Free Essay

Conrail

In: Business and Management

Submitted By jamesocannon
Words 383
Pages 2
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 toparticipate in a merger of equals. CSX has offered to acquire Conrail in a two tiereddeal. The first 40% of tendered Conrail shares will be bought at a price of $92.50while 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 fromNorfolk Southern, a competitor in the Industry. Norfolk Southern offers ____
Analysis
Case A, Question 1:
Why is CSX interested in Conrail? How much should CSX payfor Conrail? The Stagger’s Rail Act of 1980 has created a deregulated environment in whichacquisitions are used to improve the competitive positioning of existing companieswithin the railroad industry. CSX is interested in Conrail for a couple of reasons.Primarily, CSX would like to acquire Conrail because its routes are complementaryto their own, allowing the combined company to provide “long-haul, contiguous,and therefore low-cost service between the Southern, Eastern, and Mid-Westernparts of the United States.” Additionally, CSX’s acquisition of Conrail would preventthe company’s main competitor Norfolk Southern from gaining access to routes inthe Northeastern United States. This would leave Norfolk Southern at a largestrategic disadvantage. Lastly, the combination would provide cost synergies andreductions, even on the shorter haul trips, that would far exceed those of NorfolkSouthern in aggregate measures. Contrarily, it was also suggested by an analystthat the merger was a result of fear. Essentially, it was said that CSX wasconcerned that Norfolk Southern would make a bid first, thus achieving a firstmover advantages and getting the same benefits that CSX itself would from themerger, effectively degrading CSX’s competitive positioning within the industry.Whether the deal was motivated by fear or strategic positioning, the merger willimprove the competitive positioning of CSX, ultimately making the combined CSX-Conrail company extremely powerful in the industry.CSX should pay somewhere between $93.73 and $110.55 for Conrail. This range isbased on transaction multiples analysis (EPS, Sales, EBITDA) used in previousrailroad deals (calculated using only completed deals) and a Discounted Cash Flowapproach of incremental cash flow including the revenue gained from rival NorfolkSouthern (See exhibits A and B for details)…...

Similar Documents

Free Essay

Nj Transit

...taken in the past and plans on for the future as well. firm. In addition to the internal and external governance mechanisms discussed, managers also may be provided with incentives to limit firm diversification to optimal levels by a concern for their personal reputations in the labor market and the related market for managerial talent (Chapter 6 notes). “In the mid to late 1970s, new "Jersey Arrow" cars arrived from General Electric for the Northeast Corridor and North Jersey Coast Line. On April 1, 1976, the Consolidated Rail Corporation, or ConRail, was created by the government merging the financially troubled Penn Central, Erie Lackawanna, Central RR of New Jersey, Lehigh Valley, Lehigh & Hudson River, Reading, and Pennsylvania-Reading Seashore Lines; and CR operated Commuter Railroad service under contract from NJDOT. On January 1, 1980, the New Jersey Transit Corporation was formed as the "operating arm" of the NJDOT. Conrail continued to operate Commuter rail service under contract from NJT until January 1, 1983 when New Jersey Transit Rail Operations assumed operation of all commuter rail service in New Jersey” (history). Everybody in the leadership roles were well aware of the threat of new competition and if they continued to not merge and get along other companies would eventually rise up and take seize opportunities during the bickering of the major companies that are listed above. Even though the company was still ironing out after the merger and NJ......

Words: 3327 - Pages: 14

Premium Essay

Conrail Case Study

...this CSX/Conrail Merger Agreement: 1. Conrail had to suspend its Poison Pill clause a defense mechanism that would have prevented the takeover. The Poison Pill would have allowed shareholders to purchase shares discounted at 50% of value so shareholders could maintain ownership interest if an attempt was made by an outside company to acquire more than 10% of the overall shares. The economic rationale of getting rid of the Poison Pill was to allow CSX to gain ownership of the Company while working within the lines of the regulatory laws in Pennsylvania. 2. The No-talk clause was implemented which disabled Conrail’s ability to have merger discussions for a 6-month period unless special conditions occurred, such as the necessity for the Company’s board of directors to consider another offer that way they can act responsibly for their shareholders or if a better offer comes into play which dominates CSX’s bid and CSX is considered unlikely to compete. This allows Conrail to pursue better deals while weakening CSX’s barriers of preventing another company to compete in the merger. 3. A break-up fee of $300 million charged to Conrail. This guarantees that CSX will not lose the money they used to pay for the deal’s fees while compensating the Company for their time spent and reputation involved with the deal. This demotes Conrail to consider other bidders or to decline the merger in such a late stage of the deal process. On the other hand, this could also benefit Conrail......

