Strategic Business Management

Canadian Pacific bid’s for Norfolk Southern Case Analysis

Submitted By Muddasir Noor

Canadian Pacific Railways:

The Canadian Pacific Railway, also known formerly as CP Rail between 1968 and 1996, is a historic
Canadian Class I railroad incorporated in 1881. The railroad is owned by Canadian Pacific Railway
Limited, which began operations as legal owner in a corporate restructuring in 2001.

Norfolk Southern Railways:

The Norfolk Southern Railway is a Class I railroad in the United States. With headquarters in Norfolk,
Virginia, the company operates 21,500 route miles in 22 eastern states, the District of Columbia, and has
rights in Canada over the Albany to Montréal route, and previously on CN from Buffalo to St. Thomas.

Merger between Canadian Pacific & Norfolk Southern Railways:

CP went on an intensive lobbying drive to attempt to force the NS board to consider seriously its offer,
which offered NS shareholders $32.86 per share cash and 47 per cent of a new, merged company. NS
valued the offer at $91.62 per share, or $27.3bn in total equity value, while CP insisted it was worth
between $125 and $140 a share. CP argued in its pursuit of NS and CSX that further consolidation was
vital to ease congestion on the network, which carries about 40 per cent of the two countries’ interurban
freight movements.

1. Pastel Analysis of Canadian Pacific:

 PESTEL IDENTIFY REASONS STRATEGIE
S
POLITICAL • Political stability • Canadian Pacific Railway The achieve
and importance of Limited is operating in success in
Railroads sector in Railroads in more than dozen such a
the country's countries and exposes itself dynamic
economy. to different types of political Railroads
• Trade regulations environment and political industry
& tariffs related to system risks. across various
Services countries is to
• Pricing regulations diversify the
• Wage legislation systematic
risks of
political
environment.
ECONOMIC • Exchange rates & • The Macro environment Canadian
stability of host factors such as – inflation Pacific
country currency. rate, savings rate, interest Railway
• Labor costs and rate, foreign exchange rate Limited can
productivity in the and economic cycle use country’s
economy. determine the aggregate economic
• Economic growth demand and aggregate factor such as
rate investment in an economy. growth rate,
• Unemployment rate inflation &
• Inflation rate industry’s
• Interest rates economic
indicators
such as
Railroads
industry
growth rate,
consumer
spending etc
to forecast the
growth
trajectory of
not only --
sector name--
sector but also
that of the
organization
SOCIAL • Demographics and • Society’s culture and way of Canadian
skill level of the doing things impact the Pacific
population culture of an organization in Railway
• Class structure, an environment. Shared Limited will
hierarchy and beliefs and attitudes of the understand the
power structure in population play a great role. customers of a
the society. given market
• Culture (gender and how they
roles, social design the
conventions etc.) marketing
• Education level as message for
well as education Railroads
standard in the industry
Canadian Pacific consumers.
Railway Limited ’s
 industry
TECHNOLOGI • Recent • Over the last 5 years the A firm should
CAL technological industry has been not only do
developments by transforming really fast, not technological
Canadian Pacific even giving chance to the analysis of the
Railway Limited established players to cope industry but
competitors. with the changes. also the speed
• Technology's • Taxi industry is now at which
impact on product dominated by players like technology
offering. Uber and Lyft. disrupts that
• Impact on cost • Car industry is fast moving industry. Slow
structure in toward automation led by speed will
Railroads industry. technology firm such as give more
• Impact on value Google & manufacturing is time while fast
chain structure in disrupted by Tesla, which speed of
Services sector. has stated an electronic car technological
• Rate of revolution. disruption
technological may give a
diffusion. firm little time
to cope and be
profitable.
ENVIRONMEN • Laws regulating • Different markets have Before
TAL environment different norms or entering new
pollution environmental standards markets or
• Air and water which can impact the starting a new
pollution profitability of an business in
regulations in organization in those existing
Railroads industry markets. Even within a market the
• Recycling country often states can have firm should
• Waste management different environmental laws carefully
in Services sector and liability laws. evaluate the
• Attitudes toward • United States – Texas and environmental
“green” or Florida have different standards that
ecological products liability clauses in case of are required to
• Endangered species mishaps or environmental operate in
• Attitudes toward disaster. those markets.
and support for
renewable energy
LEGAL • Anti-trust law in • The legal framework and A firm should
Railroads industry institutions are not robust carefully
and overall in the enough to protect the evaluate
country. intellectual property rights of before
• Consumer an organization. entering such
protection and e- markets as it
commerce can lead to
• Employment law theft of
• Health and safety organization’s
law secret sauce
• Data Protection thus the
overall
 competitive
edge.

2. SWOT Analysis of Canadian Pacific:

SWOT IDENTIFY REASON STRATEGY

STRENGTH • Successful • It has built a culture
track record among distributor &
of developing dealers where the
new products dealers not only
• product promote company’s
innovation products but also invest
• Superb in training the sales
Performance team to explain to the
in New customer how he/she
Markets can extract the
• Reliable maximum benefits out
suppliers of the products
• Good Returns
on Capital • Canadian Pacific
Expenditure Railway Limited has
• High level of built expertise at
customer entering new markets
satisfaction and making success of
• Strong Free them. The expansion has
Cash Flow helped the organization
to build new revenue
stream and diversify the
economic cycle risk in
the markets it operates
in.

