I don't think NS will do it and the US government would not approve it on grounds of a monopoly'
A monopoly does not have to control all of it, just most of it too be considered a monopoly.
Agreed. Among other things, CP would have a 75% share of the Indiana Harbor Belt RR, which is crucial for providing access to Chicago from the east. CSX and NS each have a 25% share in IHB now, with CP owning the other 50%. CSX would have a legitimate concern about being shoved aside as the minority stakeholder in IHB if CP acquired NS. Any effiiciencies gained by CP in that scenario would be at the expense of CSX. I could see the STB forcing CP to sell NS's stake in IHB to CSX to keep the competition in place and that would erase one of CP's reason for acquiring NS.
Also, a combined CP/NS would own just 33% of the Belt Railway of Chicago. Regardless of whether the other 4 Class 1s who co-own and use BRC merge or not, they'd still outvote CP/NS. Again, CP won't get the "efficiency" they desire.
Third, I can see CSX complaining about the former D&H line between Schenectady and Montreal. It would no longer be a neutral gateway between the Northeast and eastern Canada. I figure the STB would have plenty to say there, too.