Words: 1036 - Pages: 5

Premium Essay

Conral Csx Case

...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,......

Words: 1952 - Pages: 8

Premium Essay

Case

...CORPORATION CSX has put up a bid of $8.3 B in order to horizontally integrate with Conrail in order to increase the combined profitability based on perceived improvement in Synergies. A) Lower Cost Structure: Railroad is capital intensive industry with very high fixed cost. CSX-Conrail merger will lower company’s cost-structure by creating increasing economies of scale. Operating ratio of Conrail is 87.63% and CSX’s operating ratio is 81.99% (Exhibit 1). According to American Investment research report (Exhibit 10), proposed merger will bring operating ratio to 65 % (an 18.75% decrease). Both CSX and Conrail have low ROA (2.33% and 4.11%) compared to Norfolk’s ROA of 5.06 % (Table 6). If CSX and Conrail will achieve its projected revenue growth and cost-savings, CSX-Conrail will become more efficient than Norfolk. B) Gain Market Power : Based on revenue data from 1995 (Exhibit 1), CSK control 38.5%, Conrail controls 29.4% and Norfolk controls 32.1% of Northeast rail freight market. The proposed merger will allow CSX to control major share (~70 %) of the lucrative North Eastern rail market and enable them to take advantage of synergies in the space. In addition, CSX – Conrail can further improve on its market position by limiting Norfolk’s access to long-haul routes either from south or Midwest. MECHANICS OF THE CSX – CONRAIL DEAL CSX has offered a two-tiered offer for the stocks of Conrail. For the first 40% of the shares (the front-end), stockholders will get......

Words: 1389 - Pages: 6

Premium Essay

Conrail

...6) How does CSX intend to take control of Conrail? Explain how they intend to accumulate 50% of Conrail’s shares. As of October 15, 1996 CSX Corporation (CSX) intended to merge with Consolidated Rail Corporation (Conrail) by offering a two-tier deal, structured in the following manner. CSX would purchase 90.5 million fully diluted Conrail shares by paying $92.50 per share for the first 40% of the shares (the front-end offer) and would enter a share exchange for the remaining 60% of the required shares (the back-end offer). The front-end offer would be executed in two stages. The first stage, which began the day after the merger announcement, would be a cash tender offer to acquire 17.86 million shares at $92.50 per share (accounting for 19.7% of Conrail’s acquisition shares). The second stage, which could only be executed by mid-November once Conrail shareholders decided to void the “fair value” statute under Pennsylvania law, would be to acquire another 18.4 million shares at $92.50 per share (accounting for another 20.3% of Conrail’s acquisition shares) Following shareholder approval, and successful completion of the second cash tender offer, CSX would proceed with the back-end offer through a share swap of 1.85619 CSX shares for every 1 Conrail share in addition to an extra $16 of new convertible preferred stock. This two-tier structure of paying in both cash and stock not only allows CSX to abide by Pennsylvania’s antitakeover laws, but also saves on cash spent in...

Words: 301 - Pages: 2

Free Essay

Regulations of Transportation Industries

...expanding federal regulation of railroads began to unravel in the 1970s. Beginning May 1, 1971, the National Railroad Passenger Corporation (Amtrak), established by Congress the previous year, took over operation of most intercity passenger trains. To give government-subsidized Amtrak more flexibility, Congress granted it freedom to raise and lower rates without ICC approval and removed ICC authority to review proposed discontinuation of trains. The ICC's power over abandonment of lines was suspended briefly during the mid-1970s, when seven bankrupt railroads in the Northeast and Midwest were combined into a new company, Consolidated Rail Corporation (Conrail). To plan and set up this new railroad, Congress created the U.S. Railway Association, with authority to decide which parts of the seven railroads would be included in Conrail and which parts would be offered for sale or abandoned. In the Railroad Revitalization and Regulatory Reform Act (1976), Congress sought to give railroads more freedom to set rates. The ICC was not to deny any rate equal to or exceeding variable costs unless the railroad was found to have “market dominance,” which was left to the commission to define. Railroads were allowed to raise or lower their rates by as much as 7 percent a year for two years without ICC sanction. The commission was empowered to deregulate hauling of commodities if it found that regulation was no longer in the public interest; for example, the ICC deregulated the hauling......

