The railway industry has been a major player in the transportation industry since the 1850s. During the 1870s the industry experienced a lot of consolidation as companies made acquisitions in an attempt to lower costs. Fast forward to the 1940s, trucking became a much cheaper alternative to railways and the industry started seeing declining profits. Many companies tried to mitigate the declining profits by closing unprofitable routes, merge with other railroads, and lower costs. However, these efforts were stopped by U.S. regulators. It wasn’t until 1980 that Congress passed the Stagger’s Rail Act which highly deregulated the industry. This allowed for railroads to dramatically lower costs and pursue more mergers. The largest suggested merger …show more content…
Before the passage of the Staggers Rail Act, railroads were unable to change their price to compete with alternatives like trucking. This caused many of the firms to become very unprofitable in the 1960s and 1970s. With the wave of deregulation, firms were now able to compete on price not only with other alternatives, but with other railroads. However, without a clear industry leader in the Eastern rail freight market, no firm had real pricing power. Conrail controlled 29.4% of the Eastern market, CSX controlled 38.5%, and Norfolk Southern controlled 32.1%. A Conrail-CSX merger would give the combined company a 67.9% control of the Eastern market. Furthermore, Conrail already had a near monopoly of the Northeastern market, one of the most lucrative markets. This control over the Eastern market allows CSX to have more power in setting the price for the East/Northeast …show more content…
In Table 1 these assumptions are used to find the present value of the additional cash flows as well as the present value of the tax shield. From this merger approximately $36.24 would be added in value per share this results in a value of $107.24 per share. We recommend that CSX does not offer more than $95 per share. This will ensure that CSX does not overpay for the acquisition and will create a positive NPV even if they do not realize all of the potential synergies. In recent acquisitions, the average offer price was 16.175X the earnings per share “EPS.” Using this multiple and Conrail’s 1995 EPS, an offer price of $75.86 is produced. CSX’s blended offer of $89.07 produces a multiple of nearly 19X the EPS and using our recommended max of $95 produces a 20.26X EPS. These are both higher than the average but do not exceed the acquisition price of Santa Fe Pacific by Burlington Northern that was priced at 21.4X EPS. This slightly higher price could be justified by CSX with the unique competitive edge the combined companies would produce in the Eastern
The railroad industry began to struggle when John D. Rockefeller built a pipeline to transport oil instead of the railroads causing many people to lose their jobs. As a result they rioted at Tom Scotts Pennsylvania railroad burning all his buildings trashing his livelihood. Andrew Carnegie felt this drove his mentor to his grave despite Scotts age.
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.
Its social and economic impacts dwell greatly in the 1800’s to the era of 2000’s as trains have always turned America into something greater in those times where travel and transport were at its hardest, but in 1862 congress passed a bill in which it would forge new history all together with the Pacific Railroad Bill and several grants that allowed financial support for Railroad companies primarily Central Pacific
The government really played an important role in this by giving many incentives to the building of the rail lines. Chiefly among the incentives was the free use of Federal lands and cash loans for each mile of track built. Other incentives given were tax exemption, banking privileges, monopoly protection and tariff remission. (Transcontinental Railroads- Lecture slides). The government did this so that they build more rail tracks as much as possible. With these incentives in place for the railroad companies, about 164,000 miles of tracks and $9 billion have been invested already (The Railroad Frontier-Lecture
6.2.2. Growth – the railroad industry is a mature industry and the growth is anticipated to come through acquisitions and no technological breakthrough is expected.
In his work “Railroaded: The Transcontinentals and the Making of Modern America” looks at the effect the building of the railroads throughout the United States. White looks back at what caused the massive boom in the railroad industry and, also what ended up killing the progress that the railroad industry was making. This book is a detailed look into what went into the rise of transcontinentals and the competition between the companies who were trying to build them. White used both primary and secondary sources in the writing of this book, using the primary sources to get perspective on the times and using secondary sources by looking at what sources have found. This would be a good book for a person to read if they are interested in learning in large detail about the economic development of the United States during the end of the nineteenth century due to the railroad industry.
Railroads became extremely popular in America in the 1800’s. The railroad industry itself began to boom; it was supported by its reputation for speed and efficiency. But, along with the booming industry of railroads came the strong debate that
When the transcontinental railroad construction was finished, the Big Four pursued more construction subsidies and land grants by forming a transcontinental line on the southern route. Thus, they would be able control rates and profits in the west, establishing a monopoly, or lack of competition, over transportation. Monopolies are seen as dangerous because they hinder the free competition of companies, which is used to determine the prices as well as quality of products sold to the public (ourdocuments.gov). Yet, this is exactly what the Big Four hoped to achieve.
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
Analysts estimate that the $80 million in cost saving could be realized after the acquisition , however certain other costs associated with the integration approximately $130 million would occur .Hence, I take these cost savings and integration costs into consideration for the with-synergies valuation. Incorporating the effects of 80million cost savings for the merged firm (to be achieved by end of 2007 and assumed to incur in perpetuity then on) and 130 million integration costs (half of this accounted at the beginning years) in the estimated EBITs for Torrington, a new horizon value is estimated, the new FCF is discounted by acquiring company’s WACC 8.39%. Torrington company’s with- synergies valuation $1386.38 million exceeds the value as a stand-alone entity by approximately $286 million. sheet2: With-synergies Valuation of Torrington-DCF Method.
Due to the (Harvard Business School, 9-298-095, May 2001) Norfolk Southern expresses its concern about a merger between CSX and Conrail. It would have significant consequences on Norfolk Southern way of doing business. They could be excluded from important markets. As a broker says letting the CSX Contrail merger pass could mean the end of doing business for Norfolk Southern. We believe that this is the main reason, but Norfolk Southern can also see synergies inform of both cost savings and increasing revenues.
1. CSX wanted to merge with Conrail, because the consolidated company would have more than $8.5 billion in rail revenue and almost 70 % of the Eastern market. Gain in Operating Income from Cost Reduction would bring additional $370 million by the year 2000. Total gain from revenue increase would result in additional $180 million. And from the operating income would reach $550 million. Another important point in CSX-Conrail merger is the better competitive position in both long-haul and short-haul routes through cost reduction. The last reason for buying the Conrail was the fear of CSX Company to lose competitive advantage and as a result to lose a lot of revenue, if Conrail merge with
Recommended Citation: Carbaugh, Robert J. and Ghosh, Koushik (2010) "United-Continental Merger," Journal of Industrial Organization Education: Vol. 5: Iss. 1, Article 1. DOI: 10.2202/1935-5041.1034
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
When only a few sellers offer a product with little regard to competition it is called an oligopoly. It is different from a monopoly because multiple corporations are involved, but the effects on the consumer are the same - bad. Although competition is usually in the best interest of the consumer, it is not always in the best interest of the corporation. If we examine the two leading soft drink producers, Coca-cola and Pepsi-cola, we see a prime example of an oligopoly (Zachary, 1999). As things are presently, each of these soft drink companies has about half of the soft drink market, and examined from a world-wide perspective that is a pretty large market. Either one of them, Coke or Pespi, could conceivably lower their prices in