BUSINESS, Page 55A Deal Heard Round the WorldFaced with growing global competition in the informationand entertainment industries, Time and Warner join forcesto 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