Words: 1356 - Pages: 6

Free Essay

Business

...Pacific Southern Pacific Union Pacific Illinois Central Gulf Conrail (58 percent) Norfolk & Western Southern Conrail (42 percent) Louisville & Nashville Milwaukee Soo Merged Railroad Burlington Northern Santa Fe (BNSF) Union Pacific Canadian National (U.S.) Norfolk Southern CSX Transportation Canadian Pacific (U.S.) Market Concentration and Share The top four Class I railroads originated 86 percent of grain and oilseed traffic in 2011, compared to only 53 percent in 1980 (figs. 1 and 2). In addition, the market share of the current railroads has changed from that of their predecessors. The Burlington Northern and the Atchison, Topeka & Santa Fe, which combined to form Burlington Northern Santa Fe (BNSF), together accounted for only 30 percent of grain and oilseeds originations in 1980. By 2011, the BNSF had 47 percent of the market. This market share growth contrasts with the 31 percent held by Chicago & Northwestern, Union Pacific, and Missouri Pacific in 1980 that combined into the Union Pacific (UP), which has decreased to only 19 percent in 2011. 2 3 Surface Transportation Board, Study of Railroad Rates: 1985-2007, January 2009. (PDF) ”Regional and Short Line Railroads in the United States,” Transportation Quarterly, Fall 2002. Web. (PDF) 2 Figure 1. Railroad Grain Origination Market Share, 1980 Illinois Central Gulf 6% Southern 3% Norfolk & Western 4% Burlington Northern 19% Others 12% Conrail 4% Louisville & Nashville 4% Milwaukee 3% Soo......

Words: 2209 - Pages: 9

Premium Essay

Top 10 Corporate Information Technology Failures

...integration of SAP, Manugistics Group Inc. and Siebel Systems Inc. software WHAT HAPPENED? To meet last year’s Halloween and Christmas candy rush, Hershey compressed the rollout of a new $112 million ERP system by several months. But inaccurate inventory data and other problems caused shipment delays and incomplete orders. Hershey sales fell 12% in the quarter after the system went live — down $150.5 million compared with the year before. Software and business-process fixes stretched into early this year. Hershey Foods Corp. Norfolk Southern Corp. PROJECT: Systems integration with merger target Consolidated Rail Corp. WHAT HAPPENED? Norfolk Southern lost more than $113 million in business during its 1998/1999 railroad merger with Conrail. Custom logistics software wasn’t tested properly and a dispatcher mistakenly fed bogus test data into the system. Norfolk Southern suffered more than a year of train backups, untrackable freight and crew-scheduling mishaps. Norfolk Southern spent an extra $80 million on worker overtime pay and fix-up costs until the system was stabilized early this year. PROJECT: New billing and claims-processing system based on Unix International and Oracle Corp. databases WHAT HAPPENED? A 1996 migration to a new set of applications for health maintenance organizations operations resulted in hordes of doctors and patients angry about payment delays and errors. The system also underestimated medical costs and overestimated income. As a result,......

