CSX's acquisition of Conrail: bidding strategy and shareholder considerations

Rail Acquisition

Why does CSX want to buy Conrail? How much should CSX be willing to pay for it?

CSX wants to buy Conrail to acquire a larger portion of the Northeastern available rail lines as well as to increase its efficiency. CSX should be willing to pay slightly above the blended value, so about $90 per share.

Why did CSX make a two-tiered offer? What effect does this structure have on the transaction?

Two-tiered offers are common in such situations. They comprise of a first step in which an offer is made to purchase enough of the stockholders' shares. The second phase is the offering of other shares at a lower price. This strategy has the advantages of reducing both cheaper and less risky (in terms of losing out on the purchase).

As a shareholder in Conrail, would you tender your share to CSX at $92.50 in the first stage tender offer? Explain why or why not?

Yes, I would. This amount represents somewhat less than the current evaluation of the worth of the company. Conrail shareholders can reasonably expect that CSX will pay more than the share price per se since the merger will increase the value of the stock, and Conrail shareholders can reasonably expect to be compensated (albeit in advance) for this increase.

4. What are the economic rationales for and the takeover implications of the various provisions in the merger agreement, e.g. no-talk clause, lock-up options, break-up fee and poison pill shareholder rights plan?

A no-talk clause forbids any party to the tender to comment on it to prevent future potential buyers finding out details. A target company may offer a lock-up option to a white knight for her/him to buy sufficient equity to protect the company from takeover. A breakup fee must be paid by the target company if it backs out of the deal. A poison pill is the act of a target company's less attractive and so reduce the possibility of a takeover.

5. Why did Norfolk Southern make a hostile bid for Conrail?

Norfolk Southern officials knew that they would face much greater competition if the merger took place and calculated that a hostile bid was the only reasonable chance that they had to gain control of Conrail and thus reduce the chance of having its competitive position significantly worsened.

6. How much is Conrail worth? In a bidding war, who should be willing to pay more, Norfolk Southern or CSX?

This is a more complex question that it appears to be on the surface. Norfolk Southern should probably be willing to pay more because a merger between the other two companies could have disastrous effects for Norfolk Southern in the long run. However, CSX's motivation is very high also, both because of the track and routes that it would gain but also because the merger would be extremely likely to make the new (merged) company more efficient. This latter seems the better option because Conrail and CSX do not appear to have any better options, while Norfolk Southern might turn to offering specialized services that would support its success over the long-term.

7. Why does CSX refer to Norfolk Southern's bid as a "non-bid"? What should Norfolk Southern do as of mid-January 1997?

CSX officers believe that Norfolk Southern is trying to disrupt the merger rather than being sincerely interested in buying the company. If I were heading Norfolk Southern's decision-making team, I would purchase more than 9.9% of the stock and accept the consequences of the poison pill. (We are not told precisely how it is structured so it is somewhat hard to determine this.) A poison pill provides a disincentive to buy a company, not a block. Given how much Norfolk Southern has to lose if the merger goes through, biting down on the poison pill may well be the best (albeit still poor) medicine.