Time Inc. and Warner Communications Inc. confirmed Saturday that they have agreed to merge, creating a world power in the field of media and entertainment. The merger, in which Time will acquire Warner, was valued at $18 billion.
The new company will own the nation’s most lucrative recorded music and magazine publishing businesses, the largest television programming operation for both pay-cable and prime-time network television, and cable TV franchises second only to Tele-Communications Inc. of Denver.
Time brings to the combination not only its namesake Time magazine, but other publications such as Life, Fortune, People, Money and Sports Illustrated. It also controls the second largest cable system in the United States, American Television and Communications, and Home Box Office, the nation’s largest cable programming service, which includes HBO and Cinemax. Time also maintains a significant presence in book publishing with its Book-of-the-Month Club, Time-Life Books and Little, Brown.
Warner Communications owns one of the nation’s most successful motion picture studios, Warner Bros., and recently acquired Lorimar Telepictures Corp., a pre-eminent supplier of television programs such as “Dallas” and “Falcon Crest.” Warner’s record labels include Atlantic, Elektra, Asylum and Nonesuch and its publishing operations include such off-beat assets as DC Comics and Mad Magazine.
An Awesome Giant
The reaction in Hollywood and on Wall Street was one of awe at the scope and influence of the combined company--to be called Time Warner Inc.
Industry executives said the size of the new entity should enable it to fend off unwelcome takeover bids, but there remained some question about whether other bidders might emerge for Time Inc., which is considered a corporate plum.
The overall merger requires shareholder approval, but on Saturday, Warner and Time directors used their power to exchange smaller blocks of their company’s common stock to discourage hostile bids. Time has exchanged 12.5% of its shares for about 10% of Warner’s, in a deal effective immediately.
As reported by The Times Saturday, the actual merger will involve an exchange of stock that--at Friday’s closing prices--places a value slightly in excess of $50 on each Warner share. Each Warner share will be exchanged tax-free for a .465 share of Time Inc. common stock.
For the near future, Time and Warner’s current chairmen--J. Richard Munro and Steven J. Ross, respectively--will share the office of chairman and chief executive. Ross said they have not discussed whose mid-Manhattan tower will function as headquarters.
Some analysts expressed surprise that Warner sought the merger, because they believe its stock value could appreciate more rapidly on its own. But one analyst called the move a “career capper” for the 61-year-old Ross, who co-founded Warner in 1961.
Ross rose from managing “parking lots . . . and now he is the head of the greatest media company in the world. I mean, give me a break!” said one securities analyst.
The heir apparent to Time Warner’s top job is Nicholas J. Nicholas Jr., 49, currently Time’s president who will also be president of the combined company. He will become Time Warner co-chief executive upon Munro’s expected retirement sometime in the next two years.
Nicholas had already been tapped as Munro’s successor at Time, and that pre-selection solved a problem for Ross, who by his own admission has had difficulty selecting a successor at Warner. Under the terms announced Saturday, Ross will serve as co-chief executive for the next five years. When the five-year period ends, Ross will continue to serve as chairman of the board and Nicholas will become the lone chief executive.
On another front, the merger enables Ross to dump Chris-Craft Chairman Herbert J. Siegel--his largest and most dissident shareholder--from the Warner board. Even though Chris-Craft will emerge as one of Time Warner’s largest shareholders, it appears incapable of seizing a seat on the new 24-member board, made up of 12 nominees from each company. Warner will not invite Siegel to join the new board, sources said Saturday. The Chris-Craft chairman could not be reached for comment.
In interviews, Ross and Munro disclosed that they have been privately discussing the wisdom of combining some or all of their businesses for nearly two years. Ross said he dreamed up the idea of combining their cable TV systems, Warner Bros. studio and Time’s Home Box Office, and made the first overture in 1987.
Sometime last year, Time took the initiative and proposed a complete merger, but talks stalled over the question of who would emerge as managers.
“That’s exactly right. Everything else is a slam-dunk,” said Munro, who spent 12 years at Sports Illustrated during his 31-year career at Time.
So artful is the deal’s design that reaction split in Hollywood and financial circles as to which company emerges with the upper hand.
“There’s always this ‘who won.’ I don’t know who won. If they get the synergies potentially inherent in the company, the real winners may well be the stockholders of both companies,” said Emanuel Gerard, a former member of Warner’s office of the president and currently a principal of the New York investment firm of Balis Zorn Gerard Inc.
“I think the real challenge is to meld the two cultures, which are quite different,” Gerard said.
Warner, with its big movie and music operations, is known as a decentralized, free-wheeling concern, while Time Inc. has been known as a more conservative, centralized company since the days of its iron-fisted founder, Henry Luce.
“What you have is somewhat the difference between Hollywood and New York,” said J. Kendrick Noble, analyst with the Paine Webber brokerage in New York.
Two Goals Realized
The merger seems to neatly accomplish two high-priority goals of Time Inc: to sharply reduce the lingering threat of a takeover, and to build the publishing, cable and entertainment concern into a global media powerhouse.
