TIME: Almanac 1993/TIME Almanac 1993.iso/time/061989/06198900.018

Text File | 1992-09-23 | 15.3 KB | 294 lines

                ╟jO                                                          BUSINESS, Page 42

Clash of the Titans


Paramount's bid imperils the Time-Warner deal and stirs up a
brawl

By John Greenwald


    The phone on the desk of Richard Munro, chairman of Time
Inc., rang at 6 p.m. last Tuesday. On the line was Martin Davis,
chairman of Paramount Communications, a onetime industrial
conglomerate that had changed its name from Gulf & Western just
the day before. Davis had a stunning message for his fellow
chief executive. Although Munro had assurances from Davis that
he would not mount a takeover bid for Time, Davis was reneging:
he declared that Paramount was launching an offer to acquire
Time for $175 a share, or $10.7 billion. Time stock had closed
at 126 that day.

    Paramount's tender set the stage for a clash of media
titans that could lead to months of multibillion-dollar
broadsides, legal pyrotechnics and dangerously unpredictable
consequences. The Paramount bid came just 2 1/2 weeks before
shareholders of Time and Warner Communications were to vote on
merging their firms into the world's largest media company, with
total revenues of $10 billion. But the sudden strike by
Paramount, whose operations include one of Hollywood's top
movie-and-TV studios and the giant publishing house Simon &
Schuster, disrupted those plans and threatened to provoke a
free-for-all in which the ownership of all three communications
giants could be up for grabs.

    Rarely had three firms of comparable size and stature been
locked in such a bizarre triangle. "You can't help worrying now
about what kind of company this will produce. No one knows
where this sort of runaway sled ends up," said Richard
Christian, associate dean at Northwestern University's Kellogg
Graduate School of Management. Declared a Los Angeles-based
securities analyst: "This is going to be the greatest battle
that Hollywood has ever seen."

    The offer touched off a frenzy among Wall Street
arbitragers, who snapped up Time stock in the belief that
Paramount would prevail or attract other bidders into the fray.
Time shares skyrocketed from 126 to 170 on Wednesday and
finished the week at 170 1/4. Since Wall Street investors
considered all three companies now to be in play, Warner stock
jumped to 56 1/8, up 4 points for the week, and Paramount rose
to 59 1/8, up 5 5/8.

    The bid, which was 35% more than Time's stock price before
the offer, exploited the dissatisfactions of many on Wall Street
who had long cherished the notion that Time was worth more in
pieces than whole. Since the merger agreement was reached on
March 3, some investors had complained that the terms provided
Time shareholders with no immediate financial reward. Reason:
the agreement called for a debt-free swap of 0.465 shares of
Time stock for each Warner share.

    The arrangement would give Warner stockholders a premium,
reflecting the fact that in effect Time was acquiring a
slightly larger company with many more outstanding shares, but
would leave Time's stockholders with only the prospect that
their stock would appreciate over the long run. Moreover, the
process of getting Government approval and working out legal
details required a 3 1/2-month gap between the announcement and
the stockholders' vote on the deal, which left enough time for
a hostile bidder to marshal his forces.

    Yet to those who admired the Time-Warner deal, an
old-fashioned debt-free and tax-free stock swap between friendly
companies, the Paramount bid raised disturbing doubts about
whether corporate America can free itself from the frenzied deal
making, staggering debt loads and ultimate dismemberment that
have plagued U.S. industry in the 1980s. Among other
considerations, the absence of heavy leverage in the Time-Warner
arrangement was aimed at helping the merged company compete
globally against such foreign media giants as West Germany's
Bertelsmann and France's Hachette.

    But Paramount would have to borrow some $10 billion to
acquire Time at the offering price, which Davis admitted at an
analysts' meeting would mean no earnings for at least two years
and would be a long-term drain on operations. At the very least,
the debt would impose the kind of cost cutting that has
characterized Laurence Tisch's management of CBS. At worst, it
could force the sale of certain assets to meet the bankers'
bills. Indeed, almost any of Time's defensive strategies would
require" heavy borrowing that would sap profits from whatever
entity results when the dust settles.

