1. Why is CSX interested in acquiring Consolidated Rail Corporation (Conrail)?

Describe the arguments for the offer being motivated by synergies, as well as
arguments for the motivation to 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 companys history. If CSX had been allowed to purchase Conrail
outright, not only would NS have been entirely surrounded but also it could never again
effectively compete with CSX, even if it was able to run a railroad much more efficiently
and effectively than CSX. NS had been interested in Conrail for some time because it
would add an important addition the railroad needed, direct lines to the markets of New
York City and Philadelphia which Conrail had been effective in developing and exploiting
by becoming a intermodal (i.e., the movement of ship containers which can be moved
via over-the-road trucks as well) juggernaut moving containers between Chicago and
the Northeast.

Not only was intermodal the wave of the future but NS also did not contain an effective
business in such and had CSX gained complete control of the Northeast it would only
have been a matter of time before NS was gobbled up as well, mostly likely by a
Western road (by rules of competition, CSX would not have been allowed to purchase
NS and control the entire Eastern rail market).
So, thus began the battle for Conrail in the mid-1990s when CSX announced its
intentions of purchasing the railroad outright. Through an aggressive bidding war NS
was able to not only buy into Conrail but also was able to take the most profitable
routes.

CSX-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. Snow
believes the $8.4 billion he's paying 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 Snow hopes will help CSX stay a major player in transportation well into the
21st century.
Not everyone is as ecstatic as Snow. Norfolk Southern, a competitor that also operates in the
Southeast, believes the deal threatens the delicate balance of power in the railroad industry, which
has gone through a massive consolidation in recent years. Norfolk is likely to challenge the deal,
which must be approved by government regulators. CSX's customers, companies that ship
everything from coal to chemicals to autos, are also concerned that CSX would become a virtual
monopoly in the East and, despite what Snow says, they worry about what that might do to pricing.
"The limited number of players in the rail industry keeps going down," says Robert Voltmann,

director of policy at the National Industrial Transportation League, a trade organization representing
1,500 shippers. "Shippers are concerned."
These worries don't seem to bother Snow, who sees lots of business sense in the deal. Although
they do overlap in certain markets, CSX and Conrail have impressively complementary operations.
Both companies operate east of the Mississippi River exclusively. But where CSX emphasizes northsouth service, hauling freight along a corridor that runs from the mid-Atlantic to Florida, Conrail has
an east-west axis, running from New York and Boston to Buffalo, Chicago, and other points west.
The new CSX-Conrail will be able to provide so-called single-line service across a vast area. At
present, goods traveling from, say, Chicago to Miami have to be switched from Conrail to CSX
freight cars at some point along the way. This creates delays, increases the chance that goods will
be damaged, and can make service and pricing dauntingly complex. Partly because of such
inefficiency, the railroad industry as a whole currently controls only about 10% of the $300 billion
freight-hauling market. The lion's share belongs to trucking companies, which customers generally
see as faster and more reliable than railroads.
But CSX-Conrail plans to take on the trucks. The new company will be able to offer seamless routes
that run parallel to such busy trucking corridors as I-81, I-85, and I-95. Combining service will get rid
of all manner of routing snafus as well. Goods coming up from the Southeast, for example, cannot
currently travel nonstop into New York. That's because CSX's lines terminate in Philadelphia. Conrail
runs lines from Philadelphia to New York. Post-merger, it will be a straight shot.
By being more competitive and by consolidating operations, CSX says it can bump up annual
operating earnings $550 million. Customers, meanwhile, should benefit from straighter, shorter
hauls. Says Thomas Stallkamp, Chrysler's executive vice president for procurement and supply: "We
believe this will help us. Right now on some routes there's a lot of inefficiency in the system."
But Snow's vision is much broader than just building a powerful railroad. He eventually wants CSX to
become a total-solution company for big customers like Ford and Chrysler, taking care of most of
their transportation needs. Why, for instance, should Ford worry about transportation logistics when
its strength is making cars? If the merger makes CSX more competitive with trucking, it can then go
to customers like Ford and argue for bigger (and more profitable) chunks of its business.
The argument for increased efficiency holds some weight. It's worth noting, for instance, that freight
prices have gone down on average during this period of industry consolidation. It is true, however,
that after this merger is completed certain markets that will be served only by the new CSX will be
left with just one railroad. If CSX wants its deal to be approved, it most likely will have to hand out
trackage rights, which would allow its remaining competitors to run their trains over portions of the
new company's tracks. That should continue to put downward pressure on prices. Also, CSX may
have to mollify customers with contract sweeteners such as rate freezes.
CSX's big strategic move did not go unnoticed by Norfolk Southern, the other large railroad east of
the Mississippi. It issued a strongly worded statement that closed on an ominous note: "We do not
rule out any options." One option: With a strong balance sheet, Norfolk Southern is certainly in a
position to disrupt the merger with a rival bid for Conrail, a company that it has tried to buy in the
past. That's not likely, however, given the way CSX's and Conrail's merger is structured. CSX plans

