Edited by Thane Peterson

Conrail Inc. narrowly lost a shareholder vote on Jan. 17 that it needed to move ahead with its planned sale to CSX Corp., but the fight now may move from the boardroom to the bargaining table. While Conrail is vowing to try for a second shareholder vote, both its officials and those of hostile bidder Norfolk Southern are hinting that they may be willing to cut a deal in three-way talks.

After a passionate meeting in which employees repeatedly rose to praise Conrail's plans to sell itself to CSX, shareholders turned thumbs down on a bylaw change that would have let the CSX-Conrail deal move forward. Norfolk Southern officials estimate that the total vote went about 53% against the deal. Among shareholders not associated with CSX or Conrail, the vote against was better than 90%, Norfolk official say. Conrail officials declined to provide figures until the final tally can be reckoned.

Conrail chief David M. LeVan says he will convene a second meeting at some undetermined time for a second vote. But even as he vowed to move the sale plans ahead, he hinted that he would be willing to talk with executives of both CSX and Norfolk to work out "competitive issues." While he insists that such talks could be done only in the framework of a CSX-Conrail alliance, his suggestion was the first hint of any wiggle room to cut a three-way deal.

For their part, officials of Norfolk Southern are sticking by the view that such talks could take place only in the framework of a Norfolk Southern purchase of Conrail for $115 a share, worth some $10.4 billion. Norfolk chief David R. Goode says this was the deal that Conrail shareholders were "overwhelmingly" endorsing through their vote.

Indeed, the outside shareholders certainly were venting their opposition to a CSX deal that would have given them about $1 billion less, and a combination of stock in CSX and cash, instead of just cash. If there was any uncertainty about the vote, Norfolk appears to have swayed the fence-sitters with its offer last week to buy 9.9% of the Conrail stock outright, some $1 billion worth, if the Jan. 17 vote went its way. LeVan blamed the offer for tilting the vote against the CSX-Conrail deal.

While the balloting and the planned stock purchase will strengthen Norfolk's hand, Conrail still holds some important cards. Its chief edge is that the Conrail board legally can simply say no to a buyer under Pennsylvania law. To force a change, then, objecting shareholders would have to oust the current board and change the company's bylaws -- a process that would take at least a year.

So, unless the Conrail board decides simply to hang tough or it comes up with a way to prevail in a second shareholder vote, the most likely outcome of this railroad war now appears to be a negotiated settlement. Any deal ultimately would require an O.K. from the federal Surface Transportation Board, anyway. And in the end, the STB might want to carve up Conrail among the two bidders to preserve competition in the East. Bottom line: Some serious bargaining seems to be on the agenda.

By Joseph Weber in Philadelphia