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CASE A
CSX ACQUISITION OF CONSOLIDATED RAIL 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 $92.50 and for the outstanding 60% of the shares shareholders will receive 1.85619 shares of CSX (the back-end offer). Based on CSX’s stock price of $46.75, offer had average value of $89.07/share (0.40*92.50 + 0.60*1.85619*46.75 = $89.07). Offer was structured to allow CSX: A) Gain possible maximum control of the corporation and then obtain...

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