TIME: Almanac 1993/TIME Almanac 1993.iso/time/032089/03208900.014

Text File | 1992-09-23 | 8.8 KB | 162 lines

                ▐└Y                                                          BUSINESS, Page 55

A Deal Heard Round the World


Faced with growing global competition in the information and
entertainment industries, Time and Warner join forces to form
a communications giant


    Even in the era of the megamerger, this one was remarkable.
No wonder the press and public were fascinated by the
announcement that Time Inc. and Warner Communications would join
to form the world's largest information and entertainment
company. From Tokyo to Paris to Hollywood, media moguls sized
up the new firm, trying to gauge its potential clout in the
increasingly fierce international battle for the attention of
readers, filmgoers and television viewers. The New York Times
proclaimed that the union would "insure Time Warner a place in
the 1990s as one of a handful of global media giants." Declared
the Chicago Tribune: "The deal creates a corporate dynamo."  In
Munich the daily newspaper Suddeutsche Zeitung disagreed,
predicting that the union would be a "Tower of Babel." And on
Wall Street, where there had not been much excitement since the
contest for RJR Nabisco, investors and speculators were agog
over the proposed $9.5 billion exchange of Time shares for
Warner's -- the largest stock swap ever.

    The merger, which will result in Time Warner Inc., had a
lot going for it. Who, after all, would have the money or the
fortitude to stand in the way of a solid agreement between two
of America's biggest companies? Yet Time and Warner have long
been considered takeover targets, and speculation arose that a
raider might go after one of them soon, before a merger could
create a nearly invulnerable behemoth. Everyone from Rupert
Murdoch to Warren Buffet, the shrewd Omaha-based investor, was
mentioned as a possible buyer. But no suitor had come forward
by week's end. Time's shares gained 6 5/8 for the week, to close
at 115 3/4, and Warner's rose 2 7/8, to 48 3/4.

    Time Chairman Richard Munro and Warner Chairman Steven
Ross, who agreed to share power as co-chief executives of the
new company, were confident that their deal would withstand any
challenges. Said Munro: "We are not for sale." Time President
N.J. Nicholas will take Munro's slot as co-chief executive of
Time Warner if Munro retires in 18 months as planned. To
strengthen their position, the two companies have also agreed
to exchange some 10% of each other's stock in advance of the
merger.

    One big question mark is the stance of Herbert Siegel, the
president of Chris-Craft Industries, which is Warner's largest
shareholder, controlling 19% of the company's stock. He and
Ross do not get along, largely because Siegel disapproves of the
way Warner spends money on generous executive compensation (for
Ross alone in 1987: $4.5 million in salary and bonus) and
corporate amenities like the six-bedroom Acapulco villa for
entertaining movie stars. Siegel also apparently believes that
Warner is being undervalued in the merger agreement. When the
proposed deal came up before Warner's board for a vote, Siegel
abstained, while all the other members approved. Time and Warner
officials, who are trying to convince Siegel of the merger's
merits, admit that he could take legal steps to delay the
transaction, but they insist he cannot stop it.

    If approved by Time and Warner shareholders, the merger
would create a company that will have annual revenues of more
than $10 billion and a market value of $18 billion. It would
combine Time's magazines and its hardcover-book publishing, its
cable programming and its cable-TV operations with Warner's
movie, TV and video production, music labels, cable systems,
paperbacks and comic books. The new company would include not
only Time's stable of talented journalists, spread over two
dozen magazines, but also Warner's Mad magazine, Superman comics
and such recording artists as Madonna and U2. The businesses are
thus related, but largely complementary. "This is the first
merger in a long time that makes a lot of sense," said Edward
Atorino, a media analyst at the Smith Barney investment firm.

    Time and Warner were moved to merge by the growing global
consolidation in the communications business and by the many
foreign acquisitions of American companies. In recent years,
West Germany's Bertelsmann bought RCA Records and the Doubleday
and Bantam Books publishing houses; Britain's Robert Maxwell
took over Macmillan publishers; Japan's Sony acquired CBS
Records; and Australian-born Murdoch (now a U.S. citizen)
accumulated newspapers, magazines, a movie studio and a TV
network. Said Time's Munro: "We see Maxwell, Murdoch,
Bertelsmann and Sony coming into our market and raising hell,
and we see this (merger) as an opportunity for an American
company to get competitive." In fact, Time Warner would vault
ahead of the competition. Bertelsmann, whose annual revenues are
nearly $7 billion, would fall to the No. 2 spot among the
world's media companies.

    As with any large merger, the Time-Warner deal will be
reviewed by the Government to see if it poses any antitrust or
other regulatory problems. The only major overlap between the
two companies is that they are both big operators of local
cable-TV systems. After the merger, Time Warner will serve 5.6
million customers, or 12% of U.S. households with cable. The new
operation will still be smaller than the largest cable company,
Tele-Communications, which serves 24% of the industry's
customers. Experts say that unless President Bush takes a
tougher antitrust stance than the Reagan Administration did, the
Government is not likely to block a Time-Warner merger.

    Nonetheless, Ohio Democrat Howard Metzenbaum, chairman of
the Senate antitrust subcommittee and a vocal critic of big
mergers, immediately objected to the proposed combination. He
acknowledged that the deal did not appear to violate the
Government's guidelines for "horizontal concentration" within
an industry, but asserted that those "guidelines are clearly
inadequate for a complete evaluation of this merger." The
Senator expressed concern about companies being involved in both
the production and distribution of cable-TV programming.
Metzenbaum noted that in most communities there is only one
cable operator. He fears that such operators might rely too
heavily on programs produced by a parent company, and thus offer
fewer choices to their cable subscribers. Time and Warner
executives do not think this is a real problem. "How does a
cable operator make money?" asked Ross. "By offering the widest
selection of programs to customers."

    The merger raises the possibility of conflicts of interest
among the various parts of the Time-Warner empire. Could, for
example, a Time publication objectively review a Warner Bros.
movie? Certainly, said TIME Editor in Chief Jason McManus, who
pointed out that for years TIME and PEOPLE have been reviewing,
both favorably and unfavorably, shows produced by the company's
Home Box Office cable service. In forming their union, Time and
Warner officials agreed that a commitment to journalistic and
artistic integrity was absolutely essential. When asked what
would happen when one of the Time magazines panned a Warner
film, Ross replied, "They wouldn't hear from me at all. I'd just
tell my people to make better movies."

    To allow time for the two enterprises to get thoroughly
comfortable with each other, Munro and Ross are planning to go
slow in integrating the various divisions. Only the cable and
books operations will be immediately combined. All others will
continue to operate as separate units, with Warner's old
divisions reporting to Ross and Time's to Munro and Nicholas.
Five years down the road, according to the merger agreement, the
management will be unified, with Nicholas as the chief
executive. "We're not going to crash these two companies
together," said Nicholas. Both Time and Warner believe their
greatest opportunities for cooperation and growth lie overseas.
Ross, for example, hopes to use Warner's worldwide
film-and-TV-distribution network to market HBO programming.

    Some industry observers have questioned whether Ross's
Hollywood ways can easily coexist with the more conservative
management style at Time. "Can they work together, or will egos
get in the way of the dreams of managers?" asked a Wall Street
media expert. Munro and Nicholas decided to go ahead only after
many lengthy discussions with Ross dating back to early 1987,
and they feel they know their man. "Over the past two years,"
said Munro, "we have probably spent more time with Steve Ross
than with our wives. We feel very comfortable with him." As in
all corporate marriages, the trick will be to keep the romance
going after the courtship and honeymoon are over.