1.Why does CSX want to buy Conrail? How much should CSX be willing to pay for it? 1, If the CSX buys Conrail, this combination would create the second largest rail system in the United States and the largest rail system east of the Mississippi River. The new company would get the $8.5B in rail revenue and almost 70% of the Eastern Market, which means it would have monopoly position in the Eastern Rail Market. 2, The combined rail networks would facilitate long-haul, contiguous, and, therefore, low-cost service between the Southern ports, the Northeast, and the Midwest. 3, In the short-haul routes between the Midwest and the South, CSX-Contrail would become more competitive through cost reduction.
When I calculate the price which CSX is willing to pay for Conrail. There are two parts. First, there is a synergy which means when the merge happens, the cost will reduce and the revenue will increase. For this part, I can get the price should be $83.71 according to the combined gains of operating income. Then, if Norfolk Southern purchases Conrail, some revenue of CSX will transfer to the Norfolk Southern. In this way, there is a potential loss. For this part, the price should be $23.45. As a result, the total price which CSX should pay for the Conrail is $107.16. There are more details in the form 1. 2.Why did CSX make a two-tiered offer? What effect does this structure have on the transaction? In this two-tiered offer, CSX would pay $92.50 per share in cash for the first 40% of Conrail’s acquisition shares and would exchange shares in the ratio of 1.85619:1.0 for the remaining 60%. There are some advantages. First, CSX only pay 40% of the Conrail shares in cash. In this way, it does not need to get too much cash for the shares. Then, when it exchanges shares, the blended value is $89.07 per share which is less than $92.5. So it is cheap in the two-tiered offer.
According to the Pennsylvania’s Business Corporation Law, CSX proposed the two-tiered offer with different price, so, Conrail shareholders would have to “opt-out” of the Pennsylvania statue before CSX could purchase more than 19.9% of the shares. This regulation was the reason for executing the front-end offer in two stages. At the time of the vote, CSX and employee trusts, which supported the merger, would control 35.5% of the shares and would need only another 14.6% of the acquisition shares to vote in favor of opting-out for it to pass. 3.As a shareholder in Conrail, would you tender your share to CSX at $92.50 in the first stage tender offer? Explain why or why not? I would tender my share to CSX at $92.5 in the first stage. Because if I would not tender my share to CSX at $92.50, I have to exchange the shares at the rate of 1.85619:1.0. However, the investors have bad expectation on this deal and the share price of CSX has fallen to $46.75. In this way, if I choose to sell my shares in the second stage, I may receive lower price. As a result, I would tender my share to CSX at $92.5.