Why does CSX want to buy Conrail? How much should CSX be willing to pay for it?Ans.

1:The
acquisition rationale can be looked into from the following angles:A)

Strategic- To pre-empt any such move from Norfolk and thus ensure a bettercompetitive positioning
in the industry, in view of the following strategic rationale1)

The acquisition of the rail network of Conrail would provide CSX with the highlylucrative long haul,
contiguous and therefore low cost service between the southernports, the northeast and the Midwest
and this would deny Norfolk access to thenortheast market.(Refer to exhibits 9)2)

In short haul routes between the Midwest and the south, the merger would be morecompetitive than
Norfolk through cost reductions.3)

The acquisition can potentially help form a strong East-West rail network as well asties across Canada
especially post the NAFTA agreement in 1994B)

Financial rationale1)

The acquisition will help add 8.5 Billion in rail revenue.2)

Help consolidate operations and increase service improvements.3)

Cost Reduction would yield additional 370 Million in annual operating income by theyear 2000 net of
merger costs

Q2 Why did CSX make a two tiered offer? What effect does this structure have on thetransaction?
What are the economic rationales for and the takeover implications of thevarious implications of the
various provisions in the merger agreement (i.e No talkclause, lock up options, breakup fee, and poison
pill shareholder rights plan)Ans.2 The two tiered structure of the deal was as follows:A)

Deal worth 8.3 Billion announcedB)

CSX would purchase 90.5 miilion conrail shares to complete acquisitions ( commonshares, preferred
convertible shares, and employee incentive stock options)C)

The first 40% of the shares to be paid in all cash at 92.50$ offer and rest at shareexchange at
1.85619:1.0 for 60% shares.D)

Front end offer in 2 stages-E)

a cash tender offer for 17.86 million shares at 92.50$ after merger announcement (19.7% of conrail
shares) which essentially will bypass the Pennsylvania law requiringthat if 20% shares of the company
are acquired than all shareholders must beoffered the same price and thus converting it into a vote.F)

2
nd
tender offer for 20.3% shares at same price after approval of Pennsylvania lawG)
By structuring it in this way CSX could ensure a lower price paid for the remaining60% shares through
the swap ratio.H)

By second offer, acquire 40% of the sharesI)

At around the opt out vote as required by the fair value statute, CSX and supporterwould own around
35.5% of acquisition shares and they would need only 14.6% of the acquisition shares to vote in favour
of the vote out.The various clauses and implications of the deal structure are as follows:-1)

No Talk Clause-
Conrail is unable to engage in merger talks for a period of 6months unless certain conditions are met:

a) Considering another offer is necessary to meet fiduciary responsibilities toshareholders.b) Another offer
emerges that makes it unlikely that CSX can complete themerger or win the necessary opt out
vote.Implications: The clause will limit the chance of other hostile bids while thedeal with CSX is on. A part
of the problem which could occur due to theConrail board which has considerable powers with regards to
fiduciaryresponsibility and hence could consider more lucrative offers

2)

Share purchase- CSX can buy 15.96 million new shares of Conrail at 92.5$. This clausewill let
CSX maintain its ownership control and prevents other interested parties intogetting into similar
deal, otherwise CSX would have to increase its offering.3)

Breakup fees- 300 million USD- The clause ensures that CSX gets the money in case
deal doesn’t come through and hence its fees associated with the deal gets covered.
Also looking at the value of the breakup fees, it becomes evident that another bidwould have to be
greater than 300 million USD for Conrail.4)

Poison Pill-Conrail suspended its poison pill clause which allowed currentshareholders to buy shares
discounted at 50% to maintain their ownership interest-if an outsider attempted to buy more than
10% of the overall shares. By removingthe poison pill, the shareholders made sure t
hat CSX’s ownership rights would go
unchallenged since no dilution of stake would occur.