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 ...view middle of the document...
In this case, although the synergy impact between Norfolk and Conrail is lower compared to that with CSX, the value of opportunity cost of Norfolk losing the bid is significantly higher, which brings Norfolk’s potential offer price higher than that of CSX (116.84 vs. 114.36) – calculated in Q3. If they were stand-alone bidders, CSX’s potential offer price is significantly lower (105.44), and Norfolk’s offer price is c. 102. However, since CSX, Conrail and Norfolk are in mature market with high concentration of market power, I believe the bidding war is naturally the product of this market structure.
The following analysis would provide further details of the synergies of the potential deals.
In 1973, following the Regional Reorganization Act, the government established Conrail (the target), out of the remains of the six bankrupt, Northeastern railroads. The company became the 2nd largest in the region and it was privatized in 1987, via IPO (the largest in US history at the time).
On 15 October, 1996 the CEO of CSX announced $8.3bn merger with Conrail. Due to the friendly nature of the offer, both management boards claimed significant synergies, including operations improvement, cost efficiencies and compatible cultures.
This horizontal merger would create value by consolidating overlapping operations. CSX, the largest company in the East (freight transportation market share 38.5%) operated 18,645 track miles and 29,537 employees. Conrail possessed 29.4% of the Eastern freight transportation market with 10,701 track miles and 23,510 employees. The network expansion would link Midwestern, Northeastern US cities with Canadian cities; therefore the CSX-Conrail company would also capitalize on North American Free Trade Agreement NAFTA(1994).
The merger CSX-Conrail would result in significant operating synergies, in particular in completeness of the distribution network. Although CSX’s had important presence in the railroad business, the company also provided diversified transportation services, including ocean container shipping, barging and contract logistics services. 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...