Conrail Takeover: Norfolk Southern vs. CSX

Norfolk Southern and CSX hostile takeover bid for Conrail, and relative acquisition cost
Restored Conrail caboose at the National New York Central Railroad Museum. Norfolk Southern made a hostile bid for Conrail in the face of CSX’s possible takeover of Conrail. (Photo: Public Domain)

Consolidated Rail Corporation (Conrail) was the main Class I railroad system in the Northeastern United States. It was created in 1976 by combining multiple rail companies that were about to go bankrupt. In 1996, CSX Corporation announced its $8.3 billion takeover bid on Conrail. Rival Norfolk Southern responded by placing a $9.1 billion hostile takeover bid for Conrail. Norfolk Southern and CSX were competitors in the rail industry and competed in the takeover of Conrail. Both companies recognized the potential effect of the takeover on their businesses and the competitive landscape. The large-scale takeover would alter the market and the competitiveness of the two companies. Such expectation prompted CSX and Norfolk Southern to compete and take control of Conrail.

Norfolk Southern made such a hostile takeover bid for Conrail based on its competitive position. However, Norfolk Southern and CSX had different relative acquisition costs in the takeover.

Norfolk Southern’s Hostile Bid for Conrail

Norfolk Southern made a hostile takeover bid on Conrail to prevent CSX from taking over Conrail. If CSX took over, Norfolk Southern would experience the negative effects of a higher operating ratio. The operating ratio is calculated by dividing total expenses by total revenues. A lower operating ratio is more desirable. If Norfolk Southern allowed CSX’s takeover of Conrail, CSX would have a lower operating ratio compared to Norfolk Southern. To prevent such a situation, Norfolk Southern decided to make the hostile takeover bid for Conrail.

Norfolk Southern’s operating ratio and CSX’s operating ratio are inversely proportional. This inversely proportional relationship is based on the limited population of clients. An increase in the number of clients of one company could lead to a decrease in the number of clients of the other company. Norfolk Southern’s operating ratio would favorably decrease through its takeover of Conrail. Forecasts of the firm’s performance predicted that its operating ratio would decline starting in 1997, after the takeover of Conrail. Also, Norfolk Southern would suffer more from CSX’s takeover of Conrail. In contrast, CSX would suffer less from Norfolk Southern’s takeover of Conrail. Thus, Norfolk Southern had higher incentive to take over Conrail.

Conrail’s Bid Price: Acquisition Cost to Norfolk Southern & CSX Corporation

If given a bid price, the acquisition cost to Norfolk Southern would be considerably higher, probably by about 10% more than the acquisition cost that CSX would need to spend. The relative acquisition costs of Norfolk Southern and CSX depend on the business condition of these companies. A lower business performance means higher cost of acquiring Conrail.

These two companies had the financial capacity to support the acquisition cost in the takeover of Conrail. However, Norfolk Southern was already at a relatively lower performance level in comparison to CSX. Thus, it was more difficult for Norfolk Southern than CSX to take over Conrail. The higher acquisition cost for Norfolk Southern was a major challenge.

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