Csx - Contrail Cast Study Solution
1. What is CSX’s motive for buying Conrail? • Synergy effect with lower cost
The merged company could consolidate overlapping operations and reduce cost.
CSX estimated that cost reduction would yield an additional $370 million in annual operating income by the year 2000, net of merger costs.
• Expansion of market share by extending railroad network
Railroad industry is a mature market. The only option to grow is through acquisitions. In 1995, Conrail owned 29.4% of the Eastern rail freight market, and near monopoly control over Northeast. After merge, it would create the 2nd largest rail system in the U.S., as well as the largest rail system eastern of Mississippi River.
• Enhanced competitiveness
The combined rail networks would facilitate long-haul, contiguous, and low-cost service between the Southern ports, the Northeast, and the Midwest. Compared with the major competitor, Norfolk Southern, who lacked access to the Northeast market, CSC would gain market competiveness by servicing long-haul routes from either the South or Midwest.
In shorter-haul routes between the Midwest and the South, the merged company would become more competitive through cost reduction. CSX would have greater chance to win back the market share from trucking.
• Improvement on Effectiveness and Efficiency Conrail was the least efficient railroad in the East and faced tough competition from trucking. By merging with CSX, Contrail would become more efficient in terms of higher co-operation and greater manpower. The merged company could benefit from the exchange of market knowledge and client base to be better performed than its competitors.
2. How much should CSX be willing to pay for Conrail?
a. Provide clearly your estimate of the Free Cash Flows Key Assumptions are listed as below: ← Conrail 1996E annual figure is roughly estimated as 4/3 times of reported figure in nine months ended. ← Depreciation is retrieved from SEC filing
The merged company could consolidate overlapping operations and reduce cost.
CSX estimated that cost reduction would yield an additional $370 million in annual operating income by the year 2000, net of merger costs.
• Expansion of market share by extending railroad network
Railroad industry is a mature market. The only option to grow is through acquisitions. In 1995, Conrail owned 29.4% of the Eastern rail freight market, and near monopoly control over Northeast. After merge, it would create the 2nd largest rail system in the U.S., as well as the largest rail system eastern of Mississippi River.
• Enhanced competitiveness
The combined rail networks would facilitate long-haul, contiguous, and low-cost service between the Southern ports, the Northeast, and the Midwest. Compared with the major competitor, Norfolk Southern, who lacked access to the Northeast market, CSC would gain market competiveness by servicing long-haul routes from either the South or Midwest.
In shorter-haul routes between the Midwest and the South, the merged company would become more competitive through cost reduction. CSX would have greater chance to win back the market share from trucking.
• Improvement on Effectiveness and Efficiency Conrail was the least efficient railroad in the East and faced tough competition from trucking. By merging with CSX, Contrail would become more efficient in terms of higher co-operation and greater manpower. The merged company could benefit from the exchange of market knowledge and client base to be better performed than its competitors.
2. How much should CSX be willing to pay for Conrail?
a. Provide clearly your estimate of the Free Cash Flows Key Assumptions are listed as below: ← Conrail 1996E annual figure is roughly estimated as 4/3 times of reported figure in nine months ended. ← Depreciation is retrieved from SEC filing