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The Acquisition of Consolidated Rail Corporation

  1. Why does CSX want to buy Conrail? How much should CSX be willing to pay for it?

The entire Eastern rail freight market was controlled by CSX, Norfolk and Conrail. Acquisition of Conrail would make the combined entity the major player in the market with almost 70 % market share. The main reasons for CSX to buy Conrail were
  * Conrail had near monopoly control over the Northeast rail market which was considered to be one of industry’s most prized possessions
  * Its routes complemented that of Conrail’s and they will be able to provide low cost operations to North-eastern South-eastern and Midwestern states.
  * It will give a competitive edge over Norfolk as they lacked access to the Northeast market.
  * Both CSX and Conrail were not operating at the same efficiency as Norfolk. The merger will create synergies which will make the combined entity more efficient than Norfolk. The operating ratio of Conrail was around 80% and that of CSX was 77 %. Norfolk had a better ratio of 73.5%
  * There was also a fear that if CSX does not acquire Conrail, Norfolk will go ahead and acquire it since Conrail was seen as a prized possession of the industry
  * The merger was estimated to generate an additional $370 million in annual operating income
  2. Analyze the CSX’s structure for Conrail:
  a. Why did CSX make a two tiered offer? What effect does this structure have on the transaction?
  b. What are the economic rationales for and the takeover implications of the various provisions in the merger agreement? (I.e. no talk clause, lock up options, break up fee and poison pill shareholder right plan)

  a) CSX had structured a two tiered deal of worth $8.3 billion at announcement.   Under this agreement CSX would purchase 90.5 million Conrail shares outstanding in the event of the acquisition.   CSX would pay $92.50 per share in cash for the first 40% of Conrail’s acquisition (front end offer) and...

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