Csx-Conrail Merger

FIN 670: Case 3 Conrail A and B

Jingyan Zhou

1. Reasons:

1. The offer being motivated by synergies:

  First, Conrail is a scarce jewel in the railroad industry. It’s the sole ClassⅠrailroad serving the lucrative Northeast market, and had relatively high operating ratio, which means Conrail has high operating efficiency. CSX wanted to acquire Conrail because the CSX-Conrail merger would create more than $8.5 billion in revenue and almost 70% of the Eastern market.

  Revenue enhancement and cost reduction are two main sources of synergies. After merger, Conrail would be able to consolidate overlapping operations and to increase revenue through service improvement.

  →Synergies: a. cost reduction would yield additional $370 million in annual operating income.

                            b. revenue increases would yield an additional $180 million in annual operating income.

  Besides, this merger would improve CSX-Conrail’s competitive position by combing rail networks and get more access to the Southern ports, the Northeast, and the Midwest.

1. The motivation to pre-empt a bid by Norfolk:

  Norfolk is the third major Eastern railroad and is CSX’s main competitor because Norfolk also wants to acquire Conrail. Although Norfolk has some limitations to get access in some railroad markets, it has better financial condition than CSX. As the data shown in Exhibit 1, comparing to CSX, Norfolk has higher current ratio, P/E ratio and revenue per employee. Thus, the synergies may be even higher if Conrail was acquired by Norfolk. CSX wants to prevent its main competitor from getting access to more railroad routes.

CSX would purchase 90.5 million Conrail shares to complete the acquisition.

Thus, CSX effectively offering per Conrail share= (3350000000+4710000000)/90500000=$89.06

Multiple valuation