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 to participate in a merger of equals. CSX has offered to acquire Conrail in a two tiered deal. The first 40% of tendered Conrail shares will be bought at a price of $92.50 while 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 from Norfolk Southern, a competitor in the Industry. Norfolk Southern offers ____ Analysis Case A, Question 1: Why is CSX interested in Conrail? How much should CSX pay for Conrail? The Stagger’s Rail Act of 1980 has created a deregulated environment in which acquisitions are used to improve the competitive positioning of existing companies within the railroad industry. CSX is interested in Conrail for a couple of reasons. Primarily, CSX would like to acquire Conrail because its routes are complementary to their own, allowing the combined company to provide “long-haul, contiguous, and therefore low-cost service between the Southern, Eastern, and Mid-Western parts of the United States.” Additionally, CSX’s acquisition of Conrail would prevent the company’s main competitor Norfolk Southern from gaining access to routes in the Northeastern United States. This would leave Norfolk Southern at a large strategic disadvantage. Lastly, the combination would provide cost synergies and reductions, even on the shorter haul trips, that would far exceed those of Norfolk Southern in aggregate measures. Contrarily, it was also suggested by an analyst that the merger was a result of fear. Essentially, it was said that CSX was concerned that Norfolk Southern would make a bid first, thus achieving a first mover advantages and getting the same benefits that CSX itself would from the merger, effectively degrading CSX’s competitive positioning within the industry. Whether the deal was motivated by fear or strategic positioning, the merger will improve the competitive positioning of CSX, ultimately making the combined CSXConrail company extremely powerful in the industry. CSX should pay somewhere between $93.73 and $110.55 for Conrail. This range is based on transaction multiples analysis (EPS, Sales, EBITDA) used in previous railroad deals (calculated using only completed deals) and a Discounted Cash Flow approach of incremental cash flow including the revenue gained from rival Norfolk Southern (See exhibits A and B for details).

75) in the form of a stock swap. and need 14% to get opt out approval for a two tiered offer -use second offer of 92. Question 2b: What are the economics rationales and takeover implications of the various provisions in the merger agreement (no talk clause.6% including mgmt.3% to avoid Pennsylvania one price deal and turn it into a vote -after first offer have 35. thus reducing the risk of the occurrence of a bidding war in which CSX would have to increase their offering dramatically or be unable to complete the deal. Additionally.78 (derived from the exchange ratio of 1.50 to entice shareholders to vote for opt out provision -give remaining 60% of shareholder a lower value to reduce value paid. but negative for CSX as it doesn’t provide as strong of a barrier to new bidders. thus increasing the probability that Conrail could consider other offers.85619 and the initial CSX stock price of $46. Pennsylvania law does give the Board of Directors more leeway than is present in other states in regards to fidicuary responsibility.96 Million newly issued common stock shares of Conrail at $92. and will then force the remaining shareholders to accept a lower value of $86.50. poison pill) Provision No talk clause-Conrail is unable to engage in merger talks for a period of 6 months unless certain conditions are met: 1)Considering another offer is necessary to meet fidicuary responsibilities to shareholders. 2)Another offer emerges that makes it unlikely that CSX can complete the merger or win the necessary opt out vote Lock Up Options-CSX has option to buy 15. It prevents Conrail from selling these shares to another buyer. which is Economic Rationale and Takeover Implications This ensures that CSX’s investment of time and money is worthwhile. lock up options. Question 2a: Analyze the structure of the CSX-Conrail deal. -first offer taking only 19. and either blocking the deal or significantly raising its cost. because the merger was taking place in Pennsylvania there were many specific regulatory requirements which explain why the first tier section of the deal was further split into two stages. break up fee.Case A.50 to gain control of the stock. as it lessens the chances of another bidder entering the picture. They use the first tier cash offer of $92. thus saving cash. Why did CSX make a two tiered offer? What effect does this structure have on the transaction? CSX likely made a two tiered deal due to financial and regulatory considerations. Case A. This is 18% of total shares in the company. . This ensures that CSX is able to maintain their ownership control over Conrail. This is a positive attribute for Conrail as it allows them more opportunity to achieve a better value for their shareholders.

