TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/061989/06198900.018

Text File | 1990-10-15 | 16KB | 273 lines

                ▄÷0ÑWX                                              ╜««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