1. other offers (if they arise) and cancel

1. Poison Pill

Existing shareholders are provided with the opportunity to purchase
additional discounted shares; in the case of Conrail, existing
shareholders are provided with the right to buy an additional share at a
50% discount to the market price (for every share owned) should an
outsider purchase 10% or more of the firm
The poison pill is used to fend off hostile takeovers as it dilutes
the acquirer’s shares; in the case of Conrail, the defensive strategy
contributes to Norfolk’s decision to submit a hostile offer
Since the merger between CSX and Conrail is ‘friendly,’ Conrail
decide not to enforce the poison pill process

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2. No-Talk Clause

Clause preventing Conrail from soliciting other bids for a six-month
time period; this clause was agreed between CSX and Conrail, and widely
criticised by Norfolk
The clause enables Conrail to consider other offers (if they arise)
and cancel their agreement with CSX under several conditions; these
conditions are Conrail breaching its own shareholder fiduciary obligations,
or vastly superior offers arising (such that CSX can no longer compete)
The no-talk clause contributed to Norfolk’s decision to submit a
hostile offer

 

3. Classified Board

Board is made up of directors who serve for different periods of
time; this makes it very difficult to control the company within a short
time period
In the case of Conrail, 1/3rd of directors are elected each year;
this makes it difficult for bidders to attain the support of a majority of
directors over a short time horizon

 

4. Break-Up Fee

A form of compensation for the buyer firm (i.e. CSX) paid under the
condition that the seller firm (i.e. Conrail) withdraws from a deal; this
compensation is paid to account for the time and financial costs incurred
during the period prior to the deal
Furthermore, the break-up fee defence strategy can detract other buyers
from bidding; this occurs as any potential future bid needs to cover the
costs of withdrawing from a previous takeover agreement
The break-up fee agreed between CSX and Conrail is $300m,
equivalent to 3.61% of total transaction cost (slightly greater than
average to detract Norfolk)

 

5. Lock-Up Option

A stock option that provides the opportunity for a company
(potentially a White Knight) to acquire previously-unissued shares
(typically 10-20%); in the case of Conrail, CSX are offered 15.96m shares
Following the exercise of the lock-up option, and the completion of
the second stage tender offer, CSX will control 53.46m (50.2%) of
Conrail’s shares

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