• It has a strong base of

reliable supplier of raw
material thus enabling
the company to
overcome any supply
chain bottlenecks.
• Canadian Pacific
Railway Limited is
relatively successful at
execution of new
projects and generated
good returns on capital
expenditure by building
new revenue streams.
• The company with its
dedicated customer
relationship
 management department
has able to achieve a
high level of customer
satisfaction among
present customers and
good brand equity
among the potential
customers.

• Canadian Pacific
Railway Limited has
strong free cash flows
that provide resources in
the hand of the company
to expand into new
projects.
WEAKNESSE • End up • Not very good at • Canadian Pacific
S keeping product demand Railway Limited
higher forecasting leading to has to build
inventory higher rate of missed internal feedback
both in-house opportunities compare mechanism
and in to its competitors. One directly from
channel. of the reason why the sales team on
• Days days inventory is high ground to counter
inventory is compare to its these challenges.
high compare competitors is that • Compare to other
to the Canadian Pacific organizations in
competitors Railway Limited is not the industry
• Lack in facing very good at demand Canadian Pacific
challenges forecasting, Railway Limited
• Limited • The company has not has a higher
success being able to tackle the attrition rate and
outside core challenges present by have to spend a
business the new entrants in the lot more compare
• High attrition segment and has lost to its competitors
rate in work small market share in on training and
force the niche categories. development of
its employees.
OPPORTUNI • New • Over the past few years
TIES customers the company has
from online invested vast sum of
channel. money into the online
• Lower platform. This
shipping investment has opened
prices new sales channel for
• Opening up of Canadian Pacific
new markets Railway Limited. In the
because of next few years the
government company can leverage
agreement this opportunity by
 • Lower knowing its customer
inflation rate better and serving their
• Economic needs using big data
uptick and analytics.
increase in • Decreasing cost of
customer transportation because
spending of lower shipping prices
can also bring down the
cost of Canadian Pacific
Railway Limited’s
products thus providing
an opportunity to the
company - either to
boost its profitability or
pass on the benefits to
the customers to gain
market share.
• The adoption of new
technology standard and
government free trade
agreement has provided
Canadian Pacific
Railway Limited an
opportunity to enter a
new emerging market.
• The low inflation rate
brings more stability in
the market, enable credit
at lower interest rate to
the customers of
Canadian Pacific
Railway Limited.
• Economic uptick and
increase in customer
spending, after years of
recession and slow
growth rate in the
industry, is an
opportunity for
Canadian Pacific
Railway Limited to
capture new customers
and increase its market
share.
THREATS • Currency • As the company is
fluctuations operating in numerous
• No regular countries it is exposed to
supply of currency fluctuations
innovative especially given the
products volatile political climate
 • Shortage of in number of markets
skilled across the world.
workforce • Over the years the
company has developed
numerous products but
those are often response
to the development by
other players. Secondly
the supply of new
products is not regular
thus leading to high and
low swings in the sales
number over period of
time.
• Shortage of skilled
workforce in certain
global market represents
a threat to steady growth
of profits for Canadian
Pacific Railway Limited
in those markets

3. Porters five forces model of Canadian Pacific:

Five Forces LEVEL REASONS STRATEGIES

HIGH • New entrants in Railroads
brings innovation, new ways
of doing things and put
pressure on Canadian Pacific
Railway Limited through
lower pricing strategy,
Threat of reducing costs, and providing
new entrants new value propositions to the
customers.
• Innovating new products and
services. New products not
only brings new customers to
the fold but also give old
customer a reason to buy
Canadian Pacific Railway
Limited‘s products.
• Building economies of scale
so that it can lower the fixed
cost per unit.
• Building capacities and
spending money on research
and development.