    While Time said it would give the Paramount bid a fair
hearing, as the law requires, there was every indication that
Time's top executives would fight to repel the intruder. In a
three-page "Dear Mr. Davis" letter, Munro chastised the
Paramount chairman for breaking his spoken agreement to leave
Time alone: "On a personal level, I'm disappointed that I can't
rely on you as a man of your word. Live and learn." Munro said
the Paramount offer consisted of "smoke and mirrors," since it
was subject to several conditions that included Paramount's
ability to obtain financing and regulatory approval, a process
almost certain to take longer %than the Time-Warner proposition
had. Such conditions, Munro argued, could not be met by the July
5 deadline that Paramount set on its bid for Time shares. The
letter added, "Hostile takeovers are a little like wars: once
they start, it's impossible to tell where they may end. The full
effect of what you've set in motion remains to be seen."

    In response, Davis says he discussed a friendly merger with
Munro and Time president N.J. Nicholas several times from 1986
through 1988, but was rebuffed on each occasion. As a result,
Davis told TIME senior correspondent Frederick Ungeheuer, "I
said we would not do anything hostile and would respect Time's
decision to remain independent." But Time then "put itself up
for sale," Davis argued, by agreeing to merge with Warner. He
said the deal would end Time's independence because the merger
would give Warner shareholders 60% of the stock of the combined
company.

    While that distribution reflects the premium that Warner
stockholders will get for their shares, Time officers argued
that it does not translate into corporate control because Time
and Warner stockholders would not form separate voting blocs
after the merger, and for that matter much of the stock of both
companies is held by large institutional investors, creating
overlapping ownership. Moreover, Time was, in fact, acquiring
Warner, and Munro, 58, and Warner Chairman Steven Ross, 61, had
agreed to share power as co-chief executives of the new company
until Munro's retirement, planned for next year. Time's
Nicholas, 49, would then replace Munro in the power-sharing
arrangement and become sole chief executive when Ross was
contractually required to step down five years after the merger.
The Paramount bid, by contrast, would leave Davis as chief of
the combined company.

    The Paramount proposal sent the combatants rushing into
court. In New York City, Warner brought a $1 billion suit
against Citibank, which had provided $1 billion in initial
funding for Paramount's bid and was planning to raise an
additional $13 billion through a loan syndicate. Warner accused
Citibank of violating a promise not to back efforts to break up
the Time-Warner deal. Citibank replied that it was "surprised"
by the suit and denied violating any such agreement.

    For its part, Paramount asked a Delaware chancery court to
overturn a takeover defense in the Time-Warner agreement. Under
terms of the deal, Time and Warner could immediately swap
around 10% of their shares to make both companies more costly
to take over for a hostile bidder. At week's end the court
denied Paramount's motion for a temporary restraining order to
bar such a swap. In another provision, called a poison pill,
Time has arranged to sell its stockholders new shares for half
their market value, which could make it prohibitively expensive
for Paramount to acquire the expanded number of shares.

    Time may well take the offense and come out swinging. The
company's war chest includes a $5 billion line of credit
arranged months ago that could be used, for example, to help
finance a bid for Warner and thus preserve the acquisition. But
such a buyout could saddle Warner shareholders with heavy
capital-gains taxes and hobble Time with debt. Another potential
strategy would be the so-called Pac-man maneuver, in which Time
would turn around and make a bid for its attacker.

    One of Time's defensive moves could be to boost the value
of the combined Time and Warner stock. Analysts estimated that
each new Time Warner share would initially trade for somewhere
between $110 and $115. That would be well below the $200-plus
break-up value that some Wall Street analysts say Time stock
would be worth if the company were dismantled and sold off in
pieces. While the long-term value of the merged Time Warner
stock could grow substantially if the deal created a
strengthened company, many investors, particularly arbitragers
and institutional fund managers, have more interest in
short-term gains. Thus the company could conceivably offer a
special, one-time dividend that would reward stockholders for
going along with the Time-Warner plan.

    If all else failed, Time could seek a so-called white
knight to save it from Paramount's grasp. But almost any bidder
with enough financial backing could jump into the fray without
being invited. Moreover, Wall Street analysts believe that all
three companies are now up for sale, since their stock is
falling into the hands of speculators who will gladly sell to
the highest bidder. "I bet none of the three companies will
exist a year from now," says Ellen Greenspan, a leading Wall
Street arbitrager.

    As the combatants plotted, some major Time shareholders sat
comfortably on the sidelines watching their profits add up.
They included billionaire Donald Trump, who confirmed that he
owns 2.8 million shares of Time, or 4.9% of the outstanding
stock of the company. At Time's current price, Trump has paper
profits of more than $200 million on his holdings, which could
go a long way toward the $365 million cost of the former Eastern
Air Lines shuttle he acquired last week.

