THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Saturday, January 18, 1997 TAG: 9701180526
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
DATELINE: PHILADELPHIA LENGTH: 182 lines
A partisan crowd of loyal Conrail Inc. employees packed the gilt house at the Academy of Music on Friday and heartily voiced their support of the railroad's proposed merger with CSX Corp.
But like their bosses, they went home disappointed.
Conrail shareholders rejected the $9.2 billion merger with Richmond-based CSX, throwing their votes behind Norfolk Southern and its $10.3 billion bid.
The vote forced a stalemate in the fight for Conrail that could be settled quickly or take months to resolve.
CSX is blocked from taking over Conrail, for now. Had CSX prevailed, Norfolk Southern's chances of becoming the biggest railroad in the East might have been nearly over.
The vote was close. About 53 percent of Conrail shareholders rejected the CSX merger, according to Norfolk Southern. But an overwhelming 92 percent of the shareholders that were unaffiliated with either CSX or Conrail rejected the merger.
The official vote won't be released until Monday at the earliest, but Conrail and CSX conceded defeat Friday.
``Now that the shareholders have spoken, it is time for Conrail's board to accept their will,'' said a jubilant Norfolk Southern Chairman David R. Goode, who was in Philadelphia for the vote. ``We hope that they will seize the opportunity to do that. Our superior offer should be allowed to go forward and we're ready to have meaningful discussions with Conrail and CSX to that end.''
With the setback to CSX, Norfolk Southern said it would proceed with its plans to spend nearly $1 billion to buy 9.9 percent of Conrail's stock.
A beaming Goode followed by an entourage of executives and lawyers strode confidently into the shareholders meeting, already sure of the result.
``It may be 13 degrees outside, but it feels like a very pleasant day in Philadelphia,'' Goode said before the vote.
Conrail and CSX appear to have little intention of seeking a compromise with Norfolk Southern. Conrail Chairman David M. LeVan said his railroad plans to schedule another shareholder vote. He would not say how soon such a vote could take place.
``We obviously have to get out and sell the value of this transaction to our shareholders,'' LeVan said.
Friday's vote effectively blocks the CSX merger, but it doesn't mean Norfolk Southern has won this high stakes battle for Conrail and its northeastern freight rail network.
Not only is the future of all three railroads at stake in this fight, but the very framework of transportation competition in the Eastern United States will be rewritten.
Norfolk Southern, which employs 1,800 people in Hampton Roads, has said it would consider moving its headquarters to Philadelphia if that's what it takes to complete a deal with Conrail. That would result in the loss of 300 jobs in downtown Norfolk and the active community leadership of its executives, though the 1,500 employees at the railroad's yards and terminals in Hampton Roads would likely be safe.
``We're very committed to Norfolk,'' Goode said. ``Norfolk is and always will be very important for Norfolk Southern.''
Conrail said after the loss that shareholders were swayed by Norfolk Southern's offer Monday to buy 9.9 percent of Conrail's shares if they vote against the CSX merger. It challenged the integrity of the vote, LeVan said.
``The shareholders can add and they saw that they could have their cake and eat it too,'' said Timothy T. O'Toole, Conrail's senior vice president of finance.
``We didn't need to make the 9.9 percent offer,'' rebutted Henry C. Wolf, Norfolk Southern's chief financial officer. ``It was not a quid pro quo for the vote.''
The majority of the shareholders had already indicated that they would side with Norfolk Southern, Goode said. With CSX and Conrail challenging the seriousness of Norfolk Southern's bid, the offer ``was a gesture on our part of the firmness of our commitment the Conrail shareholders,'' he added.
Norfolk Southern expects to buy 9.9 percent of Conrail's stock, the most it can buy without triggering anti-takeover defenses, as soon as possible.
If Conrail and CSX won't negotiate with Norfolk Southern, shareholders will likely be called upon again to vote on the CSX merger.
Norfolk Southern will need to maintain its coalition of opposing shareholders to win subsequent votes and, if necessary, attempt to unseat Conrail's board of directors at the next annual meeting.
The shareholders are firmly in Norfolk Southern's camp for the duration, said Alan Miller, senior managing director of Georgeson & Co. Inc., a New York shareholder solicitation firm working for Norfolk Southern.
``I don't think there's any question at all,'' Miller said. ``The situation only gets worse for Conrail.''
CSX and Conrail will apparently test the shareholders' resolve.
``Norfolk must have somehow believed that having the proposal not be approved today would somehow shake the resolve of the Conrail board,'' LeVan said. ``Norfolk is mistaken. The Conrail board is fully committed to the CSX-Conrail merger and will not agree to a transaction with Norfolk Southern.''
