The Pioneer Holding Company
The original “Southern Pacific Railroad Company” was incorporated on December 2, 1865 as the first of seven companies which ultimately used the Southern Pacific name. A second transcontinental railroad legislation was passed and funded by an Act of Congress in July, 1866, which authorized Southern Pacific to build the California portion of the Atlantic & Pacific Railroad and to receive a land grant for building it. On January 3, 1867, the company filed a map with the Government showing its proposed route from San Jose via the Santa Clara and San Benito valleys and over the rugged hills into the San Joaquin Valley, then southeast to the Bakersfield area and then easterly toward the Colorado River.
In January 1868, Southern Pacific was a company without tracks or locomotives, but with the promise of 6,000,000 acres of federal lands if it built to the California border. It had recently come under control of wealthy Bay Area capitalists Lloyd Tevis, Horace Carpentier, and California political boss William B. Carr. The San Francisco & San Jose Railroad (SF&SJ), then owned by businessmen Peter Donahue, William Newhall, and Timothy Mayne, who had acquired control of the company three years earlier, was running a railroad between its named cities but lacked land grant rights. SF&SJ incorporated the Santa Clara & Pajaro Valley Railroad (SC&PV) on December 29, 1867 to build 30 miles south to Gilroy. On April 21, 1868, grading commenced at the 4th Street Station in San Jose. The land for the railroad was purchased under the Southern Pacific Railroad Company name and newspaper advertisements used that name. By agreement with Southern Pacific, though, the SC&PV built the track and would operate it (with SF&SJ locomotives and cars). Train service to Gilroy began on March 13, 1869 under the SF&SJ and SC&PV names. In the first week of February, Lloyd Tevis, a Southern Pacific director, engaged in intense negotiations with Peter Donahue. The value of the land grant made it evident that the Southern Pacific had to be built. On February 4, 1868, Southern Pacific signed an agreement to buy the SF&SJ within two years. Southern Pacific bought the SF&SJ stock owned by San Francisco County following authorization of the state legislature on March 30, 1868.
This activity attracted the attention of Central Pacific’s owners. It was rumored in February 1868 that Central Pacific had gained control of Southern Pacific but those reports were branded false by Leland Stanford on March 6, 1868. But on June 11, 1868, Stanford and his Central Pacific associates secretly agreed to purchase the infant Southern Pacific. In September 1870, they paid for it, after Tevis agreed to advance SP $1.5 million in exchange for some 320,000 acres of Southern Pacific land in the San Joaquin Valley, amounting to an undivided 1/20th of all of Southern Pacific’s land grant. On September 25, 1868, Collis P. Huntington transmitted Southern Pacific’s annual report to the Secretary of the Interior, disclosing the associates’ control.
The San Jose-Gilroy line was built by SF&SJ directors Peter Donahue, Charles Mayne, and Timothy Newhall under contract to the Southern Pacific with the understanding that controlling interest by Stanford and associates required payment of $3 plus million in gold prior to January 1871. The first $1 million installment was paid in September 1870 to Donahue, Mayne, and Newhall. Soon thereafter, on October 12, 1870, Southern Pacific was reincorporated as a new Southern Pacific Railroad Company — the second. It absorbed the SF&SJ, SC&PV, and the California Southern Railroad Company, which was incorporated by SF&SJ on January 22, 1870 to build from Gilroy to Salinas. The latter company did not, however, construct any railroad. Under the Southern Pacific name, the railroad was built from Gilroy to Hollister beginning on July 13, 1871. Four days later, two miles south of Gilroy, the construction forces broke ground on the “Watsonville Branch” to Pajaro (now Watsonville Junction), which opened for traffic on November 27, 1871. On November 1, 1872, the line was completed to Salinas. In 1901 this line was completed to Santa Barbara and Los Angeles. It became famous as Southern Pacific’s “Coast Line.”
In 1884, the Southern Pacific Company was incorporated as a holding company to hold stock of the Southern Pacific Railroad Company and others, including the Central Pacific Railway Company and the 3.84-mile-long Berkeley Branch Railroad. This holding company became the first-of-its-kind, essentially creating America’s first shell corporation to hold assets of other corporations. This model proved so successful, that Southern Pacific Railroad Company’s Pacific Improvement Company, which incorporated on November 4, 1878, was later held by the Southern Pacific Company. Pacific Improvement Company served as Southern Pacific’s construction entity and held the land assets owned by parent Southern Pacific.
Of the 11,235 miles of railroad operated by Southern Pacific System in 1921, only 548 miles were actually owned by the Southern Pacific Company (the holding company). Of this, 33.38 miles were in California (the Sutter Basin Branch, Bayshore Cutoff, and 4.3 miles of branches in Alameda and South San Francisco) and the rest was in Oregon. The other miles, including the Southern Pacific Railroad Company, was leased by the Southern Pacific Company in 1885.
Southern Pacific Company’s pioneering achievements and corporate structure as a holding company remain a widely-used model and practice in corporate industry into the 21st Century. If Southern Pacific had remained a railroad company without the advantages of its holding and development companies, the story of the Southern Pacific and its empire would be much different.