THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, October 27, 1996 TAG: 9610260456
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: STAFF AND WIRE REPORT
LENGTH: 90 lines
Norfolk Southern's biggest barrier to taking over Philadelphia-based Conrail may be a Pennsylvania law designed to fend off hostile takeovers.
Norfolk Southern Corp.'s unsolicited $100-a-share bid for Conrail Inc. on Wednesday topped by at least $1 billion the friendly offer of its Richmond-based rival CSX Corp.
Typically a company like Conrail would be hard-pressed to explain why it shouldn't take Norfolk Southern's all-cash offer. After all, the financial terms are sweeter for shareholders than the $89-a-share cash-and-stock deal Conrail reached with CSX on Oct. 15.
But Norfolk-based Norfolk Southern may not be able to get its bid past a Pennsylvania statute that allows companies in the state to consider the interests of all stakeholders - including employees, customers and local communities - who would be affected by a proposed merger.
``The Pennsylvania law is an obstacle, there's no question about that,'' said Henry C. ``Hank'' Wolf, Norfolk Southern's executive vice president of finance. ``But I think we have put a compelling offer on the table and we have a compelling case for a Norfolk Southern-Conrail combination.''
The law, considered the nation's strongest anti-takeover statute, allows companies to employ defensive strategies to resist hostile tender offers that ``negatively impact'' stakeholders.
In its only response to Norfolk Southern's hostile offer, Conrail said that its board of directors had considered the relative merits of a merger with Norfolk Southern and decided that a merger with CSX was in the best interests of Conrail and its ``constituencies.''
Norfolk Southern has sued Conrail in a federal court in Philadelphia to press its case for a merger and contest Conrail's interpretation of the law.
``This transaction is very favorable to the shipping public, the employees of Conrail and to the cities of Pennsylvania because it will ensure excellent competitive service to places that would otherwise be served by only one railroad,'' said Norfolk Southern Chairman David R. Goode. Charles Vincent, a rail stock analyst for PNC Financial Corp. in Philadelphia, said ``the board has to have a very powerful argument as to why it wants to do the CSX deal as opposed to the (Norfolk Southern) deal, which is more attractive in terms of time and money.''
Vincent argues that boards are still ultimately responsible to shareholders. ``It seems a little irresponsible to the shareholders to say the CSX offer is more attractive,'' he added.
But under a 1990 addition to the law, directors are not required to consider shareholder interests ``dominant or controlling'' when considering the effect of any transaction on the company's well-being.
And no hostile takeover in recent memory has succeeded in the railroad business, leading some observers to say Norfolk Southern faces an uphill battle.
``On the surface, a cash bid beats a cash-stock bid,'' said Thomas Galvin, an analyst at Deutsche Morgan Grenfell. ``But the resolution of this Pennsylvania statute is a critical variable. It will likely be a courtroom wrestling match for the next few weeks or months.''
This spring, Norfolk Southern reportedly abandoned its efforts to acquire Conrail. One of the reasons: a hostile takeover was deemed too difficult in the Keystone state.
Other players in the railroad business have also recognized the problems that would be encountered in launching a hostile bid for the freight carrier.
Last May, Robert D. Krebs, the president of Burlington Northern Santa Fe, which had also sought to merge with Conrail, concluded that Pennsylvania law all but barred a hostile takeover attempt.
``It's pretty hard to do a hostile merger in the railroad industry, especially in Pennsylvania,'' Krebs said then. ``And we're just not interested in doing it.''
Already, Pennsylvania's strict anti-takeover law has come to the aid of at least two companies.
In 1990, the law helped Armstrong World Industries Inc. fend off an unwanted takeover bid by Canada's Belzberg family. And in 1987, Commonwealth National Financial Corp. successfully avoided a hostile bid from Meridian Bancorp by merging with Mellon Bank. In court, Commonwealth had argued, among other things, that its employees would have more career opportunities with Mellon than Meridian. Meridian was later bought by CoreStates Financial.
Norfolk Southern believes it can succeed where others have failed.
``The only thing standing between doing this merger and not doing this merger is a vote of the (Conrail) shareholders,'' Wolf said.
Indeed, under the Pennsylvania law a company located in the state can opt out of the law's provisions on its own or through a shareholder vote.
``This is an issue that could very well go away,'' said PNC analyst Vincent.
Transportation experts say that no matter which company succeeds in acquiring Conrail, the public should benefit from the increased competition, particularly in New York, where Conrail has virtually an exclusive franchise. In all likelihood, they say, the losing bidder will still get the right to use some rail lines in the Northeast, if not the prize of Conrail itself. MEMO: Staff Writer Christopher Dinsmore, Dow Jones News and The New York
Times contributed to this report.
KEYWORDS: NORFOLK SOUTHERN TAKEOVER by CNB