Unlike some valuations that have floated around the market, at least CSX has substantial revenue. Last year, sales reached $12 billion and net income $1.9 billion. Canadian Pacific Railway may claim that “synergies” will make a transaction more attractive, which is to say that people and perhaps routes can be eliminated. The value of cost cuts would be accelerated by a turnaround in the industry made possible by energy shipments, much of it coal and crude oil or crude by-products.
The stock market is so fat with investors that even companies that are barely companies have massive market values. Twitter Inc. (NYSE: TWTR) is worth $31 billion, with nearly no revenue at all. However, Wall Street believes the social media network has potential to grow. Even at a white-hot revenue growth pace, it would take years for Twitter to become as large as CSX. With an unproven business model, Twitter may not even get close.
The valuation issue and the ease with which companies can get, have and will spend money is illustrated by a recent comment by editors at CNET. They pointed out that M&A activity in the tech market could hit $500 billion, which might top the figure set in the frothy market of 2000. The tech medium’s primary example is the Facebook Inc. (NASDAQ: FB) buyout of WhatsApp for $19 billion. WhatsApp has about 500 million visitors, but no revenue of any size to show for that colossal price.
In the present M&A atmosphere, a CSX buyout is relatively small.
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