Conrail Case Essay Example
Conrail Case Essay Example

Conrail Case Essay Example

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  •  Based on the information provided in the “A” case and especially in Exhibit 7 the most that CSX should pay for Conrail should be $93. 42 per share (calculations are attached hereto as Exhibit 1).

I assumed that the correct or required discount rate to be used in the DCF analysis should be CSX’s cost of equity which is 15. 93%. Based on this analysis – which reflects the expected synergies arising from the deal - CSX could still justify an increase in its offer by $4. 35 which would imply an increase in the total value of the deal of 393. 675 million dollars.


  •  I believe that the proposed synergies are reasonable when compared with similar previous mergers in the railroad industry (calculations are attached hereto as Exhibit
  • ...

     In terms of the projected merger synergies, the CSX-Conrail merger should originate 550 million dollars in the year 2000 and thereafter they should grow at the rate of inflation – 3% (Exhibit 7 case “A”). According to the data in case “A”, Exhibit 6, this value is in line with both the Santa Fe Pacific merger (560 million dollars) and the Southern Pacific merger (660 million dollars) but it is substantially higher than the Chicago and Northwestern merger (250 million).

    Also in terms of projected synergies as a percent of the Target?  Operating Expenses I believe that the projection of the CSX-Conrail merger is reasonable as its value is lower than its comparables – 14. 69% compared to 22. 3% (Santa Fe Pacific), 27. 7% (Chicago and North Western) and 24. 5% (Southern Pacific). As we do not have any projection for Conrail’s operating expense i

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the year 2000 I assumed that such value should increase at the projected rate of inflation (3%).


  • Considering that CSX’s stock price was $46. 75 the offer was $89. 07 per share (blended value).
  • This meant that if Conrail’s stock price was $71. 00, CSX was offering to pay a premium of 25. 45% (calculations are attached hereto as Exhibit

Also if we compare the premium of the front-end offer ($92.5) with its comparables we can see that it is still below the average premium paid ($53. 25). Comparing the premium offered by CSX and the premium paid by other players in previous mergers in the railroad industry there is a big gap between the first and the seconds. There are some factors that can possibly explain the difference between the premium offered by CSX and the premiums paid by other companies in the same industry.

In order to obtain the necessary answers we should ask the following questions:

  • Is CSX offer the last and binding offer? Because the premiums referred to in Case “A” Exhibit 6 are final offers.
  • Is Conrail’s stock overvalued? If it is it can justify the lower premium offered.
  • Given that there are legal issues arising from Pennsylvania’s Business Corporation Law that need to solve before CSX can buy the 90. 5 million shares, is the lower blended offer a way to convince shareholders to sell in the first stage?
  • What are the terms of the other mergers? Maybe the payment, timing, and general conditions were different


In a bidding war for Conrail between CSX and Norfolk Southern the company that should be able to pay more is the one that can get

more (or more valuable) synergies from the merger and the one that will lose less if the merger does not go through and is consumed with its competitor. Given that it is the summation of these two factors that will determine which company will be able to pay more for Conrail I estimated the value of the target company for both CSX and Norfolk Southern and those values are respectively 3,393. 37 million dollars and 3,589. 4 million dollars (the calculations of such values are attached hereto as Exhibit 4).

Thus, Norfolk Southern is willing to pay more for Conrail than CSX and the main reason is that it has more to lose than CSX if it does not close the merger and CSX does. As to the reasons why the synergies are higher in the “B” case I can only identify two: the first is directly related to the possible due diligence performed by CSX to Conrail’s business. It is often the case in merger deals that after the first due diligence the assumptions (which include future synergies) of the deal have to be revised. The second reason why it may have changed maybe to eventually justify to CSX’s shareholders a higher offer to buy Conrail.

This is not a very “serious” reason but nevertheless one that is possible.

Question 2. Risks facing CSX in the acquisition of Conrail:

  1. Paying a price too high for Conrail (deal with negative NPV)
  2. Not achieving the synergies proposed in the projection
  3. STB possible requirement to provide competitive access to key markets
  4.  Not succeeding in convincing Conrail shareholders to “opt-out”. Should this happen in accordance with Pennsylvania State Law, CSX would

have to offer all shareholders the same price.

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