to pay $92.50 a share to buy up 40% of Conrail's stock, then purchase the remaining 60% through a
tax-free exchange of stock. Norfolk Southern may well feel disinclined to top this bid, already set at a
premium price of 18 times Conrail's estimated 1996 earnings. There's also the trifling matter of a
$300 million breakup fee, which CSX or Conrail must pay as a penalty should one accept a rival bid.
What's more, Conrail appears perfectly happy with its new partner. The merger between the two rail
giants has been one of equals to a surprising degree so far. For example, the pair plan to dream up
a name for the new company. Headquarters for the holding company will be in Conrail's Philadelphia
home rather than CSX's in Richmond. John Snow will be CEO for the first two years of the merger,
after which David LeVan, Conrail's current CEO, will take over. The two men even managed to
hammer out the essentials of this deal during private discussions, before involving investment
bankers and other advisers. "We handed the deal to the bankers on a silver platter," says LeVan.
So what's next? Industry watchers expect the handful of companies left to make one of the few
moves left for big rail: a single company owning a transcontinental railroad, something that's never
been achieved, even by the 19th-century rail barons. The CSX merger creates an eastern Goliath,
that, once the dust settles, might look west to Burlington Northern Santa Fe or Union Pacific as a
transcontinental partner.
Such a move would further Snow's strategy to become a total transportation company. For its part,
Burlington Northern Santa Fe, say industry insiders, wants to merge with Norfolk Southern. Robert
Krebs, Burlington's CEO, seems hungry to build a transcontinental railroad. Some experts expect a
move to happen quickly to counteract the CSX-Conrail merger. "The stage is set," says Jeff Medford,
an analyst with William Blair & Co. "A transcontinental railroad is the dream of every rail CEO, and
you'll see one before the end of the century."
Let the dreaming and scheming begin.

Some of the reasons why CSX wants to buy Conrail are, to increase the consolidation in the Railway industry.
Further consolidation typically means lower cost for the consolidators fx because economies of scale and
synergies and .
A consolidation also results in lower competition inside the industry, which typically follows with higher, or at
least not lower, prices and therefore higher profit.
Another argument that is mentioned in the materials is that CSX want to do the merger, before another
company tries. CSX doesnt want Norfolk southern to get Conrail.

CSX is willing to pay $92.84 per share

2. Describe the offer made by CSX. How much is CSX effectively offering per Conrail share?

5. Why did CSX make a two-tiered offer? For the shareholders of Conrail, does this make a
difference relative to an all cash offer?

6. Describe the anti-takeover devices in the deal structure: 1) no-talk clause, 2) poison pill, 3) breakup fee, and 4) lock up option. What are these devices and why would CSX or Conrail want to have
them included?
A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used
by a corporation's board of directors against a takeover. In the field of mergers and acquisitions,
shareholder rights plans were devised in the early 1980s as a way for directors to prevent takeover
bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the
bidder to negotiate with the board.

The statutes of some companies may hold special clauses designed to prevent or at least severely
handicap the chances of a hostile bid against them. This kind of defense is generally disliked by
financial markets to the extent they hamper speculation on listed companies. These defenses are
commonly known as poison pills. They can take various forms, including:

Limitation of voting rights

Authorization to securities issues or additional obligations

Block certain assets.

Definition of 'Breakup Fee'

A common fee used in takeover agreements if the seller backs out of a deal to sell to the
purchaser. A breakup fee, or termination fee, is required to compensate the prospective purchaser

for the time and resources used to facilitate the deal. Breakup fees are normally 1-3% of the
deal's value.

Investopedia explains 'Breakup Fee'

A company might pay a breakup fee if it decides not to sell to the original purchaser and instead
sells to a competing bidder with a more attractive offer. Sometimes a breakup fee can discourage
other companies from bidding on the company because they would have to bid a price that
covers the breakup fee

Definition of 'Lock-Up Option'

A stock option offered by a target company to a white knight for additional equity or for the
purchase of a valuable portion of their company.

Investopedia explains 'Lock-Up Option'

An undesired third party is deterred from acquiring a major portion of the
target company due to the very high value of the lockup option.
Also known as Lock-Up Defense

No talk provision is a contractual provision which prohibits the parties to an agreement from
disclosing the terms of the agreement or anything related to the formation of the agreement to
nonparties. Such clauses are also known as confidentiality clause or nondisclosure clause