HIGH • Buyers are often a demanding • Building a large base of

lot. They want to buy the best
offerings available by paying
the minimum price as
Bargaining
possible. This put pressure on
Power of
Canadian Pacific Railway
Customers
Limited profitability in the
long run. The smaller and
more powerful the customer
base is of Canadian Pacific
customers. This will be
helpful in two ways. It will
reduce the bargaining power
of the buyers plus it will
provide an opportunity to the
firm to streamline its sales
and production process.
• Rapidly innovating new
products. Customers often
 Railway Limited the higher
the bargaining power of the
customers and higher their
ability to seek increasing
discounts and offers.
HIGH • All most all the companies in
the Railroads industry buy
their raw material from
numerous suppliers. Suppliers
in dominant position can
decrease the margins
Canadian Pacific Railway
Bargaining Limited can earn in the
power of market. Powerful suppliers in
Supplier Services sector use their
negotiating power to extract
higher prices from the firms
in Railroads field. The overall
impact of higher supplier
bargaining power is that it
lowers the overall
profitability of Railroads.
LOW • No one can easily have the
vast railway network like
Canadian Pacific because it
Threat of requires higher capital, legal
Substitute permission and many other
factors can be the hindrance.
HIGH • Canadian Pacific Railway
Limited operates in a very
competitive Railroads
industry. This competition
Competitor/
does take toll on the overall
Rivalry
long term profitability of the
organization.
4. What was CP’s revised offer and initial offer and how CP will carry this offer?
seek discounts and offerings
on established products so if
Canadian Pacific Railway
Limited keeps on coming up
with new products then it can
limit the bargaining power of
buyers.
• New products will also
reduce the defection of
existing customers of
Canadian Pacific Railway
Limited to its competitors.
• Building efficient supply
chain with multiple suppliers.
• Experimenting with product
designs using different
materials so that if the prices
go up of one raw material
then company can shift to
another.
• Developing dedicated
suppliers whose business
depends upon the firm.
• Being service oriented rather
than just product oriented.
• Understanding the core need
of the customer rather than
what the customer is buying.
• Increasing the switching cost
for the customers.
• By building a sustainable
differentiation
• By building scale so that it
can compete better
• Collaborating with
competitors to increase the
market size rather than just
competing for small market.
New Offer:

• 0.451 shares in new company

• US$32.86 in cash in May 2016

• Closing into trust in May 2016

• 77% premium to unaffected price of $79.14

Initial Offer:

• 0.348 shares in new company

• US$46.72 in cash on Dec 31, 2017

• Merger closing upon STB approval Dec 31, 2017

• 59% premium to unaffected price of $79.14

Immediate cash on closing more than 18 months before STB merger approval

Substantially greater NS shareholder ownership of new company

72% of operating efficiencies not contingent on STB merger approval

5. How companies will create substantial value through merger?

PRE-MERGER OPERATIONAL IMPROVEMENTS (72%)

Commencing upon trust approval:

Fuel efficiency improvement

Velocity improvement

Improved asset utilization

Yard and terminal optimization

Workforce management (leveraging attrition)

War on bureaucracy

POST-MERGER COMBINATION SYNERGIES (28%)

Commencing upon final STB approval:

Extended reach and longer length of haul

Market share gains with improved service

 Interline efficiencies

ADDITIONAL SOURCES OF VALUE CREATION

Effective tax rate below 30%

Cash tax savings of ~$200M annually

Asset monetization opportunities

Real estate monetization

6. What public interest STB needed for approval Merger?

Service and safety improvements:

• Efficient, reliable single-line service

• Eases Chicago congestion

Substantial economic and environmental benefits:

• Increases equipment utilization

• Reduces fuel consumption

• Streamline facilities

• Creates capacity through efficiencies, not new construction

• Reduces highway congestion

• Opens new competitive opportunities

• Proposed access model would introduce meaningful competition

7. Can you define Chicago opportunity for company?

Chicago handoffs reduced by:

Increased single-line transit moves

Lower dependency on Belt carriers

Alternate gateways for interchange

Re-routing around Chicago

Increased supply chain reliability for existing customers

8. What different paths Norfolk Southern share holder have during Merger with Canadian
Pacific?
9. How CP’s offer create vast value with lower risk for NS shareholders?
10. What is NS new announced plan to improve performance of their railways?

In Response to the CP Offer, NS Has Announced a New Plan to Improve Performance

• In response to CP’s acquisition offer, NS management has initiated medium-term guidance that
calls for a 65% OR by 2020
• NS has not historically issued medium- or long-term guidance

11. Does value creation from CP’s offer is conditioned on merger approval?

The Substantial Majority of Value Creation from CP’s Offer is Not Conditioned on Merger
Approval:

• The substantial majority of value creation is driven by management change, not corporate
consolidation
• The Pre-Merger Operational Improvements will be achieved whether or not the merger is
approved or consummated
• Potential for additional value creation from real estate and asset monetization is not included
• Significant Post-Merger Combination Synergies will be achieved if the merger is approved

12. Evaluate proper methodology for valuing the proposed transaction between these two
companies?

• Valued on an unaffected basis, this transaction is a merger between a US$23bn market cap
company, CP, and a US$24bn market cap company, NS
• For each NS share, shareholders will receive 0.451 shares of a new company, CP-NS (NS
shareholders will own 47% of CP-NS), and $32.86 in cash
• In such a transaction, one cannot value the offer using the current share price of the acquirer’s
common stock, but instead must use the expected fair value of the combined company’s common
stock at closing.
• The expected fair value of CP-NS must reflect the impact of management change; cost, revenue,
and tax synergies; the new capital structure; strategic benefits of the combination; and the
anticipated multiple investors will assign to CP-NS earnings

13. Clearly define value maximizing path for NS?

References:
http://fernfortuniversity.com/term-papers/pestel/nyse4/2681-canadian-pacific-railway-
limited.php
https://www.usatoday.com/story/money/2016/04/11/canadian-pacific-railway-norfolk-
southern/82884876
https://www.mbaskool.com/brandguide/transport-and-logistics/4467-canadian-pacific-
railway.html