Conrail Bidding

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1. Why does CSX want to buy Conrail? How much should CSX be willing to pay for it? Conrail is a significant player in the Eastern rail freight market controlling 29.4% of the market. More importantly, it had near monopoly control over the lucrative Northeast rail market; its routes connected the major Northeastern cities with major Midwestern hubs. Conrail proves to be an attractive target for CSX for a number of reasons. First and foremost, value could be created by consolidating overlapping operations and increasing revenue through service improvement. At the moment, Conrail is the least efficient railroad in the East. It faced tough competition from trucking, which had a dominant share of the total Northeast freight market. CSX and Conrail estimated that cost reduction would yield an additional $370 million in annual operating income by the year 2000, net of merger costs. Over the same period, they also projected that revenue increases would yield an additional $180 million in annual operating income. Total gains add up to $550 million in 2000. In addition, this merger would improve CSX-Conrail’s competitive position. First, note that CSX’s routes connected 20 South-eastern and Midwestern States and the Canadian Province of Ontario. Same is true for Norfolk, the third major Eastern railroad and the major competitor of CSX. Since Conrail has near monopoly control over the lucrative Northeast rail market, the combined rail networks of CSX-Conrail would facilitate long-haul, contiguous, and therefore, low-cost service between the southern ports, the Northeast, and the Midwest. Norfolk Southern, on the other hand, lacked access to the Northeast market, would be less able to service long-haul routes from either the South or Midwest. Secondly, in the shorter-haul routes between the Midwest and the South, CSX-Conrail would become more competitive through cost reduction. According to the case, using current cost and revenue data combined with estimates of merger...
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