ACQUISITION OF CONRAIL CORP.

BY CSX CORP.
M&A ASSIGNMENT
GROUP 3
MEGHA SONI, 25A
KRISHNA KOUNDINYA CHALLA, 24B
MOHIT JAIN, 28B
PIYUSH KUMAR SINGH, 34B
ROHINI BAHUGUNA, 39B
SUNNY PANDEY, 50C

CASE SUMMARY
CSX has put forth a two-tier merger agreement to acquire Conrail

The front end offer for 40% of the shares is $92.5

The backend offer is an exchange offer with a ratio of 1.85 shares of

CSX for one share of Conrail

Conrail is also a potential target of Norfolk Southern

Both CSX and Norfolk are mature firms who operate mostly in the

railroad industry and intend to go through acquaints as the

market is a mature one
The Pennysylvania antitakeover law makes the bidding process

difficult due to the several provisions incorporated in it

The DCF valuation gives a range of $93.24 - $93.54

CSX

CONRAIL

BACKGROUND INFORMATION

STRATEGIC DUE DILIGENCE

MAIN PLAYERS IN US RAILROAD WORLD

Top 3 players in order based on size:

Richmond-based CSX (CEO: John W. Snow)

Virginia-based Norfolk Southern (CEO: David R. Goode)

Philadelphia-based Conrail (CEO David M. LeVan)

The US railroad industry is a mature market. Therefore growth

through acquisitions is a lucrative strategy.

FLOW OF EVENTS: CSX AND NORFOLK TRY

TO ACQUIRE CONRAIL
CSX made a friendly offer to takeover Conrail
CSX put forth a two-tier merger agreement (due to legal limitations)
o

Front-end offer for 40% of shares at $92.50 and

Back-end exchange offer with 1.85619 CSX shares for a Conrail share

Norfolk Southern made a hostile counter bid

Norfolk offered 14.1% premium over CSXs offer; also asked Conrail to

end CSX deal and suspend poison pill

However, Norfolks attempt bore no fruit as Conrail board had agreed

to a no-talk clause.

BENEFITS: CSX-CONRAIL MERGER

CSX-Conrail gains:
$ 8.5 billion+ revenue and access to ~ 70% of the Eastern market
Rail-way control between the Southern ports (CSX), the Northeast

(Conrail) and the Midwest (both present)

Offer services for a lower price (economies of scale).

Ward off competition

The new combination would restrict the access to Norfolk Southern in

these markets, deviating business towards the new company.

Other benefits:
Faster loading and unloading of goods; more line tracks available; co-

operation; Exchange of client base; Potential to connect East & West

ASSESSMENT: NORFOLK-CONRAIL MERGER

INTENTIONS

Norfolk has access to Southeastern and Midwestern States and

Ontario (Canada)
But it lacks presence in Northeastern states that are very

lucrative
Taking over Conrail gives Norfolk this access.
Among other things Norfolk is healthier than CSX. Leverage ratio

is 33.6% while CSXs is 40.1%.

Norfolk has incentive in stopping CSX-Conrail deal that threatens

its business.

KEY CHALLENGE TO MERGER BENEFITS

REALIZATION

Both CSX and Norfolk are strategic bidders and can gain if each

acquires Conrail.
The acquisition war can lead to high valuations for Conrail

thereby lowering realizable profits.

VALUATION

Valuation