Commentary: Csx Conrail: How Shareholders Would Get Railroaded

Should major business decisions be left to greedy, shortsighted shareholders? Or should boards, with their long view, be the ultimate rulers? To hear CSX CEO John W. Snow tell it, some decisions just can't be left to a company's owners, the shareholders. It's a peculiar stance, coming from an economist, lawyer, and former Nixon/Ford-era Transportation Dept. official. Yet that's the sentiment behind Snow's troubling rationale for CSX's planned $8.48 billion takeover of Conrail Inc.--a deal that would deny investors a chance at $9.87 billion offered by Norfolk Southern Corp.

Rather than let the marketplace reshape the East Coast rail industry, Snow argues that the boards of Conrail and CSX are best qualified to carve out a new system. Besides, he says, there's an antitakeover law in Pennsylvania, home to Philadelphia-based Conrail, that allows directors to weigh other interests equally with those of investors'. "Shareholders always want more," he says. "The Pennsylvania statute creates the opportunities for a board to consider what's in the long-run interests."

A CUSHY DEAL. Nice argument. But what's really at work here is old-fashioned self-interest. The managements of both Conrail and CSX make out mightily under their proposed deal. David M. LeVan, the Conrail chief who snubbed repeated overtures by Norfolk Southern, would become a CEO-in-waiting at the newly joined CSX-Conrail. After two years as chief operating officer, he would take the helm from Snow. According to a lawsuit filed by Norfolk Southern, the pact would boost LeVan's pay from last year's $539,000 to at least $2.3 million as CEO. Not bad for someone who runs a $3.7 billion-a-year outfit whose sales and profits have grown less than 10% since 1990. Snow, meanwhile, gets to stay on for an additional two years as chairman.

Stockholders don't get such a cushy deal. CSX would pay $110 a share in cash for the first 40% of stock tendered and then toss in about $83 worth of CSX shares for each remaining Conrail share, for a total of about $8.48 billion. At first, the company wanted to pay just $92.50 a share for its cash portion, but under pressure from Norfolk Southern's all-cash bids of first $100 and then $110 a share, it has had to sweeten its offer. Snow argues that his deal is actually richer than Norfolk's because stock prices rise after mergers. Just wait.

To give Snow and LeVan their due, the intellectual case for their bid has a certain elegance. Conrail, they say, was never looking to sell itself to the highest bidder but rather wanted the best possible partner it could find to form a strategic alliance. With CSX's enviable spots in sea- and truck-shipping, along with rail, the deal does make sense. But Norfolk Southern has been the nation's most profitable big carrier for years. And its managers know a few things about smart railroading.

Moreover, this is a path investors have been down before--in the merger that created Time Warner Inc. In 1989, a Delaware court said Time could acquire Warner without even holding a Time shareholders meeting, though the move killed a $200-a-share rival offer for Time by Paramount Communications Inc. The court, siding with Time's directors, ruled the Time-Warner alliance was in Time's best interest long term. That's debatable now. Time Warner trades near 40, the equivalent after a stock split of $160 a share in 1989.

But the CSX-Conrail deal is more troubling than the Time Warner deal because it relies on Pennsylvania's antitakeover law to give it an edge. Citing that law, Conrail's board has agreed to reject all offers other than CSX's until July 12. By then, CSX expects to control the stock--first by buying up just under 20% and then through a shareholder vote that gives it the right to buy another 20%. The state law lets Conrail simply say no to Norfolk Southern or anybody else. "If you're pro-shareholder rights, you'd say this is a race to the bottom," says Philadelphia corporate lawyer Richard J. Busis.

The 1989 antitakeover law was designed to thwart raids on local companies by foreign slice-and-dice artists out to kill jobs for quick market gains. It was never aimed at efficiency-driven bidders such as Norfolk Southern. Even at the time the law was being considered in the state legislature, one Democratic state senator dubbed it "the fat-cat protection and shareholder-rip-off act." If the CSX-Conrail bid sails through, those words will prove prophetic.

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