Conrail Case

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Perspective: Conrail shareholder.
1. Why does CSX want to buy Conrail? How much should CSX be willing to pay?

Some of the reasons why CSX wants to buy Conrail are, to increase the consolidation in the Railway industry. Further consolidation typically means lower cost for the consolidators fx because economies of scale and synergies and …. A consolidation also results in lower competition inside the industry, which typically follows with higher, or at least not lower, prices and therefore higher profit. Another argument that is mentioned in the materials is that CSX want to do the merger, before another company tries. CSX doesn’t want Norfolk southern to get Conrail.

CSX is willing to pay $92.84 per share.

2. Analyze the structure of CSX’s offer for Conrail. Why did CSX make a two-tiered offer? Why did CSX want to do the first-tier transaction in two steps?

Figure above shows the structure of CSX’s offer for Conrail. The offer was a two-tiered deal, the first tier was a cash tender offer, which were split up in two stages, the front-end-offer and the back end offer. Front-end-offers first stage involves an acquisition of 17.86 million Conrail shares, 19,7% of the total number of shares. CSX offered a price of $ 92,5 per share. Second stage of first tier was an offer for additional 20,3% at the same prices $ 92,5 per share. The back-end-offer is a exchange of shares, in the ratio of 1,85619:1,0 (CSX:Conrail) for the remaining 60%, the exchange was based on CSX’s stock price of 46,75. The offer had a value of $ 89,07 per share.

We have found some of the reasons, why CSX made a two-tiered offer to be following. Pennsylvania’s Business law, “required bidders holding 20% or more of a company’s stock to offer all shareholders the same prices unless target shareholder explicitly voted to nullify this provision.” (Harvard Business School, 9-298-006, July 2005). This means that if CSX cross the 20% boundary, it could cost them a lot of cash, instead of...
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