The day he announced plans to buy Paramount five months ago, Viacom Chairman Sumner Redstone grabbed the phone and called Barry Diller.
Convinced the QVC Network chief might try to break up his friendly $ 8.2 billion deal with a bid of his own, Redstone delivered a clear message: Don't try it. You'll only start a bidding war you can't win. "All you will do is cost me money," Diller recalls Redstone saying last Sept. 12.
Redstone's instincts were right. QVC, a home shopping service, launched a rival bid Sept. 20, starting a grueling, five-month bidding contest and legal battle. (Diller's recollection of the Sept. 12 conversation comes from court documents filed in the case.) Tuesday, Redstone emerged as the victor, just as he said he would. But to win he had to raise his offer by more than $ 1 billion, just as he feared.
Paramount shareholders declared Viacom the winner Monday by tendering nearly 75% of their shares to the company that owns MTV, easily beating the 50.1% needed to win. The results were announced Tuesday. Viacom won even though its $ 9.5 billion offer was worth hundreds of millions less than QVC's. Viacom offered more cash, plus protections if its stock performs poorly. The final decision was made mostly by Wall Street traders - arbitrageurs - who wound up owning about half Paramount's stock.
Viacom won't be doing the deal alone. It will be joined by video-rental chain Blockbuster Entertainment, which last month agreed to be taken over by Viacom for $ 6.2 billion in stock and to invest heavily in the Paramount deal. Not all Blockbuster shareholders are happy about their involvement in the Paramount adventure. There's talk they will vote down the Viacom-Blockbuster deal when they get the chance in late April or early May.
But Redstone and other Viacom officials are convinced the Viacom-Paramount-Blockbuster triumvirate will be a global entertainment power with the muscle to compete with Disney and Time Warner. "Viacom, Paramount and Blockbuster are three of the most creative and dynamic organizations in our industry," says Viacom CEO Frank Biondi, who also will be CEO of the combined company. "Working together, they will be an unparalleled worldwide force."'
Imagine, for starters, a movie about MTV's Beavis and Butthead, made at Paramount's studio, shown at theaters owned by the Redstone-controlled National Amusements, shown on Viacom's Showtime cable channel or its pay-per-view arm and rented and sold at Blockbuster video stores. Paramount alone is a movie-making, TV-show producing, book publishing factory - a potential bonanza at a time when demand is expected to soar for all kinds of programming to dispatch onto the information highway.
To many, though, the Paramount fight was about more than business. It was about personalities - and especially the effort by Diller, the one-time head of Paramount's movie studio, to unseat his ex-boss, Paramount CEO Martin Davis.
Then there was Redstone, whose victory over QVC re-establishes his reputation as perhaps the toughest, most tenacious man in U.S. business. The 70-year-old billionaire already is a legend. He survived a Boston hotel fire in 1979 by hanging from a window ledge by his fingertips. In 1987, the movie-theater magnate refused to give up his quest for Viacom, making bid after bid against Viacom's management group until he finally won.
But winning Paramount may be his hardest-won victory yet. Making the deal work in the long run could prove even harder. To prevail, Redstone had to:
- Pay far more than he bargained for. During takeover talks with Paramount last summer, Redstone ordered his chief negotiator - Viacom general counsel Philippe Dauman - to offer no more than $ 67.50 a share, or $ 8 billion. Paramount's Davis demanded no less than $ 70 a share. They settled on $ 69.14 a share Sept. 12. Redstone later claimed he'd been out-negotiated by Davis.
But the bidding had only begun. After QVC made a rival offer Sept. 20, Viacom had to go to above $ 80 a share, to win.
- Recover from a stunning defeat in court. As the bidding war raged through the fall, Viacom held one big advantage: Paramount's board and management were on its side. That meant Viacom could close a deal faster than QVC could, and pay off Paramount shareholders quicker - a big edge considering large chunks of Paramount stock were held by arbs looking to make a fast buck.
But Dec. 9, the Delaware Supreme Court leveled the playing field, ordering Paramount to let its shareholders decide between the two bidders. The ruling wiped out Viacom's advantage. From then on, the Paramount board acted as an impartial auctioneer, coaxing slightly sweeter bids.
- Take on two powerful partners, then agree to buy one. Redstone, who likes to control his ventures, had to team with regional phone giant Nynex and Blockbuster. Nynex put up $ 1.2 billion of Viacom's bid; Blockbuster originally put up $ 600 million. But as the bidding rose Viacom needed more money. On Jan. 7, it announced a stunning solution: It agreed to acquire Blockbuster in a stock swap then worth $ 8 billion. In return, Blockbuster invested an additional $ 1.3 billion in Redstone's Paramount venture. Redstone's voting stake in Viacom-Blockbuster-Paramount will be 61%, down from the 70% in a Viacom-Paramount combination.
Now that it has solved those problems, Viacom must answer new questions:
- Did it overpay? Most analysts pegged Paramount's worth at about $ 75 a share - vs. Viacom's winning offer, worth $ 80 a share at Tuesday's closing price of Viacom's Class B stock. The offer would have been worth more if
Viacom B shares hadn't fallen 1 7/8 to $ 28 Tuesday on fears Viacom is diluting the value of its stock by issuing so many shares to buy Paramount and Blockbuster. "Redstone must justify the premium he paid," says Jim Meyer, analyst at Janney Montgomery Scott.
Even Biondi admits the deal looks expensive - if measured "conventionally." But Biondi says every successful deal he's been involved in - including Redstone's acquisition of Viacom - was criticized as overpriced. The combined company will have about $ 10.3 billion in debt - a big number, but manageable considering all the cash Paramount, Viacom and Blockbuster bring in.
- Can angry Blockbuster shareholders be calmed down? Many Blockbuster shareholders feel ripped off by the Viacom deal. Because Viacom's stock has skidded, the all-securities offer for Blockbuster was worth only $ 23.22 a share at Tuesday's closing stock prices. Before the deal was announced last month, Blockbuster stock traded over $ 30. What's more, many Blockbuster shareholders feel they should have been paid a hefty premium - perhaps in the mid-$ 30s - to give up control of their company to Redstone. They're likely to vote this spring against teaming with Viacom. Bibb figures Viacom may have to renegotiate the deal.
- Can Viacom's team turn Paramount around? By Paramount's own admission, it has been a lackluster performer the past few years. Recently - partly because top managers have been distracted by the takeover battle - its performance has deteriorated further. Paramount has said it will lose $ 35 million to $ 40 million its fiscal third quarter, which ended Jan. 31. "Viacom needs to get everybody back to work," says Oppenheimer & Co. analyst Jessica Reif.
- Can everybody get along? Meshing three corporate cultures isn't easy. Analysts wonder whether Blockbuster Chairman H. Wayne Huizenga - a strong-willed billionaire too - will chafe at being vice chairman under Redstone. "Pray that Sumner and Wayne don't get in a fight at the first board meeting," says Dennis McAlpine, analyst at Josephthal Lyon & Ross.
Even more important may be how well the lower-level employees from the far-flung reaches of this new entertainment empire work together. "You've got to get all the people to talk to each other," McAlpine says. "Ultimately, it's going to come down to people."
Viacom gets Paramount after 5-month struggle
The longest takeover battle of the '90s is over. Here's
