Conrail Essay

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Mergers & Acquisitions Question 1 CSX wants to buy Conrail for three primary reasons: firstly, buying Conrail would generate synergies by increasing revenue while reducing costs through consolidation of overlapping operations; secondly, the deal would strength CXS-Conrail’s market position while simultaneously weakening Norfolk Southern’s; and, similarly, CSX seeks to preempt another company’s potential bid for Conrail for fear that they would lose market share themselves. In order to gauge the amount CSX would be willing to pay to acquire Conrail, we used both comparative and DCF analyses. Multiples Valuation We used three different ratios sourced from precedent transactions in order to calculate Conrail’s value to CSX: Price/Earnings, Price/Book, and EV/EBITDA. Table 1: Precedent Transactions We used the average value of each multiple as a benchmark and assumed that Conrail represents the average level of the rail industry. Furthermore, to get a range of share prices, thus developing a more robust analysis, we also show the minimum and maximum values for each multiple. We also assumed that Conrail’s trailing four quarters could be roughly used as real data for 1996, meaning there were no significant changes among different time periods. EV/EBITDA According to EV/EBITDA comparisons, Conrail shares are worth $103.84. Table 2: Enterprise Value to EBITDA Ratio Implied Value P/E Since the P/E ratio is based on current year earnings estimates, we used Conrail’s 1996 estimated EPS for consistency, which yielded an average share price of $95.09. Table 3: Price to Earnings Ratio Implied Value P/B The implied acquisition value/share, given average P/B ratios, was $148.23. Table 4: Price to Book Ratio Implied Value The ranges of prices yielded from each method are so wide that they are somewhat meaningless. Therefore, we only

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