The Acquisition of Consolidated Rail Corporation (a and B)
Case No: 9-297-006, 9-298-095; Teaching Notes: 5-298-087
Posted: 27 Jun 1998
Date Written: June 1, 1998
SUBJECT AREAS: mergers and acquisitions, hostile takeovers, bidding wars, two-tiered offers, valuation by multiples, competitive strategy, takeover defenses, deregulation, valuing merger synergies, industry consolidation CASE SETTING: Fall 1996 to Spring 1997, USA, railroads, 23,500 employees, $3.7B sales.
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Situation: On October 15, 1996, Virginia-based CSX Corporation and Pennsylvania-based Consolidated Rail Corporation (Conrail), the first and third largest railroads in the Eastern United States, announced their intent to merge in a friendly deal worth $8.3 billion. This deal was part of an industry-wide trend towards consolidation and promised to change the competitive dynamics of the Eastern rail market. In the A case, students, as shareholders, must decide whether to tender shares into the front-end of a two-tiered acquisition offer. To make this decision, they must value Conrail as an acquisition target and understand the structure of CSX's offer.
Eight days after CSX Corporation announced it was going to buy Conrail for $88.65 per share, Norfolk Southern Corporation made a hostile $100 per share bid for Conrail. Over the next several months, the potential acquirers upped their bids while exchanging criticism in the popular press, prompting analysts to call this one of the nastiest takeover battles of the 1990s. The B case is set in January 1997, just before Conrail shareholders are scheduled to vote on the proposed deal with CSX. The case analyzes the bidding war for Conrail and the various provisions in Pennsylvania's strict anti-takeover law which restricts the market for corporate control.
Although the cases were designed to be taught over two consecutive days, they can be taught in a single session. Both cases provide an opportunity to value a large-scale acquisition using comparable transactions and discounted merger synergies. The A case, in particular, analyzes and uncontested takeover, illustrates the mechanics of a two-tiered offer, and provides a vehicle to discuss various anti-takeover provisions including poison pills, lock-up options, break-up fees, and no-talk clauses. The B case analyzes a contested takeover offer, explores the strategic and financial implications of a bidding war, and challenges the assumption that failure to acquire is a zero net present value endeavor. It also examines the nature of and economic basis for regulating of the market for corporate control.
While these cases were written for a module on corporate control in an advanced corporate finance course, they have also been used with executives in a special program on valuation and in an introductory corporate finance program.
JEL Classification: G34, L92
Suggested Citation: Suggested Citation