Under the plan, the Richmond-based CSX would buy Conrail, then sell roughly half of it to its Norfolk-based rival. How those transactions would be structured has not been worked out, Norfolk Southern sources said.
The two railroads would then jointly seek the federal Surface Transportation Board's approval of two new freight rail systems for the eastern United States.
The Conrail board's announcement came late yesterday after a six-hour meeting that kept rival railroads and Wall Street waiting anxiously for news.
Conrail stock soared $7.13 from its Friday close of $104.50 to $111.63 per share on news of the settlement talks.
The mood was gloomy yesterday at 2001 Market Street in Center City, Conrail's corporate headquarters, as employees began mourning the imminent death of a company they had built over the last two decades from the bankrupt remains of six northeastern railroads.
``Those who have been here from the beginning are taking it the hardest,'' one Conrail manager said.
Splitting Conrail would not affect the number of operating jobs in Pennsylvania and New Jersey, but management jobs could be eliminated.
There was no estimate of the number yesterday, but the board acknowledged the problem by taking steps to assure generous severance packages for those who don't find work at Norfolk Southern or CSX. Conrail employs about 3,000 people in the region.
The proposed new agreement was outlined in a Feb. 24 letter from Norfolk chairman David R. Goode to the CEOs of Conrail and CSX - David M. LeVan and John W. Snow. Goode set yesterday as a deadline for getting a response.
Snow embraced Goode's plan, leaving LeVan and Conrail's board feeling ``angry and backed into a corner,'' one source said.
Goode's proposal is a radical departure from the $8.4 billion, $92.13-per-share ``strategic merger of equals'' announced by Conrail and the larger CSX Corp. last October.
Under that deal, Philadelphia was to be the headquarters of a combined Conrail-CSX system that would have linked virtually every market east of the Mississippi River.
Conrail's LeVan was to have succeeded CSX's Snow at the helm of the new company within two years. Half the new company's board was to come from Conrail.
The possibility of a Philadelphia headquarters as well as LeVan's future role were in doubt yesterday, several sources said.
The Conrail network has a virtual monopoly on freight rail service between the Midwest and the North Atlantic seacoast. The larger CSX network, cobbled in a series of four mergers over the last 20 years, stretches from the Midwest to Philadelphia and throughout the south.
Conrail and CSX had proposed to preserve two-railroad competition where it exists today by selling or renting track to rival railroads. Norfolk Southern, CSX's longtime rival in the South and Midwest, would have been left perilously smaller.
After nearly five months of contentious and litigious battle, the Conrail board conceded defeat yesterday with a brief statement. It expressed ``disappointment that recent events indicate that all the strategic goals in the merger agreement with CSX may not be attainable.''
Though it was able to fend off Norfolk Southern's $115-a-share hostile takeover bid, using Pennsylvania's tough antitakeover law and a battery of top lawyers, the Conrail board and management were unable, in a Jan. 17 vote, to win shareholder approval of the CSX merger.
The board's statement yesterday ``expressed confidence that the final resolution will be beneficial to all of the company's constituencies.''
After the Conrail announcement, Snow, the CSX chairman, said, ``We look forward to these negotiations with great anticipation, fully expecting to resolve these issues and bring forth a proposal that will serve the best interests of all constituents and provide a pro-competitive solution in the East.''
A short while later, Norfolk Southern's Goode said, ``We are pleased with today's announcement. . . . Norfolk Southern is hopeful that CSX and Conrail will quickly reach a definitive agreement that would permit CSX and Norfolk Southern to work out a plan to restructure the rail transportation system in the east.''
Under the breakup of Conrail that Goode proposed on Feb. 24, both CSX and Norfolk Southern would get major east-west and north-south routes now operated by Conrail.
Norfolk Southern would get the prized former Pennsylvania Railroad route from the Midwest to Philadelphia and New York. This could intensify rail competition and service at the Port of Philadelphia and Camden, which would continue to be served by CSX and the Canadian Pacific Railway System.
Norfolk Southern is also expected to get the lightly used former Erie-Lackawanna route from Buffalo to New York. That line connects with the former Nickel Plate line, already owned by Norfolk Southern, between Buffalo and Chicago.
CSX, on the other hand, would get the busy former New York Central route from the Midwest to New York via Albany.
Some analysts wondered aloud whether getting half of Conrail - without the company's current monopoly position in the northeastern freight markets - would produce enough benefit for either acquirer to justify the price.