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TitleConrail-CSX Case2
TagsMergers And Acquisitions Takeover Stocks Business Economics
File Size58.4 KB
Total Pages5
Document Text Contents
Page 2

Case A, Question 2a: Analyze the structure of the CSX-Conrail deal. Why did CSX
make a two tiered offer? What effect does this structure have on the transaction?

CSX likely made a two tiered deal due to financial and regulatory considerations.
They use the first tier cash offer of $92.50 to gain control of the stock, and will then
force the remaining shareholders to accept a lower value of $86.78 (derived from
the exchange ratio of 1.85619 and the initial CSX stock price of $46.75) in the form
of a stock swap, thus saving cash. Additionally, because the merger was taking
place in Pennsylvania there were many specific regulatory requirements which
explain why the first tier section of the deal was further split into two stages.

-first offer taking only 19.3% to avoid Pennsylvania one price deal and turn it into a

-after first offer have 35.6% including mgmt, and need 14% to get opt out approval
for a two tiered offer

-use second offer of 92.50 to entice shareholders to vote for opt out provision

-give remaining 60% of shareholder a lower value to reduce value paid.

Case A, Question 2b: What are the economics rationales and takeover
implications of the various provisions in the merger agreement (no talk clause, lock
up options, break up fee, poison pill)

Provision Economic Rationale and Takeover Implications
No talk clause-Conrail is
unable to engage in
merger talks for a period
of 6 months unless certain
conditions are met:
1)Considering another
offer is necessary to meet
fidicuary responsibilities to
2)Another offer emerges
that makes it unlikely that
CSX can complete the
merger or win the
necessary opt out vote

This ensures that CSX’s investment of time and money is
worthwhile, as it lessens the chances of another bidder
entering the picture, and either blocking the deal or
significantly raising its cost.
Pennsylvania law does give the Board of Directors more
leeway than is present in other states in regards to
fidicuary responsibility, thus increasing the probability
that Conrail could consider other offers. This is a positive
attribute for Conrail as it allows them more opportunity to
achieve a better value for their shareholders, but
negative for CSX as it doesn’t provide as strong of a
barrier to new bidders.

Lock Up Options-CSX has
option to buy 15.96 Million
newly issued common
stock shares of Conrail at
$92.50. This is 18% of
total shares in the
company, which is

This ensures that CSX is able to maintain their ownership
control over Conrail. It prevents Conrail from selling
these shares to another buyer, thus reducing the risk of
the occurrence of a bidding war in which CSX would have
to increase their offering dramatically or be unable to
complete the deal.

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relatively high for this
type of agreement

Break Up Fee-$300 Million,
4% of deal which is higher
than a normal

This ensures that CSX does not lose the money it invests
in the fees associated with the deal, and also that it is
compensated for potential reputation damage and time
investment. This also acts as an disincentive for Conrail
to look into other bids, and/or decide not to move forward
with the deal in general. It ensures that another
profitable bid would have to be at least $300 million more
to compensate for the loss associated with the break up.

Poison Pill-Conrail
suspended its poison pill
clause which allowed
current shareholders to
buy shares discounted at
50% to maintain their
ownership interest- if an
outsider attempted to buy
more than 10% of the
overall shares.

This suspension allowed CSX to gain ownership control of
the company, by reducing the possibility that current
shareholders could challenge their stake and dilute the
power of their shares. This makes it easier for the
company to move forward with the takeover deal leading
to less of a required value outlay , while navigating the
regulatory issues within Pennsylvania.

Case A, Question 3: As a Conrail Shareholder would you tender your shares to
CSX at a price of 92.50 in the first offer?

A prisoner’s dilemma analysis shows that in the complete absence of another bidder
and a foreseeable market for the acquisition of the company, it is in a shareholder’s
best interest to tender their shares during the first round offer whether or not the
deal succeeds ultimately. This is because the absolute value in this circumstance is
higher. Therefore, we would tender our share in the initial round.

Tender Not Tender

Deal Succeeds $92.50-price paid to
shareholder if they sell

$88.20- weighted average
of future outcomes in
continuation of first tier
offer and second tier offer
* associated with
remaining 80% of
shareholders after first

Deal Fails $92.50-price paid to
shareholder if share is sold

$71.00-share price of
Conrail before merger

Case B, Question 1: Why did Norfolk Southern make a hostile bid for Conrail?

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Norfolk Southern made a hostile bid for Conrail because not doing so was going to
cause them to lose revenue. The CSX-Conrail merger would effectively shut Norfolk
Southern out of the Northeastern routes in the United States, and prevent them
from achieving a competitive cost structure, specifically savings associated with
overlapping operations and cheaper longer-haul contiguous routes. Essentially, if
Norfolk Southern did not acquire Conrail, CSX was going to steal their future

Case B, Question 2: How much is Conrail worth? In a bidding war who would be
willing to pay more Norfolk Southern or CSX?

The stand alone value of Conrail is 6425.50 (the market price of $71.00*the 90.5
million shares). In a bidding war, it seems that CSX would be willing to pay more for
Conrail as the incremental gains associated with its acquisition of the company are
larger than those that Norfolk southern would achieve. However, it is important to
note that CSX will also lose less revenue than Norfolk if they lose out on the deal,
therefore Norfolk could be willing to pay more. Ultimately it will come down to
whether the deal is done primarily for strategic maneuvering and a strong upside in
which CSX is likely to bid more, or if it is done out of fear which would imply that
Norfolk would pay more (See exhibits C and D for details).

Case B, Question 3: Why does CSX refer to Norfolk’s bid as a non-bid?
What should Norfolk Southern do as of Mid-January 1997?

CSX refers to Norfolk’s bid as a non-bid because they believe that it would violate
the CSX-Conrail “No talk clause” in the merger agreement if Conrail engages in
talks with Norfolk. Additionally the required time delays in Norfolk’s proposal
implied that, using a 2% discount rate per month, the actual present value of the
offer is worth less than $90.00. This is below Conrail’s initial offer of $92.50 and
extremely close to its blended offer value of $87.67 thus negating the “fiduciary
responsibility” condition of the No talk clause. Additionally CSX contended that the
offer was not high enough to stop the CSX-Conrail merger from proceeding or
influence the opt out vote. Therefore the board could not engage based on this
principal. In mid-January 1997 Norfolk Southern should either offer shareholders
substantially more money to sabotage the opt out vote or get the board to support
their cause. Because they do not have the necessary time frame to replace the
board, they must influence the opt out vote by offering more money.

Case B, Question 4: As a shareholder would you vote to opt-out of the
Pennsylvania antitakeover statute? What do the capital markets expect to

As a shareholder you do not have a win/win strategy anymore. On one hand you
have CSX which is obviously scared that shareholders would not vote the opt-out
and is increasing the price and extending the no-talk clause to make sure the
Norfolk bid is not even considered as a bid by the shareholders. On the other hand

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