
DATE: Wednesday, March 5, 1997              TAG: 9703050489

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER 

                                            LENGTH:  114 lines

HOW NORFOLK SOUTHERN DERAILED THE MERGER OF CSX AND CONRAIL

David R. Goode issued the ultimatum on Feb. 24 - deal with Norfolk Southern Corp. by March 3 or else.

In a letter to his counterparts at CSX Corp. and Conrail Inc., Goode outlined a compromise that would split Conrail between CSX and Norfolk Southern and end the costly standoff in the takeover battle. The two Virginia-based railroads had been battling for control of Conrail for four months.

Goode, Norfolk Southern's chairman, threw a hard ball straight up the middle and gave them a week to respond.

The strategy worked. The three railroads are on the verge of a deal that splits Conrail, assuring the dominance of both Norfolk Southern and CSX in the East.

Goode essentially forced the compromise by telling CSX's John W. Snow and Conrail's David R. LeVan that if they didn't deal, Norfolk Southern would proceed with its planned hostile takeover of Philadelphia-based Conrail, breaking up Conrail's merger with Richmond-based CSX.

While he didn't say that explicitly, Goode's message was loud and clear - we would rather do this the easy way than the hard way.

During the four months of sparring, Norfolk Southern had won over Conrail shareholders with a bid $1 billion richer than CSX's. The Norfolk-based railroad also bought 9.9 percent of Conrail's shares, moved to unseat Conrail's board and stood ready to file an application for outright control of Conrail with the Surface Transportation Board before CSX did.

The STB, a federal board, would have to approve any takeover of Conrail. The board was intent on preserving railroad competition inthe East and strongly signaled that Conrail's tracks would have to be somehow divided between CSX and Norfolk Southern.

Goode's gambit worked.

There was already immense pressure from shippers, other railroads and the regulators for a pro-competitive resolution, and Goode was offering a way out.

CSX's Snow, once LeVan's staunch ally, had already recognized the inevitable and was trying to convince the Conrail chairman that a CSX-Conrail merger excluding Norfolk Southern probably wasn't possible. About a week before Goode's Feb. 24 letter, Snow sent his own ``get real'' letter to Conrail's LeVan.

``David, the time has come for us to face reality, and I know how unpleasant it is for you to accept, that gaining regulatory approval of our merger most probably requires the disposition of a large part'' of the Conrail system, Snow wrote, according to the Wall Street Journal.

Neither Snow nor LeVan could be reached for comment.

Goode's letter made it clear that its Conrail takeover plan would achieve ``competitive balance'' in the Northeast by making available certain lines and rights to another big railroad, CSX by implication.

``However, in an effort to respond to political and regulatory calls for settling our differences, we are prepared to offer an alternative for comprehensive resolution of the issues confronting eastern railroads,'' Goode wrote.

On Monday, Conrail's board capitulated, approving talks with CSX that will likely bring about a split up of the railroad. The Conrail press release made no mention of Norfolk Southern, but expressed the board's ``disappointment'' that its strategic goal of maintaining the Conrail franchise ``may not be attainable.''

CSX and Conrail were hammering out the details Tuesday of how their merger agreement must be altered to allow Norfolk Southern to buy about half of Conrail's 11,000 miles of tracks. A deal could be announced today, said a source familiar with the talks.

The body of Goode's Feb. 24 letter outlined that plan, which called for both Norfolk Southern and CSX to get north-south and east-west lines out of Conrail.

Under the proposal, Norfolk Southern and CSX would create a joint company that would buy Conrail for $115 a share, the equivalent of Norfolk Southern's $10.3 billion takeover offer. That would fulfill Goode's promise to Conrail shareholders that helped sway them to reject the CSX merger in January.

The cost of acquiring Conrail would be split by Norfolk Southern and CSX on a formula derived from the operating revenues each would get out of the deal.

The two railroads would then jointly file with the STB for control of Conrail.

The proposal would result in two railroads that ``compete at and between most of the major ports and markets east of the Mississippi,'' Goode said.

Goode specifically proposed that Norfolk Southern would take most of the old Pennsylvania Central, from Philadelphia west to Pittsburgh, Cleveland and Chicago. CSX would take the old New York Central line from New York to Albany and west to Buffalo, Cleveland, Indianapolis and St. Louis.

Norfolk Southern would also take the old Reading line connecting its line at Hagerstown, Md., to Philadelphia and New York, as well as a line from Washington north to Philadelphia and New York and a slower line from New York to Buffalo.

CSX would get a line between Albany and Boston and other lines in New Jersey and Pennsylvania giving it a connection from New York to its network in the South.

Both would share lines in New Jersey, around Detroit and in the coal-producing region of Pennsylvania and West Virginia.

CSX would take Conrail's headquarters. Norfolk Southern would take Conrail's Pittsburgh service center and the shops at Altoona, Pa., and Hollidaysburg, Pa.

Details about how Conrail employees and other assets would be divided need to be worked out.

``We are willing to consider any alternative suggestions for accomplishing the same results,'' Goode said. MEMO: (Staff Writer Christopher Dinsmore can be phoned at

757/446-2271 or e-mailed at (dins@pilotonline.com) ILLUSTRATION: [Color] Photo Illustration by JOHN EARLE/The

Virginian-Pilot

[Color photos]

On Feb. 24, Norfolk Southern Chairman David R. Goode, left top,

issued an ultimatum: Deal or else. Conrail's board captitulated,

approving talks with CSX that will likely split up the railroad.

Even before Goode's letter, CSX Chairman John W. Snow, left middle,

had recognized the inevitable. In a letter to Conrail Chairman R.

LeVan, left bottom, Snow wrote: ``David, the time has come for us to

face reality...''