It was never really clear why the acquisition fell through, but rumors were that KCS was seeking well over 1 billion and had overvalued themselves so much that no other Class 1 was even interested besides IC. Then after that announcement of their intent, IC's stock price dropped substantially by over $3. Their investors clearly didn't seem particularly enthused at the prospects.
And this was the prelude of the BNSF merger at a time when rumors had Union Pacific considering going after Santa Fe themselves. Some speculated that KCS thought they could position themselves for a better deal with Burlington Northern if that course of events came to pass, and withdrew from the deal in the hopes for an even better situation.
This also was a time when they had just beat IC to MidSouth just before NAFTA, their expansion to Mexico, and other success stories. So some speculate that KCS Industries simply had a change of heart and saw more potential in the long-term in hanging onto this asset rather than selling it off.
I doubt you'll find a precise answer unless someone like Harrison has shed some light on it in an interview in the years since then.
