Conrail Case Study

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(a) Why did CSX make a two-tiered offer? What effect does this structure have on the transaction?

A two tiered deal was made by CSX because of the heavy regulation Pennsylvania has for mergers and to provide financial considerations for Conrail’s shareholders.
Pennsylvania’s Business Corporation Law makes it difficult to perform a first tier tender offer this is why CSX choose to split the offer into two stages. The first stage cash offer of $92.50 per share enables CSX to gain control of Conrail’s stock as shareholders should be willing to trade their ownership for such a significant payout. The remaining shareholders who decide not to give up their shares will only be paid $86.78, calculated from taking the initial stock price of
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The economic rationale of getting rid of the Poison Pill was to allow CSX to gain ownership of the Company while working within the lines of the regulatory laws in Pennsylvania.

2. The No-talk clause was implemented which disabled Conrail’s ability to have merger discussions for a 6-month period unless special conditions occurred, such as the necessity for the Company’s board of directors to consider another offer that way they can act responsibly for their shareholders or if a better offer comes into play which dominates CSX’s bid and CSX is considered unlikely to compete. This allows Conrail to pursue better deals while weakening CSX’s barriers of preventing another company to compete in the merger.

3. A break-up fee of $300 million charged to Conrail. This guarantees that CSX will not lose the money they used to pay for the deal’s fees while compensating the Company for their time spent and reputation involved with the deal. This demotes Conrail to consider other bidders or to decline the merger in such a late stage of the deal process. On the other hand, this could also benefit Conrail because if another bidder emerges then that new bidder would be required to pay at least $300 million extra to Conrail to cover the break-up fee.

4. CSX is given lock-up options which will allow them to buy 15.96 million newly issued Conrail shares at a price of $92.50
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