Conrail Case Study

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.

Larry Page once said, “Especially in technology, [we] need revolutionary change, not incremental change.” Whether he is speaking about the Transcontinental Railroad system or the latest iPhone, what he says is true. If change is going to happen, it needs to bring a revolution of some kind along with it, otherwise, it will just become lost in history. This makes us wonder, how did the railroad system affect the US? The railroad system benefited the US most economically by industrializing towns it ran through, lowering shipping costs, and allowing for mass imports and exports.

In addition, like any other merger between two firms, companies benefit from significant cost synergy during the implementation of an acquisition and/or merger with other company. For example, when two companies combine their strengths to complement each other, they restructure their operations and as a result several offices and sites are closed down which leads to the laying off of employees, consolidating services and software applications. All these changes, result in synergy savings for the new company.

The Canadian National Railways is a part of the Railway Industry and it is the most popular and longest system all over North America. It is the only “transcontinental railway” company that Canada has which crosses the Atlantic Coast in Nova Scotia to the Pacific Coast in British Columbia. The CN Railway system provides transportation services to coal, automobiles, grain, beverages, lumber and metal products. They use railway containers which is a cost-effective method that helps easily transport Canadian and American goods. CN Railway’s profit increases every year due to the vast amount of items it transports and this causes multiple consumers and businesses to be involved with the CN Railway Company. (Canadian National, 2015).

In 2011, Pershing Square Capital Management acquired some 14.2% of Canadian Pacific Railway’s (CP) outstanding shares and proceeded to require several changes in the management and governance of the company. The CP board resisted fiercely these entreaties, which led to an intense proxy fight. Eventually, Pershing won the battle and brought in a new CEO and new board members and designed a new strategy for CP as well. Since the shakeup of the CP’s board and senior management, the company’s stock price has more than triple between 2011 and 2016. Furthermore, under the new management, CP increased operational efficiency, improved performance and enhanced competitiveness. These performance ratios and financial indicators show that CP benefited

Intermodal. Intermodal is the form of moving freight utilizing multiple modes of transportation. One of the most common is rail and truck. Typically, a trucking company will pick up a trailer or a container at a customer’s facility, take the product to a railroad intermodal yard to normally be shipped several hundred miles away (although shorter hauls are becoming more common) to arrive at another railroad intermodal yard to be unloaded and picked up by a trucking company to take the goods to the final destination. The nation’s railroads have focused on this segment of business in the last several years due to a sharp decline in hauling coal. Coal has always been one of CSX’s main sources of revenue. “Railroads wrung efficiencies out of their costs, and discovered that if you make even a little money on a lot of volume, you're soon talking big bucks.” (Frailey, 2011, p. 1) CSX has utilized their own trucking brand to deliver trailers from or to intermodal yards cutting out the additional company in many instances. In this segment of the business strategy, CSX was behind its competitors. The main competitor is Norfolk Southern which operates in the eastern United States just as CSX does. The reason that this information is important is due to investments in infrastructure. Many people do not know that generally the railroad have to fund most of their track maintenance and improvements out of their

I think there will be no market concentration occurred as a result of this merger/acquisition. Because due to this acquisition the monopoly of the other giant company in this business will be reduced. This will lead to increase the price competition.

The principal benefits from consolidation include increase value generation and higher cost efficiencies. Most mergers can generate tax gains, increase revenue, reduce uncertainty, and substantially lower the cost of capital. The 2012 proposed BAE System and European Aeronautics Defence and Space (now Airbus) merger, for example, was largely motivated by a desire to share economic and financial risks, while increasing profits, reducing costs through the realisation of economies of

One major objective of mergers is to be able to reduce or fully eliminate the weaknesses that may exit in

Additionally, analysts view that either company that would get the merger with Conrail might reduce business for the other company or lead to its collapse. This reference as a ‘scarce jewel’ is further exhibited in the wars that arose after CSX and Conrail announced their intentions to form a merger. These wars are in form of the offers made to Conrail that ended up in a lawsuit by Norfolk Southern to stop the Conrail-CSX merger.

According to Parnell, “The attractiveness of mergers and acquisitions seems intuitively obvious: Two firms join forces and the combined organization possesses all the strengths of the individual firms” (2006).

In an industry beset by limited options to consolidate domestic rail traffic, CSX looked at Conrail as an avenue to increase market share and gain access to the North East rail network. With air travel, road travel and trucking taking an increasing share, significant revenue growth became difficult. As Conrail became profitable, Congress explored ways of privatizing it, giving CSX an opportunity to acquire Conrail. Though Conrail suffered from performance inefficiencies it had certain strengths relative to CSX and Norfolk with respect to highest revenue per mile of track operated, per carload originated etc. Conrail with operating revenue of $3,686

By combining the market share, it represents a threat to the new entry. As the merged company has the reputation of quality control and security of supply, it is more reluctant for the new entry to switch and also be difficult to meet its initial stages of operation to generate profit.

According to Risberg (2013), the efficiency theory argues that mergers are organizational strategies that are implemented to achieve three types of synergies, namely financial synergy, operational synergy and managerial synergy. Generally, the acquirer firm will have considered the target’s capable assets and resources and presume that they can be beneficial to its own development. The synergy concept reinforces this idea when it comes to mergers. For instance, the synergy concept argues that mergers allow the combining of the efficient parts of the companies and the discarding of parts that are considered redundant. Johnson (2014) observes that synergy occurs in varying ways, for instance, when companies combine their different competitive advantages, potential tax benefit, or high manpower. Any factor that raises the market value of the merging firms is called a synergy. This means that the

Other companies, however, merge in order to reduce the agency costs, which seem not for sound economic reasons. This essay is an attempt to argue that the majority of companies merge for sound economic reasons, whereas some might merge for other reasons.