ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, November 23, 1996 TAG: 9611250124
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
TYPE: ANALYSIS
SOURCE: ROGER LOWENSTEIN THE WALL STREET JOURNAL
SHAREHOLDERS of the Erie Rail Road's descendant should rest assured they'll come out on top once again.
After the Civil War, Cornelius Vanderbilt directed agents to ``buy every share'' of the Erie Rail Road - the prized link from the Great Lakes eastward. But much as he bought, more shares appeared.
It developed that an inglorious trio of Daniel Drew, Jay Gould and Jim Fisk were driving the stock to the ground. Drew was treasurer and a director of Erie, but that hardly dissuaded him from shorting its stock.
The ``Erie ring'' effectively set up a printing press to mint dubious shares, flooding the market. When a judge cited them for contempt, they emptied the company's vaults and hopped a ferry to New Jersey, a breath ahead of pursuing deputies.
Running the railroad from an armed hotel in Jersey City, Gould distinguished himself with prodigious bribes of legislators in Albany, who were so impressed by his political theory they approved a law to shield his directors.
Eventually, Gould made peace with Vanderbilt. But the rickety, lamp-lit railroad was soon bankrupt - transporting freight was never as profitable as transporting stock.
Sweetly, the Erie's corporate descendant is Conrail, and the latter-day script almost seems to write itself. Sired by bankrupts, Conrail was born in the 1970s with a virtual monopoly over Northeastern rail freight, such as Vanderbilt, Gould, et al. would have praised. New Jersey's protection wasn't available, but Pennsylvania's would be. Recognizing its attractiveness to the Goulds of its day, Conrail contributed to the crafting of a restrictive takeover law that theoretically protects Pennsylvania's employees, communities, citizens and dogs, and also, presumably, its chief executives. Then, with visions of their own guaranteed and amply rewarded jobs, Conrail's management bound itself to a cash-and-stock merger with CSX Corp., now valued at $8.8 billion, refusing even a glance at the sweeter, $10 billion cash offer from Norfolk Southern Corp. Conrail's directors, too, are temporarily shielded from proxy, and its shareholders are said to be coerced.
Perhaps present mischief pales in light of history, but the latter script is less egregious on second read. Conrail's managers cannot hide their conflicted interests, but this is true in many friendly deals.
They have surely tried to sway their shareholders, but this is reasonable if it results in a genuinely good deal.
Looking at Conrail as the object of the hunt, it promises what the Erie and railroads since have delivered territorial dominance but not much growth. In fact, Conrail, even with a monopoly, hasn't managed back-to-back years of rising profits since 1984. Its revenue since then has grown, though that is hardly the word, from $3.4 billion to all of $3.7 billion.
Its bankers appraised its stand-alone intrinsic value at $75-$90 a share for its 79 million outstanding shares.
Both bidders are willing to pay more due to a mix of strategy-cum-wishful thinking and fear. The strategic impulse is that freight in the East moves disproportionately via truck; a single railroad blanketing Maine to Florida and accessing the ports would theoretically divert traffic from trucks. It must be said, though, that promised improvements in rail service have a sorry history, and in the East, where hauls are shorter, trucking has intrinsic appeal. Moreover, both bidders - especially CSX - may be deluded in thinking the government will let them keep most of what they acquire.
Conrail-CSX would be an octopus with 70 percent of the rail-freight traffic in the East, eliminating competition in up to 64 cities. Conrail-Norfolk Southern would control only 60 percent; indeed, a Norfolk Southern position paper plaintively asserts that in fostering Conrail the government ``did not intend to fortify a rail monopoly'' and that Norfolk Southern would be ``competing with a handicap'' if CSX won.
This may be an admirable public-policy argument, but Conrail is entitled to pursue its best partner and leave antitrust to regulators.
From the monopolist's point of view, monopoly has its appeal. This is where fear enters. Both bidders know the loser will be left without a good route system into freight centers such as New York, Boston and Albany. That is why they are willing to overpay for Conrail stock.
Pennsylvania's statute, by authorizing managements to ward off and pick between suitors, probably gave Conrail the leverage to stop the result most desirable for the bidders and everyone else save Conrail's shareholders - a fair and peaceable division of its assets. In short, a law with social pretensions will likely result in greater monopoly, not less, and in middling management (Conrail-CSX) over the industry's proven best (Norfolk Southern).
Legally boxed out, Norfolk Southern had to bid an absurdly high $110, dragging CSX also higher, to about $96. That is 35 percent more than the predeal price, at the upper end of other railroad deals, and 21 times earnings for a flat business. To win approval, CSX probably will go higher - even though mandated divestitures could depreciate its prize. In short, Conrail's holders will do fine. They won't get $110, but managements need not auction every company every day, nor should they scrap every reasonable long-term strategy to match any irrationally high bid, assuming their own plan is delivering gains. And given that shareholders who don't buy into Conrail's strategy can sell today for more than they had a right to dream, they should stop the sore winner's complaining. Even Gould knew how to take a profit with grace.
LENGTH: Medium: 99 lines KEYWORDS: 2DAby CNB