Acquisition Motivation for Csx

Acquisition motivation for CSX

Synergies

CSX and Conrail are the first- and third-largest railroads companies in the Eastern United States. As part of their business operations, both provide railroad freight services in adjacent and overlapping regions. A CSX-Conrail merger would thereby be a horizontal merger with potential to create value through synergies. The merger could generate substantial synergies on both cost and revenue sides. On a long-term, run-rate basis, analysts estimate gains in operating income from cost reductions of c. $370m and of c.$180m from revenue synergies from the year 2000 onwards. Based on our intrinsic synergy valuation, the incremental value created would be substantially higher than the takeover premium that CSX offered.

Cost Synergies. The merger with Conrail would create significant benefits for the merged entity based on consolidation of overlapping operations. Many routes of Conrail, especially in the Midwestern states, are currently overlapping with those of CSX. By integrating those similar routes and operating them under one merged company, CSX could cut marginal operating costs and gain economies of scope. There would also be economies of scale as the two companies could consolidate fixed costs by sharing maintenance equipment and offices. Additionally, CSX could have the chance to close some unprofitable routes and lay off redundant employees after merging with one of its main competitors, benefiting from the improvement of efficiency where its operating ratio is estimated to go down.

Revenue Synergies. By 1995, CSX earned $4.8bn rail revenue and controlled 38.5% of the Eastern rail freight market, while Conrail generated $3.7bn in rail revenue with 29.4% market share. The merger of them would create an entity with more than $8.5bn rail revenue and almost 70% market share, dominating the railroad industry of the Eastern United States. The new entity would hold a greater market power to potentially raise market prices and generate more revenue. The merged company would also increase revenue through service improvements. Conrail’s railway lines in the Northeastern states could complement CSX’s current network to form a larger and better one which would cover almost all regions in the Eastern United States. The combined network would facilitate long-haul and contiguous service between Southern ports, Northeast, and Midwest. As their main competitor, Norfolk Southern, is less able to provide services in long-haul routes due to lack of access to the Northeastern market, they would possibly take over the whole long-haul rail service revenue. In the shorter-haul routes, the broader rail network and the cost savings would enable CSX-Conrail to offer cheaper services. Since railway companies normally compete on prices, it could capture market shares from Norfolk Southern as well as the trucking industry by offering customers more attracting prices.