View / The forces of FOMO are strong in the US railroad industry

Warren Buffett once quipped that CEOs and M&A are like teenagers and sex: Neither needs much encouragement. There are no Harvard Business School endowed chairs for deals not done.

The forces of FOMO are especially intense in what I’ll call “regulatory last-call” industries. It’s late at the bar, the pickings are slim, and the bouncer is standing cross-armed by the door. These are heavily regulated industries that are immune to startup competition and have a handful of big players, the pluckiest of which see an opening to reduce that number. The result is a frenzied game of footsie that can produce suboptimal deals, or none at all, but ties everyone in knots for a while.

This happened a decade ago in health insurance. Aetna struck a deal to buy Humana, which set Anthem in hostile pursuit of a very unwilling Cigna. The calculus was that Washington would either bless both deals or neither, leaving CEOs free to give in to their FOMO. In the end, antitrust regulators blocked both deals, memorably assisted by internal squabbles between Anthem and Cigna.

This dynamic is shaping up in America’s railroad industry. Union Pacific confirmed this morning that it’s in talks to acquire Norfolk Southern, an unusually half-baked announcement made after Semafor and others reported talks. A deal between them would create the country’s only coast-to-coast network and leave CSX, Norfolk’s main east-coast rival, in a tough spot, which helps explain why its CEO said yesterday that he was “open to any and all possibilities.” His earlier, perceived reluctance to a deal may have pushed Union Pacific to look elsewhere, setting off what’s likely to be a partner scramble. (Will Buffett dance? After Semafor reported that Berkshire Hathaway’s BNSF had been working with Goldman Sachs to evaluate its deal options, the billionaire — who famously dislikes investment bankers — said he hadn’t personally spoken with any.)