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Conrail A

Ankit Mittal, Ravinder Wadhwa, Rahul Ranjan, Raman Gupta, Vandana Soni

11/4/2012

Conrail A

Why does CSX want to buy Conrail? How much should CSX be willing to pay for it? Ans. 1: The acquisition rationale can be looked into from the following angles: A) Strategic- To pre-empt any such move from Norfolk and thus ensure a better competitive positioning in the industry, in view of the following strategic rationale 1) The acquisition of the rail network of Conrail would provide CSX with the highly lucrative long haul, contiguous and therefore low cost service between the southern ports, the northeast and the Midwest and this would deny Norfolk access to the northeast market.(Refer to exhibits 9) 2) In short haul routes between the Midwest and the south, the merger would be more competitive than Norfolk through cost reductions. 3) The acquisition can potentially help form a strong East-West rail network as well as ties across Canada especially post the NAFTA agreement in 1994 B) 1) 2) 3) Financial rationale The acquisition will help add 8.5 Billion in rail revenue. Help consolidate operations and increase service improvements. Cost Reduction would yield additional 370 Million in annual operating income by the year 2000 net of merger costs

Q2 Why did CSX make a two tiered offer? What effect does this structure have on the transaction? What are the economic rationales for and the takeover implications of the various implications of the various provisions in the merger agreement (i.e No talk clause, lock up options, breakup fee, and poison pill shareholder rights plan)

Ans.2 The two tiered structure of the deal was as follows: A) Deal worth 8.3 Billion announced B) CSX would purchase 90.5 miilion conrail shares to complete acquisitions ( common shares, preferred convertible shares, and employee incentive stock options) C) The first 40% of the shares to be paid in all cash at 92.50$ offer and rest at share exchange at 1.85619:1.0 for 60% shares. D) Front end offer in 2 stagesE) a cash tender offer for 17.86 million shares at 92.50$ after merger announcement ( 19.7% of conrail shares) which essentially will bypass the Pennsylvania law requiring that if 20% shares of the company are acquired than all shareholders must be offered the same price and thus converting it into a vote. F) 2nd tender offer for 20.3% shares at same price after approval of Pennsylvania law G) By structuring it in this way CSX could ensure a lower price paid for the remaining 60% shares through the swap ratio. H) By second offer, acquire 40% of the shares I) At around the opt out vote as required by the fair value statute, CSX and supporter would own around 35.5% of acquisition shares and they would need only 14.6% of the acquisition shares to vote in favour of the vote out.

The various clauses and implications of the deal structure are as follows:-

1) No Talk Clause-Conrail is unable to engage in merger talks for a period of 6 months unless certain conditions are met: a) Considering another offer is necessary to meet fiduciary responsibilities to shareholders. b) Another offer emerges that makes it unlikely that CSX can complete the merger or win the necessary opt out vote. Implications: The clause will limit the chance of other hostile bids while the deal with CSX is on. A part of the problem which could occur due to the Conrail board which has considerable powers with regards to fiduciary responsibility and hence could consider more lucrative offers

2) Share purchase- CSX can buy 15.96 million new shares of Conrail at 92.5$. This clause will let CSX maintain its ownership control and prevents other interested parties into getting into similar deal, otherwise CSX would have to increase its offering.

3) Breakup fees- 300 million USD- The clause ensures that CSX gets the money in case deal doesnt come through and hence its fees associated with the deal gets covered. Also looking at the value of the breakup fees, it becomes evident that another bid would have to be greater than 300 million USD for Conrail. 4) Poison Pill-Conrail suspended its poison pill clause which allowed current shareholders to buy shares discounted at 50% to maintain their ownership interestif an outsider attempted to buy more than 10% of the overall shares. By removing the poison pill, the shareholders made sure that CSXs ownership rights would go unchallenged since no dilution of stake would occur.