Conrail Merger
Instructions: While this case focuses on the battle that went on for Conrail from a financial perspective, we also need to consider other issues from economic and strategic standpoints.
Please answer each question individually
1. Conrail (CR), CSX and Norfolk Southern (NS) were all known as Class I railroads. While CR had the market for the Northeast, the other two generally skirted this region. Discuss the advantages to both CSX and NS of taking over CR. Remember that the case says that both NS and CSX took the position that they could not lose this battle. Consider that there are generally two types of RR mergers: end-to-end and parallel.
2. It has been said that “[T]he easy part of mergers and acquisitions is that done by accountants and lawyers whereas the difficult job is the post-merger integration.” A railroad consists of right-of-way including track, bridges, and tunnels; communications and signaling systems, fleets of railcars and locomotives, and miscellaneous infrastructure such as port terminals and rail yards. To what extent does integration create an extremely significant cost? To what extent do the economies projected in the attachments to the case seem to discount this fact?
3. One of the main themes of this course is transportation capacity. To what extent does the merger address capacity problems, if any? Moreover, how might the split up of Conrail with distribution of its various key assets contribute to the capacity of CSX and NS, respectively.
Solution.
Conrail Merger
Part One
Advantages to CSX and NS over CR
The acquisition of CR by CSX and NS created two of the largest railroads. It created much concern on the agricultural consolidation with the rail traffic that was at the eastern United States. The merger over CR became a broader wave by consolidating activities that are within the rail industry and was capable of reducing major U.S railroads that were 33 in the year 1982 to 7 presently. With latest plans of merging, it helped the United States to remain with only six major railroads. The merger facilitated contagious and long haul, which were to be less effective in terms of cost for the services of transportation between Northeast, the Southern ports, and the Midwest in the models of efficiency and economics (Esty, 2005).
After CR was merged it suspended most of its shareholders plan rights and permitted companies to be issuing discounted shares which benefited outside parties who were able take spontaneous takeover offers or achieved certain levels of ownerships and moreover, an outsider was allowed to purchase a 10% and more of CR. The merging reduced congestion for individuals who used shipping as their means of transportation for the goods that were not to be economically shipped by other modes or motor carriers. The CSX and SN over CR addressed customer’s needs, managed headcounts and made improvement to the locomotive industry by optimizing prices, they maximized the unique position of securing the highway to rail conversion. They prioritized the capital investments by pursuing Tuck-in M and A opportunities that enhanced the current existing network.
Part Two
Significant Cost
Integration of the railroads is likely to be cost effective without raising competition concerns with an exception of integrating the railways infrastructure type of businesses with the operations of the train (Ang & Boyer, 2006). With the help of accounting separation, it is difficult to assure absence of bias between the competitors and the train operations over prices and allocating ancillary and track access. Regulators have put measures in integration in the infrastructure charging protocols that help in avoiding discrimination, but full separation becomes a better assurance of being neutral and ensures that funds from the public are never leaked to support other indirect activities. Moreover, Incumbent short line freight rails operators and the non-incumbent block trains account for a larger percentage of the market economic share.
Discounting Fact
There is lack of valid economic empiric evidence that show a two or more railway carriage merging with different infrastructures will be cost effective. The integration result is likely to suffer incorrect specification, data inadequacies, statistical accounting biases and several problems that are made reliable and with irrelevance to the merging process. Policing and monitoring of more than two railways is difficult since the railroads offered services are differentiated extensively in terms of billing systems, extent of damage that is caused to shipments and information, which is provided to the customers that can secretly mask price-cutting.
Part Three
Address of Capacity Problems
The merging made efficiency in the transportation capacity by creating a rail system that was second largest in the United States and to some extent it was the largest eastern rail system of River Mississippi. The merging helped in dominating the freight transport system, which had covered larger parts by introduction of trucking in tire and motor technologies by trying to leave routes that were not with profits and lowered prices.
Capacity of CSX
The merging will have an entity of more than 8.5 United States billion Dollars in revenues of the railway, which would facilitate the growth of the Eastern market. CSX will have the capacity of buying 90.5 million shares from CR which will enable it to complete the acquisition that will include employee’s incentives stock choices, preferable shares that can be converted to common shares and the outstanding common shares that will be exercised in the acquisition event.
Capacity of NS
The merging facilitated NS to be making transportation of raw materials, finished goods and raw products across the East, Southeast and the Midwest United States through the interchange with other rail carriers. This helped in serving of overseas transport services and needs with serving of several of Gulf Coast and Atlantic ports (Kanter & Guilford, 2014). The latest Norfolk corporation public total stock value increased to slightly over 34.5 billion United States Dollars. NS majored in transportation of export and the domestic coal. From the merging, NS was responsible for the maintenance of 29,000 miles leaving the remainder to be worked under the rights of truckage for the rest maintenance.
References
Ang, J. & Boyer, C. (2006). Finance and politics: the wealth effects of special interest group influence during the nationalisation and privatisation of Conrail. Cambridge Journal Of Economics, 31(2), 193-215.
Esty, B. (2005). The Acquisition of Consolidated Rail Corporation. 9-298-006, Havard Business School.
Kanter, R. & Guilford, M. (2014). Rail Transportation in the United States. Havard Business School.