Conral CSX case

Executive Summary

Conrail has received two acquisition bids from CSX and Norfolk Southern.

Introduction

Conrail and CSX, the nation’s first and third largest railroads, have decided to participate in a merger of equals. CSX has offered to acquire Conrail in a two tiered deal. The first 40% of tendered Conrail shares will be bought at a price of $92.50 while the remaining 60% will be acquired through a stock swap at a ratio of 1.8561921 (CSX:Conrail). In the midst of this offer, a hostile Bid comes in from Norfolk Southern, a competitor in the Industry. Norfolk Southern offers ____

Analysis

Case A, Question 1: Why is CSX interested in Conrail? How much should CSX pay for Conrail?

The Stagger’s Rail Act of 1980 has created a deregulated environment in which acquisitions are used to improve the competitive positioning of existing companies within the railroad industry. CSX is interested in Conrail for a couple of reasons. Primarily, CSX would like to acquire Conrail because its routes are complementary to their own, allowing the combined company to provide “long-haul, contiguous, and therefore low-cost service between the Southern, Eastern, and Mid-Western parts of the United States.” Additionally, CSX’s acquisition of Conrail would prevent the company’s main competitor Norfolk Southern from gaining access to routes in the Northeastern United States. This would leave Norfolk Southern at a large strategic disadvantage. Lastly, the combination would provide cost synergies and reductions, even on the shorter haul trips, that would far exceed those of Norfolk Southern in aggregate measures. Contrarily, it was also suggested by an analyst that the merger was a result of fear. Essentially, it was said that CSX was concerned that Norfolk Southern would make a bid first, thus achieving a first mover advantages and getting