Conrail Case Study

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Question 1 Railroading industry overview: The Railroad revolution in the United States began in the early 1800s. The developed infrastructure was used for freight transportation business. In the mid-1800s the industry experienced explosive growth, followed by significant consolidation in 1870. The rail road companies initiated expansion through acquisitions in attempt to reduce marginal costs and increase their market share. As a result of this competition, a number of cartels were formed; therefore the federal government intervened and established regulation on railroad mergers, infrastructure construction and divestments. On the other hand, the government initiated enormous investments in highway infrastructure, which resulted in the…show more content…
The combination of intermodal services (transportation of truck trailers and container by rail-car) and network expansion would result in higher operation efficiency to compete with the trucking industry. In addition, the maritime and the railroad presence of the merged company would result in economies of scope. The universal container would promote better branding and it would open the business to international trade. The industry consolidation and the merger of CSX and Conrail would create the 2nd largest company in US and the largest in the Eastern region; therefore the company would increase its market power in the freight transportation business, gaining revenues from its competitors Norfolk and the trucking industry companies. The financial synergies of the deal would lead to improved economies of scale in financing. The size of the merged firm would increase the debt capacity and tax debt shield, therefore dilute financing costs. Although the management of both CSX and Conrail were convinced in the success of this merger, individually the companies were the least efficient (higher operating ratio) among the three leading railroad companies in the East. This potential weakness could result in a concern about the management synergies of the deal. Following the merger announcement of $8.3bn of CSX-Conrail in 1996, the third largest railroad company in the Eastern region, Norfolk proposed a hostile offer of $9.1bn for Conrail. The concerns of a potential
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