Case Analysis Conrail & CSX

Name Aditya Verma Khushboo Sethi

Roll Num 5 34

Group 14, Sec-A MBA 2010-13, Indian Institute of Foreign Trade, New Delhi
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CSX STRATEGY
CSX planned a two tiered deal due to financial and regulatory considerations. They use the first tier cash tender offer of $92.50 to gain control of the 19.7% stock, and the second stage was another tender offer for an additional 20.3% of Conrail acquisitions shares at same price. CSX would own 17.86 million shares at the stage of first tender offer. Conrail Mgmt. own 1.3 million shares & employee trust (which included an employee stock option program & a traditional benefit trust) that supports the merger & own 13.0 million shares. Thus party supporting merger would control 35.5% of the acquisitions share & would need another 14.6% of the shares to vote in favor of opting out for it to pass. Following the shareholder approval & successful completion of second tender offer, CSX would proceed with back end offer for the remaining 60% of Conrail shares.

No talk clause Conrail is unable to engage in merger talks for a period of 6 months with any other party under no talk clause. It ensures that CSXs investment of time and money is worthwhile, as it lessens the chances of another bidder entering the picture, and either blocking the deal or significantly raising its cost.

No talk clause-Conrail is unable to engage in merger talks for a period of 6 months unless certain conditions are met: 1. Considering another offer is necessary to meet fiduciary responsibilities to shareholders. 2. Another offer emerges that makes it unlikely that CSX can complete the merger or win the necessary opt out vote

Poison Pill

Conrail suspended its poison pill clause which allowed current shareholders to buy shares discounted at 50% to maintain their ownership interest- if an outsider attempted to buy more than 10% of the overall shares. This suspension allowed CSX to gain ownership control of the company, by reducing the possibility that current shareholders could challenge their take and dilute the power of their shares. This makes it easier for the company to move forward with the takeover deal leading to less of a required value outlay , while navigating the regulatory issues within Pennsylvania.

Break Up Fee-

$300 Million, Conrail to pay to CSX if the transaction did not take place..
This ensures that CSX does not lose the money it invests in the fees associated with the deal, and also that it is compensated for potential reputation damage and time investment. This also acts as an disincentive for Conrail to look into other bids, and/or decide not to move forward with the deal in general. It ensures that another profitable bid would have to be at least $300 million more to compensate for the loss associated with the break up.

Lock up Options Lock Up Options-CSX has option to buy 15.96 Million newly issued common stock shares of Conrail at $92.50. This ensures that CSX is able to maintain their ownership control over Conrail. It prevents Conrail from selling these shares to another buyer, thus reducing the risk of the occurrence of a bidding war.