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Conrail
Acquisition Wars
Prof. Ian Giddy
New York University

Mergers and Acquisitions

Mergers & Acquisitions
 Valuation
 Divestitures


Concept: Is a division or firm worth more within the company, or outside it?
Copyright ©2002 Ian H. Giddy

Corporate Financial Restructuring 2

Valuation in a Bidding-War Context

Copyright ©2002 Ian H. Giddy

Corporate Financial Restructuring 3

Case Study: The Acquisition of Conrail
Why merge Conrail and CSX?
 How was the CSX offer structured?
 How was Conrail’s resistance to an unfriendly bid structured?
 How would you, as a Conrail shareholder, react to the offer?
 What’s Conrail worth?


Copyright ©2002 Ian H. Giddy

Corporate Financial Restructuring 4

Gains from Conrail Acquisition?
Rationale: Firm A should merge with Firm B if
[Value of AB > Value of A + Value of B + Cost of transaction]
 Synergies (what kind?)
 Gain market power
 Discipline
 Taxes
 Financing
Copyright ©2002 Ian H. Giddy

Corporate Financial Restructuring 5

The Network

Conrail
Conrail

CSX
CSX

Norfolk
Norfolk
Southern
Southern

Railroad Operations
Railroad Operations
Operating Revenues
$3,686
$4,819
$4,012
Operating Revenues
$3,686
$4,819
$4,012
Operating Expenses
3,230
3,951
2,950
Operating Expenses
3,230
3,951
2,950
Operating Cost Ratio (%)
87.60%
82.00%
73.50%
Operating Cost Ratio (%)
87.60%
82.00%
73.50%
Railroad Employees
23,510
29,537
24,488
Railroad Employees
23,510
29,537
24,488
Total Carloads Originated (thousands) 2,531
4,402
3,435
Total Carloads Originated (thousands) 2,531
4,402
3,435
Revenue per Employee
$156,784 $163,151 $193,690
Revenue per Employee
$156,784 $163,151 $193,690
Financial Ratios (%)
Financial Ratios (%)
Return on Sales
Return on Sales
Return on Average Equity
Return on Average Equity

Copyright ©2002 Ian H. Giddy

11.4%
11.4%
9%
9%

6.9%
6.9%
15.5%
15.5%

15.3%
15.3%
15%
15%

Corporate Financial Restructuring 6

The CSX Offer


Two-tier offer (why?)
Front-end

cash offer, in two stages
40%*$92.50
Back-end
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