Following the $8.3 billion merger announcement of CSX Corporation ("CSX") and Consolidated Rail Corp. ("Conrail") on 15 October 1996, Norfolk Southern Corporation ("NSC") joined the bidding war by announcing a hostile offer of $100 per share cash tender offer to compete with CSX as NSC recognized the proposed merger of CSX and Conrail ("CSX-Conrail Merger"), if consummated, would pose a considerable threat to the survival of NSC. How much should NSC be willing to pay to acquire Conrail? In a bidding war, who should be willing to pay more, Norfolk Southern or CSX?
Benjamin C. Esty and Mathew Mateo Millett
Harvard Business Review (298095-PDF-ENG)
August 21, 2002
Case questions answered:
- Why did NSC bid for Consolidated Rail Corp.?
- How much should NSC be willing to pay to acquire Conrail? In a bidding war, who should be willing to pay more, Norfolk Southern or CSX?
- Why does CSX refer to Norfolk Southern’s bid as a “non-bid”? What should Norfolk Southern do as of mid-January 1997? How do you interpret the stock market’s reaction(s) to the offer and counter-offers?
- Should Conrail shareholders vote for or against opting out of the Pennsylvania antitakeover statute?
- Overall, what are the costs and benefits of regulating the market for corporate control through statutes such as Pennsylvania’s anti-takeover law? Assumptions: Risk premium: 7.5%; Debt Beta: 0.10.
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Acquisition of Consolidated Rail Corp. (B) Case Answers
Executive Summary – Acquisition of Consolidated Rail Corp. (B) Case Study
Following the $8.3 billion merger announcement of CSX Corporation (“CSX”) and Consolidated Rail Corp. (“Conrail”) on 15 October 1996, Norfolk Southern Corporation (“NSC”) joined the bidding war by announcing a hostile offer of $100 per share cash tender offer to compete with CSX as NSC recognized the proposed merger of CSX and Conrail (“CSX-Conrail Merger”), if consummated, would pose a considerable threat to the survival of NSC.
Over the next several months, the potential acquirers kept increasing while criticizing each other through legal actions, advertisements, and news. To comply with Pennsylvania’s anti-takeover law, an opt-out vote would take place on 17 January 1997. The shareholders of Conrail would vote on the deal of CSX-Conrail Merger to decide upon the future of the three companies.
1. Why did NSC bid for Consolidated Rail Corp.?
There are four major reasons for the NSC bid for Consolidated Rail Corp. These are as follows:
a.) Stop CSX from acquiring Conrail
The combined rail network of the CSX-Conrail merger would provide low-cost service between the Southern ports, the Northeast, and the Midwest. The CSX-Conrail merger would result in an $8.6 billion gain in revenues and a 68% gain in the Eastern market.
On the other hand, the NSC-Conrail Merger (as defined below) would result in rail revenue of $7.8 billion and 61% of the Eastern market. The combined railway network could also provide contiguous rail service between Northeastern, Midwestern, and Southeastern markets.
NSC was regarded as the most efficient and best-managed railroad in the United States within the industry, with its operating ratios consistently below 80% since 1990 and reaching 70% by 1996E. If CSX-Conrail Merger succeeded, NSC would be left out of the Northeast market, experience a significant loss in market share of the Eastern Market, and therefore lose the opportunity to service long haul routes from either the South or Midwest.
As such, NSC would incur extra costs of $50 million to $121 million for gaining access to the Northeast market and suffer from a loss in operating income of $130 million to $320 million during 1998E-2001E. If CSX won the bid, the CSX-Conrail Merger would be able to obtain dominance of the Eastern and Midwestern rail freight market, which would threaten the survival of the losing corporation – NSC.
At the same time, it forwent the potential increase in operating revenue of $231 million to $680 million in 1998E-2001E in the event of a successful NSC-Conrail Merger, although NSC might have gained revenue from the greater access to markets originally exclusively served by CSX.
The CSX-Conrail Merger would improve their operating ratio post-merger and outpace NSC by reaching below 70% by 1999 due to the cost reduction under the synergy, eliminating the competitive advantage of NSC in operating efficiency even in shorter-haul routes.
Moreover, Consolidated Rail Corp. shareholders could vote to opt out of the fair value statute to waive the 20% shareholding restriction for CSX to continue with its two-tier offer. The fair value statute had bought some time for NSC to offer competitive hostile bidding before the shareholder meeting by providing incentives for Conrail shareholders to turn to higher bidding and to show the shareholders that CSX was offering inferior bidding at their expense of them, increasing the odds to reject the offer.
The no-talk clause under the CSX-Conrail Merger agreement and the poison pill of Consolidated Rail Corp. allowing current shareholders to buy shares discounted at 50% had forced NSC to make a hostile offer in order to attract the shareholders to vote against the opt-out.
b.) Enjoy merger synergy
The NSC-Conrail Merger is expected to…
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