New York New York USA - Activist investors get plenty of attention, especially Bill Ackman of Pershing Square Capital Management.
 
But not much notice has been paid to the fact that many of his plays (Herbalife, Fannie Mae) are big gambles on the future of government action.
 
His latest promotion, a proposed merger between his Canadian Pacific Railway (CP) (his firm owns 14 percent) and the Norfolk Southern (NS), may be his high-rollingest yet.
 
Deregulation saved the rail industry in the 1980s but when it comes to mergers, politics still rules, in the form of the U.S. Surface Transportation Board (STB) applying whatever criteria and conditions its political leadership fancies.
 
"You get into merger proceeding and the risks are unmanageable... the risks are unquantifiable," said NS's CEO Jim Squires last spring when CP's approach was first being rumored.
 
No wonder NS this week rejected CP's third, sweeter, offer.
 
Regulatory risk is still the reason cited.
 
Not that a merger would lack for industrial or economic appeal.
 
A quarter of the nation's rail freight passes through the perpetual snarl of Chicago, where six railroads meet and incentive alignment would be a challenge even if all six were run by saints.
 
Many medium hauls today don't take place because carriers can't agree on a division of the revenue.
 
A merged east-west line would have incentive to take on such traffic.
 
What's more, a portion of the merged line's freight could skip Chicago altogether, traveling via Canada and the eastern U.S. through the CP's Buffalo and Albany gateways.
 
Solutions are needed.
 
New railroads aren't being built.
 
Freight traffic can only continue to grow.
 
Plus the industry's slow-boiling congestion problem is further complicated by new mandates imposing slower speeds on its accident-prone oil-by-rail trains.
 
Fixing these headaches is the job of Mr. Ackman's quarterback, E. Hunter Harrison, the 71-year-old chairman of CP, whom Mr. Ackman helped install at the once-lagging railroad three years ago.
 
A known maniac for efficiency, Mr. Harrison envisions a new kind of "scheduled precision railroading."
 
The goal, cutting rail costs while attempting to meet shipper "just-in-time" expectations.
 
Alas, partly in response to traffic disruptions caused by previous mergers, the U.S. Surface Transportation Board has not approved a major deal since the late 1990s.
 
At the same time, it also announced a new stipulation:
 
Any future mergers would have to materially "increase competition".
 
By these words, the board did not mean just challenge other carriers to up their game.
 
It meant a form of re-regulation.
 
In order to gain approval, the merged line would likely be required to open its tracks to trains operated by competitors at rates set or approved by government.
 
Messrs. Ackman and Harrison appear ready to concede this condition, so confident are they that a merged CP-NS would be the low-cost operator.
 
But to the industry as a whole the precedent would be abhorrent.
 
That's why CEOs of lines not party to the merger talks are already sounding off in opposition.
 
They fear a new round of consolidation kicked off by Messrs. Ackman and Harrison.
 
If pressured into their own deals to match the efficiencies of a combined NS and CP, they likely would be subject to the same re-regulatory mandate.
 
Doing justice to the malign legacy of rail regulation would require a book, not a column.
 
It took 50 years and the industry's near-destruction before Washington realized that the arrival of truck and plane competition had rendered its previous assumptions obsolete.
 
Even today, getting a merger approved means scything through an army of ghosts.
 
Not many on Wall Street give Messrs. Ackman and Harrison much chance.
 
Even more so because their new company, if headquartered in Canada, would be eligible to avoid higher U.S. corporate taxes and thus become a target for anti-inversion campaigners.
 
But Mr. Harrison, who was born in Tennessee, has spent most of the last 17 years running railroads in Canada.
 
Maybe that's why he speaks with rare optimism about the rule of law in the United States, holding that any merger proposal would ultimately be weighed and approved in Washington on its merits.
 
Uh huh.
 
The law's disinterested majesty was not evident in the case of the Keystone XL pipeline, also backed by Canadian promoters.
 
But any rail merger would likely run the gantlet only after the Obama crowd has left town.
 
If rail shareholders decide to take the bet, waiting till Election Day would hardly worsen their odds.
 
Holman W. Jenkins Jr..