a significant shift in Norfolk Southern’s direction and commitment to long-term improvement.

In previous successful activist campaigns, such as those at Canadian Pacific and CSX, one common factor was the replacement of the CEO. Ancora believes that for its activist plan to succeed at Norfolk Southern, a change in leadership is necessary. Although settlement discussions may be sought, Ancora is prepared to take the fight to a proxy battle if necessary.

Ancora’s activist strategy is supported by three of Norfolk Southern’s top shareholders, who have previously benefited from similar initiatives at CSX. Other hedge funds that own shares in Norfolk Southern are also likely to support Ancora’s director slate. While a majority slate is preferred, Ancora recognizes that settlement discussions may lead to successful outcomes below a majority presence on the board.

Within the activist world and among investors familiar with successful campaigns at Canadian Pacific and CSX, Ancora’s strategy is highly regarded. The track record of PSR implementation indicates that significant improvements in Norfolk Southern’s performance and shareholder value can be achieved. Ancora’s commitment to long-term shareholder engagement further strengthens its position in the activist campaign.

Ancora’s activist plan to turn around Norfolk Southern is driven by the potential for significant improvements in operating ratios and overall performance. By implementing the proven PSR strategy and bringing in experienced leadership, Ancora aims to make a lasting impact on the company. Supported by top shareholders and with the potential for settlement discussions, Ancora’s activist strategy is expected to bring positive change to Norfolk Southern and create value for its shareholders.

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