Meanwhile, Norfolk Southern reiterated its commitment to file an application for control of Conrail with the federal Surface Transportation Board, regardless of the outcome of the fight for shareholders.
Norfolk Southern believes the federal agency, which regulates railroads, would be able to approve its takeover of Conrail regardless of the wishes of Conrail's management and board.
``Whatever happens, we will move forward,'' Goode said.
Based on the shareholders meeting, where the support for Conrail's board was evident in vigorous applause for LeVan and other Conrail speakers, that prospect has many Conrail employees unhappy.
``I fear Norfolk Southern will drink from wells they did not dig and will be warmed from fires they did not build,'' said Joseph Folk, a 25-year veteran Conrail employee.
Referring to Norfolk Southern's attempt to buy Conrail in 1986, Phillip Bonifasi, a third generation railroad employee, said, ``I remember when Norfolk Southern said we would never survive - our pockets weren't deep enough, our employees weren't committed enough. Just look at us now, baby!''
Four protesters in front of the theater carried signs that said things like ``Conrail employees support David LeVan'' and ``They shoot horses, don't they?'' with a crossmark through a Norfolk Southern logo of a rearing horse.
Of more than 20 speakers besides Goode at the meeting, only one stood up to question the proposed CSX merger. A retired Conrail employee also voiced concern about how the merger would weaken the pension fund by combining its with CSX's underfunded pension plan.
The outpouring of support from Conrail employees touched LeVan and impressed Goode.
``There are times in this process when I've questioned whether I'm doing the right thing, but your comments . . . have convinced me that I am,'' LeVan said.
Goode said he would welcome Conrail's 23,500 employees to the Norfolk Southern team.
``The employees that you heard today at the Conrail meeting are the kind of good, loyal employees any corporation would like to have,'' Goode said. ILLUSTRATION: Graphic with color photos and map
THE DEAL
After CSX and Conrail announce a merger in October, Norfolk
Southern attemptsa hostile takeover bid for Conrail. A corporate and
legal battle ensues. Conrail shareholders reject the CSX merger
Friday giving Norfolk Southern Chairman David R. Goode (above) new
hope for a deal.
WHAT'S AT STAKE?
Norfolk Southern or CSX when combinded with Conrail would become
the largest railroad in the East and the nation's third biggest.
Hampton Roads could lose its only Fortune 500 headquarters and
300 downtown Norfolk jobs if Norfolk Southern wins and moves to
Philadelphia.
If it loses Conrail, Norfolk Southern's competitive viability
could be threatened.
WHAT'S NEXT?
Conrail and CSX appear to have little intention of seeking a
compromise with Norfolk Southern. Conrail Chairman David M. LeVan
(above) said his railroad plans to schedule another shareholder
vote. But if they keep losing they may try to negotiate a settlement
with Norfolk Southern.
Graphic
TIMELINE
Oct. 15: CSX and Conrail announce friendly $8.4 billion merger.
Oct. 23: Norfolk Southern launches $9.1 billion hostile takeover
bid for Conrail, sues Conrail and CSX.
Oct. 25: Norfolk Southern asks federal judge to block CSX's
merger with Conrail, while allegations in suit are resolved.
Nov. 2: Norfolk Southern and CSX start discussing their competing
bids for Conrail. Talks break down three days later.
Nov. 6: Conrail spurns Norfolk Southern's offer as CSX restores
the value of its bid to $8.5 billion by raising its upfront cash
offer. The value of CSX's original offer had shrunk as its stock
price fell more than 10 percent since the offer was made.
Nov. 8: Norfolk Southern increases its bid to $10 billion.
Nov. 13: Conrail and CSX begin discussing again increasing CSX's
offer.
Nov. 18: Federal court hearing begins on Norfolk Southern's
request to temporarily block CSX's merger with Conrail.
Nov. 19: Federal judge rules against Norfolk Southern.
Nov. 21: CSX buys 19.9 percent of Conrail stock.
Dec. 5: CSX and Conrail sue Norfolk Southern, saying its bid
isn't serious.
Dec. 12: Major shareholder advisor sides with Norfolk Southern.
Dec. 17: Judge orders Conrail to hold shareholders' vote Dec. 23.
Dec. 19: CSX raises bid to $9.2 billion, postponing Dec. 23 vote;
Norfolk Southern counters with $10.3 billion bid.
Jan. 9: Judge and federal board permit CSX-Conrail merger
agreement to forbid talks with Norfolk Southern until 1999.
Jan. 13: Norfolk Southern says it will buy 9.9 percent of Conrail
stock, if shareholders vote against CSX in Jan. 17 vote.
Jan. 17: Conrail shareholders reject CSX merger.
Next: Conrail and CSX will likely test shareholder resolve in
another vote, but may decide to talk to Norfolk Southern.