The Acquisition of Consolidated Rail Corporation (A) & (B) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

The Acquisition of Consolidated Rail Corporation (A) & (B) Case Study Solution

Conrail B

Question 1

A hostile bid was made by Norfolk Southern for Conrail due to the fact that the merger of CSX and Conrail was going to result in a massive amount of revenue loss to be incurred by the company. In case, CSX acquiresConrail; the consolidated firm would steal the major proportion of the revenues of Norfolk Southern. A merger with the CSX would provide a number of benefits to Norfolk Southern. Norfolk Southernis not only adversely influenced by the merger of CSX and Conrail, but it is also forgoing the positive impacts of its own merger with Conrail, due to which it has decided to make holistic bid for Conrail.

Question 2

Without the agreement of merger; the market value of Conrail’s shares is $6425, which is calculated by multiplying the 90.5 shares outstanding and $71 pre-merger market price. As per the information provided in the case; both CSX and Norfolk Southern projected the large synergies from merger from acquiring Conrail. The Conrail and CSX projected gains in $565 million/ year operating income from the cost reduction and $165 million / year from revenue enhancement by 2000;whereas, the Norfolk Southern projected the gain of $515 million operating income from cost reduction and $145 million from revenue increment.

Using the required rate of return of 16%; the total synergy value is estimated to be $1883 million and the incremental net present value per share is $17.58. The stand-alone value is $71 per share, which is added into the synergetic value of $17.58 alongside the opportunity cost of $28.81, to calculate the share value of $120.62. The maximum estimate of market value of Conrail for CSX is amounted as $17.58 million and the maximum estimate of market value of Conrail for Norfolk is amounted as $20.81 million. According to the discounted cash flow model; the maximum acquisition price of Conrail for CSX and Norfolk are $103.65 and $120.62, respectively.

Question 3

The situation is quite challenging and complex for the company’s shareholders. CSX is anxious that the shareholders might vote against opting-out, which in turn would consequently increase theprices of shares. I would not vote to opt out due to the reason that the operating margin of the merged CSX and Conrail is lower than the operating margin of the Norfolk and Conrail. Additionally, the offer price of Norfolk ($115) is greater than the offer price of Conrail (102.16) as of 1/16/1997.

Assuming the reduction in the growth rate from 3% to 2% and keeping other things constraint; the total synergy value is estimated to be $1541 million and the incremental net present value per share is $17.03. The stand-alone value is $71 per share, which is added into the synergetic value of $17.58 and an opportunity cost of $15.07, to calculate the share value of $103.10. The maximum estimate of Conrail’s market value for CSX is amounted as $17.03 million and the maximum estimate of market value of Conrail for Norfolk is amounted as $20.15 million. According to the discounted cash flow model; the maximum acquisition price of Conrail for CSX and Norfolk are $103.10 and $119.96, respectively.............................

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