Words: 997 - Pages: 4

Premium Essay

Csx Merger

...the transaction isn’t the same, bigger with the tender offer, in order to take the control of the firm, and smaller in the back-end merger, this is not allowed unless the shareholder vote for the opt out of the statute before CSX would acquire more than the 19,9 % of Conrail. After the first stage of the transaction is completed CSX will own a 19,7 % stake of Conrail, and considering all the parties that support the merger ( management of Conrail and the employee trust ), CSX would control 35,50 % of the acquisition share and will need only another 14,60 % of the target shares to vote in favor of the opting out for it to pass. Ones the shareholders approved the opt out CSX could implement the second stage of the front end offer in order to acquire another 20,30 % stake of Conrail. After that CSX would proceed with the back end offer for the remaining 60 % of Conrail’s share. The transaction is constructed in order to pay less to the non-tendering stockholders. The exchange ratio of the stock offer is fixed, considering the price of CSX before the announcement of the transaction the price offered is lower compared to the cash bid offer, and if the price of CSX stocks goes down the remaining shareholders of Conrail could face a very little premium. In this way. CSX doesn’t have enough cash or equivalent in order to achieve the bidder offer, which require about 3,3 billion of dollars, so CSX need to issue more debt or issue new share. Looking at CSX balance sheet more, and the......

Words: 611 - Pages: 3

Premium Essay

Conrail Case Study

...Conrail Case Study 1. Why does CSX want to buy Conrail? Why can CSX justify paying a premium to acquire 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-Conrail merger would result in more than $8.5 billion in revenues and nearly 70% of the Eastern market. The combined entity would be able to control the railroads between the Southern ports (CSX), the Northeast (Conrail) and the Midwest (both). By having a full access to these markets the new company would be able to offer services to its clients for a lower price (economies of scale). 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. The Midwest market, where both firms were heavily present, would become a center of operations and the result would be a reduction of marginal costs. The new business would be able to faster load and unload goods with more line tracks available for transportation, higher co-operation and greater manpower, not to mention benefits from exchange of market knowledge and client base. Beside this there were potential to capitalize on the opportunity of being the first railroad company to connect the East to the West. * Geographically well placed *......

Words: 1665 - Pages: 7

Premium Essay

Conrail Case

...Consolidated Rail Corporation (Conrail) by CSX Corporation (CSX) and Norfolk Southern Corporation (Norfolk). The stand-alone bidders, CSX and Norfolk would value the target, Conrail, based on its fundamentals, however if both bidders are present they would enter price wars and legal battles, therefore this would inflate the offered price for the target. In particular the acquirers have to take into account of the opportunity cost of losing the bidding war (i.e. losing significant proportion of their revenue going forward) as calculated in Question 3. According to our analysis, the value of opportunity cost of losing the bid war can be as high as 13% of total offer price (calculated in Q3). In this case, although the synergy impact between Norfolk and Conrail is lower compared to that with CSX, the value of opportunity cost of Norfolk losing the bid is significantly higher, which brings Norfolk’s potential offer price higher than that of CSX (116.84 vs. 114.36) – calculated in Q3. If they were stand-alone bidders, CSX’s potential offer price is significantly lower (105.44), and Norfolk’s offer price is c. 102. However, since CSX, Conrail and Norfolk are in mature market with high concentration of market power, I believe the bidding war is naturally the product of this market structure. The following analysis would provide further details of the synergies of the potential deals. In 1973, following the Regional Reorganization Act, the government established Conrail (the......

Words: 5428 - Pages: 22

Free Essay

Hadi

....   Why is CSX interested in acquiring Consolidated Rail Corporation (Conrail)? Describe thearguments for the offer being motivated by synergies, as well as arguments for the motivationto pre-empt a bid by Norfolk. The 1999 acquisition of Conrail, jointly split with CSX, was perhaps the most important and critical time in the company’s history. If CSX had been allowed to purchase Conrail outright, not only would NS have been entirely surrounded but also it could never againeffectively compete with CSX, even if it was able to run a railroad much more efficientlyand effectively than CSX. NS had been interested in Conrail for some time because itwould add an important addition the railroad needed, direct lines to the markets of NewYork City and Philadelphia which Conrail had been effective in developing and exploitingby becoming a intermodal (i.e., the movement of ship containers which can be movedvia over-the-road trucks as well) juggernaut moving containers between Chicago andthe Northeast.Not only was intermodal the wave of the future but NS also did not contain an effectivebusiness in such and had CSX gained complete control of the Northeast it would onlyhave been a matter of time before NS was gobbled up as well, mostly likely by aWestern road (by rules of competition, CSX would not have been allowed to purchaseNS and control the entire Eastern rail market).So, thus began the battle for Conrail in the mid-1990s when CSX announced itsintentions of purchasing the......

