The Acquisition of Consolidated Rail Corporation

Topics: Rail transport, Balance sheet, CSX Transportation Pages: 29 (6662 words) Published: April 3, 2011
REV: JULY 20, 2005


The Acquisition of Consolidated Rail Corporation (A)
After eight days of intense negotiations in a New York City hotel room, executives from CSX Corporation (CSX) and Consolidated Rail Corporation (Conrail), the first- and third-largest railroads in the Eastern United States, announced an $8.3 billion merger.1 This combination would create the second largest rail system in the United States and by far the largest rail system east of the Mississippi River. John W. Snow, CSX’s chief executive officer, announced the merger on October 15, 1996, proclaiming, “This merger of equals represents a strategic combination that will provide excellent value for our customers and our shareholders, and is consistent with sound public policy. This is the right merger at the right time between the right companies.”2 David M. LeVan, Conrail’s chief executive officer, concurred. “We are delighted to be merging with our ideal partner. Our companies share an uncompromising commitment to safety, operating excellence, and superior service and have compatible cultures that will expedite realization of the benefits of the merger.”3

Railroading Background4
Although its roots go back to the early 1800s, American railroading did not reach its heyday until the mid-1800s. Yet after two decades of explosive growth, the industry experienced a period of dramatic consolidation in the 1870s as railroads began acquiring other railroads in an attempt to lower costs. Despite the high cost of building and maintaining lines, expansion through acquisition proved to be very profitable because it reduced marginal costs significantly. As costs fell, however, railroads began to compete on price, causing many of them to fail. Recognizing the inherent danger in this form of competition, many of the surviving railroads formed cartels to allocate traffic and revenues. To prevent monopolistic pricing in a market without substitutes for long-haul transportation, the federal government intervened and established regulations on interstate rates. In the following years, the government extended its regulatory reach to include control of railroad mergers, infrastructure construction, and divestiture of rail lines. By the turn of the century, railroading had recovered and the industry once again entered an expansionary period. Railroads dominated the freight transportation business until trucking emerged as a powerful competitor in the 1940s. The rise of trucking resulted from not only innovations in motor and tire technologies, but also enormous investment in highway infrastructure by the federal government. Unlike railroads, which were responsible for constructing their own rail lines, trucking ____________________________________________________________

Professor Professor Benjamin C. Esty and Research Associate Mathew Mateo Millett prepared this case. Lori Flees (MBA ‘97) prepared an earlier version of the case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1998 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


The Acquisition of Consolidated Rail Corporation (A)

firms were not responsible for building roads. As a result, trucks could provide cheaper, and more flexible, transportation, especially over short distances. Railroads responded to declining profitability...
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