    In some respects, a Time-Paramount combination would create
a company similar, in structure if not in control, to the one
envisioned in the Time-Warner deal. Time's magazine and book
publishing operations, which include TIME, PEOPLE, SPORTS
ILLUSTRATED and TIME-LIFE Books, might dovetail effectively
with Paramount's book division. Time's cable television
programming units, including Home Box Office and Cinemax, could
mesh with Paramount's film-studio and television ventures.
Time's cable-television systems would provide distribution
vehicles for that product. Warner, meanwhile, has film, cable-TV
and publishing units and differs from Paramount in owning the
largest domestic record company. "Time would make a good fit
with either Warner or Paramount," says Peter Appert, a media
analyst for the investment firm of C.J. Lawrence, Morgan
Grenfell.

    In some important ways, however, the matchups look quite
different. For one thing, the debt-free nature of the
Time-Warner deal would have given the merged company far more
flexibility than a Time-Paramount consolidation might have. "The
Time-Warner combination left everybody's powder dry to be able
to go out and make acquisitions," says Larry Gerbrandt, a vice
president of Paul Kagan Associates, a California-based
communications-industry analyst. "But in a tender offer like
Paramount's, you have to load up with a tremendous amount of
debt that limits your options. The strategy can work, but it's
much riskier."

    In his interview with TIME last week, Davis sought to
downplay the debt issue. "We have the ability and the
credibility to manage this debt," he said. "Also, it will not
last forever. We will bring it down in time." An avowed cost
cutter, Davis strongly denied rumors that he would dismantle
Time by selling off its magazine operations to reduce the debt.
"We are not going to sell anything," Davis said. "We are not
bust-up artists." He also said he would maintain the editorial
independence and integrity of Time's books and magazines. "Not
only will we maintain editorial independence," Davis insisted,
"we will demand it." Journalists at Time Inc. were concerned
because, reassuring as such statements made in the heat of
battle may be, they fall well short of the written, legal
guarantees that had been cemented into the Warner merger.

    While rumors had circulated for months that Davis was
preparing a bid, Time executives counted on his promise of
noninterference. "He's on the telephone to us almost every day,"
a senior Time officer said several weeks before Davis made his
move. "He's just unhappy that he's been left out. He can't stop
kibitzing." All the while, however, Davis was preparing his
attack under the code name Kronos, for a Greek god associated
with time. Davis was advised by Robert Greenhill, vice chairman
of the Morgan Stanley investment banking firm, which is now
Paramount's chief adviser in the bid. Paramount said last week
that Donald Rumsfeld, a former Defense Secretary, has agreed to
serve as trustee for tendered Time stock until Paramount clears
all legal barriers to its takeover.

    Investment bankers, who stand to make hundreds of millions
of dollars in advisory and underwriting fees no matter who comes
out on top, had been hunting for months for a firm to derail
the Time-Warner deal. Morgan Stanley gave its search for a
spoiler the code name Project Clock. Merrill Lynch, another
Davis adviser, assigned the name Space to its project. Citibank,
for its part, stands to make $350 million in fees for putting
together Paramount's war chest. At the same time, the bank
manages 1.5 million shares of Time stock for its clients, on
which they stand to make a huge profit if the deal goes through.

    In Washington, where Congress and regulatory agencies had
already given their blessings to the Time-Warner transaction,
legislators adopted a wait-and-see attitude toward the
Paramount bid. Ironically, approval of the Time-Warner merger
could make it easier for a Time-Paramount deal to win
acceptance, since the two combinations are similar. But a senior
congressional aide called such speculation premature. Said he:
"The Paramount bid is just the opening move in a game of chess."

    It is a game, however, with extraordinary stakes. The
Time-Warner deal had gathered support among many U.S. business
leaders because it suggested a healthy way for companies to
grow and expand without incurring a backbreaking load of debt.
But the frenzy that surrounded the Paramount proposal last week
seemed more closely linked to the merger mania of the roaring
'80s than to hopes of restoring U.S. competitiveness in the
1990s. At the very least, the managers and employees of Time,
Warner and Paramount stand to be distracted for months by the
takeover struggle. And while a clash of the titans may be an
exciting spectacle, it can waste huge amounts of time and money
that might better be used to improve products at home and
compete with firms abroad.


-- Thomas McCarroll and Frederick Ungeheuer/New York, with other
  bureaus