Words: 498 - Pages: 2

Free Essay

Dividend Policy

...Arbitrage Mergers & Acquisitions Bidding Corporate Restructuring International Finance/Risk Management Emerging Markets & Comprehensive CASE INTEL AVON MARRIOTT PINKERTON ALZA CUMBERLAND PARAMOUNT 93 PARAMOUNT 94 CONRAIL USX JAGUAR PEPSI You will find that the cases we will discuss in this course which are on a topic previously covered are covered in a sophisticated manner here. Again, the intention is to limit redundancy in your education as well as provide you with the toughest challenges. The end result, however, is that the cases we will cover in this course are quite difficult. Below is the schedule for when we will cover various cases. This is tentative and may be adjusted as the course proceeds; although, I expect little deviation from the plan. In addition, note that I will occasionally interject some lecture-ish moments. These will generally happen when I am summarizing a concept and will often be accompanied with handouts. V. Class Schedule TBD Class 1 2 3 4 5 6 7 8 9 10 11 12 Topic (cases in caps) Introduction: INTEL Dividend Policy: AVON Capital Structure: MARRIOTT Valuation: PINKETON Security Design: ALZA Distress restructuring: CUMBERLAND M&A: PARAMOUNT 93 M&A: PARAMOUNT 94 CONRAIL Spin-offs:USX International Finance: JAGUAR PEPSI Summary and Final Exam Assignments: Questions for Each Case Intel Corporation Readings: Chapter 16-18, Brealey and Myers (review) "Signaling with Dividends, Stock......

Words: 4432 - Pages: 18

Premium Essay

Strategic Analysis of Csx

...Barge. Fairly new in the railroad business, CSX needed a quick jumpstart, a good footprint to cover more territories, name recognition among its customers, and low capital investment. . Lower cost allows railroads to offer competitive prices and yield more return on investment. Mergers and acquisitions favor railroad companies due to lower capital and operating cost structures, expanding market access, and increase traffic density. CSX continued the strategy of acquiring railroad companies throughout the 1980s and 1990s; one of its biggest acquisitions came in 1996 when CSX merged with Conrail. “Conrail's ‘beautiful fit’ will create the nation's biggest railroad, with combined revenues of $14 billion and 29,600 miles of track in 22 states, stretching from Miami to Chicago to Boston. The logic behind this vision is that CSX believes the $8.4 billion the firm paid for Conrail will result in lower prices and more efficient service for customers-not to mention, of course, fatter profits and a higher share price for stockholders. It's all part of a grand strategy to make CSX more competitive, not only with other railroads, but also with truckers, a strategy that CSX hopes will help the company remain a major player in transportation well into the 21st century.” http://money.cnn.com/magazines/fortune/fortune_archive/1996/11/11/218183/index.htm-merger Between 1982 through 2011 CSX had 18 acquisitions, 4 stakes and 24 Divestitures. But why 24 Divestitures? “A......

Words: 11327 - Pages: 46

Free Essay

Norfolk Southern

...and additional 14 US states to service. President Mahone was responsible for the linking of Norfolk and Petersburg, Southside, Virginia, and Tennessee. A partner in one of the acquired firms Kimbell was responsible for creation of the Pochantas Coalfields West Virginia which created lines leading the various states including Ohio. When Virginia merged with Southwest this was considered an innovative and new way of the rail transportation industry with Northwest leading the trade. Conrail, which was originally the first commercial railroad in America, entered the passenger rail transportation industry. Both freight and passenger rail service grew dramatically then dramatically decreased after World War II. Much of the rail freight transportation lost a large amount of their business to the road transportation industry. Around 1980 The Stagger Rail Act made it possible for rail freight to become competitive once more. Conrail was auctioned in the market and Norfolk Southern was the winning bid. Conrails IPO made history with a record breaking 1.8B. In 1997 Norfolk teamed up with a similar rail transport to control Conrail’s operations and assets. This grew operations an additional 7200 miles. Present day Northfolk Southern subsidiary controls approximately 1.2 million acres of coal, natural gas and timber through states ranging from Tennessee to West Virginia. Intermodal freight transport encompasses the shipping of cargo in a container or car using various types of......

Words: 656 - Pages: 3