by reducing the possibility that current shareholders could challenge their stake and dilute the power of their shares. it is in a shareholder’s best interest to tender their shares during the first round offer whether or not the deal succeeds ultimately. Tender Deal Succeeds $92.50+.relatively high for this type of agreement Break Up Fee-$300 Million.75*$86. we would tender our share in the initial round. and/or decide not to move forward with the deal in general. Poison Pill-Conrail suspended its poison pill clause which allowed current shareholders to buy shares discounted at 50% to maintain their ownership interest. 4% of deal which is higher than a normal circumstance.20. while navigating the regulatory issues within Pennsylvania.00-share price of shareholder if share is sold Conrail before merger speculation Case B. This ensures that CSX does not lose the money it invests in the fees associated with the deal.50-price paid to $71. This suspension allowed CSX to gain ownership control of the company. This also acts as an disincentive for Conrail to look into other bids. This is because the absolute value in this circumstance is higher.weighted average of future outcomes in continuation of first tier offer and second tier offer * associated with remaining 80% of shareholders after first offer (.25*92. Question 3: As a Conrail Shareholder would you tender your shares to CSX at a price of 92. This makes it easier for the company to move forward with the takeover deal leading to less of a required value outlay . and also that it is compensated for potential reputation damage and time investment.50 in the first offer? A prisoner’s dilemma analysis shows that in the complete absence of another bidder and a foreseeable market for the acquisition of the company.if an outsider attempted to buy more than 10% of the overall shares.50-price paid to shareholder if they sell Not Tender Deal Fails $88.78) $92. It ensures that another profitable bid would have to be at least $300 million more to compensate for the loss associated with the break up. Therefore. Question 1: Why did Norfolk Southern make a hostile bid for Conrail? . Case A.

Question 4: As a shareholder would you vote to opt-out of the Pennsylvania antitakeover statute? What do the capital markets expect to happen? As a shareholder you do not have a win/win strategy anymore. therefore Norfolk could be willing to pay more. Question 2: How much is Conrail worth? In a bidding war who would be willing to pay more Norfolk Southern or CSX? The stand alone value of Conrail is 6425.5 million shares). Additionally CSX contended that the offer was not high enough to stop the CSX-Conrail merger from proceeding or influence the opt out vote.67 thus negating the “fiduciary responsibility” condition of the No talk clause. Case B. The CSX-Conrail merger would effectively shut Norfolk Southern out of the Northeastern routes in the United States. Ultimately it will come down to whether the deal is done primarily for strategic maneuvering and a strong upside in which CSX is likely to bid more.00*the 90. using a 2% discount rate per month. Essentially. if Norfolk Southern did not acquire Conrail. they must influence the opt out vote by offering more money. In mid-January 1997 Norfolk Southern should either offer shareholders substantially more money to sabotage the opt out vote or get the board to support their cause.Norfolk Southern made a hostile bid for Conrail because not doing so was going to cause them to lose revenue. CSX was going to steal their future revenue. Additionally the required time delays in Norfolk’s proposal implied that. it seems that CSX would be willing to pay more for Conrail as the incremental gains associated with its acquisition of the company are larger than those that Norfolk southern would achieve. Question 3: Why does CSX refer to Norfolk’s bid as a non-bid? What should Norfolk Southern do as of Mid-January 1997? CSX refers to Norfolk’s bid as a non-bid because they believe that it would violate the CSX-Conrail “No talk clause” in the merger agreement if Conrail engages in talks with Norfolk. Therefore the board could not engage based on this principal. However. On the other hand . specifically savings associated with overlapping operations and cheaper longer-haul contiguous routes. Because they do not have the necessary time frame to replace the board. In a bidding war.00. and prevent them from achieving a competitive cost structure. the actual present value of the offer is worth less than $90. it is important to note that CSX will also lose less revenue than Norfolk if they lose out on the deal. On one hand you have CSX which is obviously scared that shareholders would not vote the opt-out and is increasing the price and extending the no-talk clause to make sure the Norfolk bid is not even considered as a bid by the shareholders. This is below Conrail’s initial offer of $92. Case B. Case B. or if it is done out of fear which would imply that Norfolk would pay more (See exhibits C and D for details).50 and extremely close to its blended offer value of $87.50 (the market price of $71.

Question 5: What are the costs and benefits of regulating the market for corporate control for statutes such as Pennsylvania’s antitakeover law? Potential cost.if the STB requires Conrail to service certain lower profit areas. and conversely influence the opt out vote-thus stopping the Conrail merger. The 85.you have Norfolk who keeps increasing the price and is backed by banks – creating incentives for shareholders not to opt-out. the overall value of the merger/company would be diminished. This further implies that the market does not believe at this point that Norfolk Southern will put forth what would be necessary to break the “no talk clause” in the CSX-Conrail agreement.5% of shareholders who agree to initially tender in November 1996. . the markets seem to be split on what the outcome will be. Later as the vote approaches. before the opt out vote. Case B. imply that markets expect CSX will acquire Conrail. and instead force the board to get out of the no-talk clause and consider the Norfolk bid.

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