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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)

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