In recent months, Time Inc. executives have repeatedly spoken of their conviction that the company needed to join a group of players that have been piecing together media conglomerates with broadcast and cable television operations, book and magazine publishing units, recorded music, television and movie studios, and audio and video cassette distributors, and related enterprises.
Time’s Munro and Nicholas have said they saw half a dozen such media “megacompanies” emerging, citing recent acquisitions by the Japanese electronics giant Sony, the German publisher Bertelsmann A.G. and the French publisher Hachette S.A.
These firms all aim to reduce the heavy risks involved in production of books and magazines, television, movie and recorded music by having the capacity to distribute their products world-wide. Time Inc. executives believe these firms could place crushing competitive pressures on smaller rivals, and have cited some predictions that there might be no American firms among this group.
“The fact is, unless a company becomes really aggressive on this world stage, they’re not going to be a major player in the future,” said Gerald M. Levin, who is now Time Inc. vice chairman and will also be vice chairman of the new company. “Now we’re going to have the size and distribution capacity to join that group.”
A Dominant Role
Indeed, one analyst, John S. Reidy of the Drexel Burnham Lambert brokerage, said that the new company will be “the dominant worldwide media and entertainment concern.” Time Warner’s $10 billion in revenues will eclipse even the $7-billion global reach of Rupert Murdoch’s News Corp., Reidy said.
Time Inc. has been a rumored takeover target because of the prestige of its magazines and cable operations, their enormous cash flow, and because the company’s stock price has lagged what many Wall Street analysts believe the company’s true value to be, if it were broken up and its parts sold separately.
Many believe that the company’s “breakup value” per share has been about twice the stock’s value on the open market for some time. Among those who might have been interested in taking over the company have been Revlon Chairman Ronald O. Perelman, the Coniston Partners investment group, and even Kohlberg Kravis Roberts & Co., the leveraged buyout specialists who recently engineered the record-setting $25-billion acquisition of RJR Nabisco.
Although the company’s stock has several times skyrocketed on rumors of an impending takeover attempt, there has never been a formal takeover run at the concern.
Time officials have publicly denied that they were worried about a takeover, and Vice Chairman Levin insisted Saturday that the company did not agree to the merger as an anti-takeover device. “This wasn’t some kind of shotgun marriage--it makes sense only as a constructive move,” Levin said, also contending that Time officials have felt “very confident” that they could successfully resist any takeover attempt.
The merger will doubtless also raise questions in the minds of many Time Inc. staff members about whether there will be further drastic changes at a company that has already gone through a painful transformation in recent years. As it sought to increase profits and raise its stock price, the company has drastically pared its staff and cut out fat expense accounts and other perks that were fabled in its industry.
Levin insisted the merger would bring minimal staff cuts at the company. The administrative operations of Warner and Time Inc. are already “very lean” he said, noting that the companies’ operating units overlap in only a few areas.
Levin said the deal is a “merger of equals, that will leave lots of cash to expand operations.” The deal is not the kind of takeover that will involve large amounts of debt and require future sales of assets and layoffs to pay interest expenses, he said.
Some have also speculated that the companies would find it difficult to merge because of the problem of finding acceptable positions for some of the strong-willed executives of the companies, including Nicholas, Home Box Office Chairman Michael Fuchs, and Warner Bros. Chairman Robert Daly.
When the merger talks fell apart late last summer, some sources said it was partly because the two sides could not agree on which executives would fill which positions.
Agreement on Goals
Time executives said the two companies have spent recent months considering the melding of the two organizations, and whether the two companies’ ultimate goals were the same. “Some will say these organizations have two different kinds of people, " said Levin. “But ultimately, both are after the same thing, which is artistic entrepreneurship.”
Asked about the merger, HBO Chairman Fuchs commented: “If you have to work for a big corporation, it might as well be the biggest one on the block. . . . People here have had a long time to think about how the organizations will go together.”
The merger further reduces the role of Time’s magazine publishing operations, which were the primary interest of Time Inc. founder Luce. Magazine publishing, with $1.8 billion in annual sales, will represent less than 20% of the sales of the new concern.
Yet Levin maintained that the company is not de-emphasizing magazines. He insisted the financial stability provided by the merger will help a magazine division that has struggled in recent years with the high risk and high cost of magazine start-ups.
While Time Inc. has abandoned a number of new magazines in recent years, including TV-Cable Week, Quality and Discover, Levin noted that the company has increased its total collection of magazines from eight to 24 since 1985. In a number of cases, the new magazines are part of joint ventures.
“We feel very strongly our commitment to magazine journalism,” Levin said, adding that he had heard from many members of the magazines’ staffs Saturday, and that reactions were “very positive.”
Kathryn Harris reported from Los Angles and Paul Richter reported from New York.
What Time and Warner Communications Own A merger of the two giants would unite some of the nation’s most important media and entertainment properties. Here is a sample of what each company owns. Time, TIME INC. (1988 revenues of $4.5 billion and profits of $289 million) Magazines: Time Life Fortune People Money Sports Illustrated Southern Living Cooking Light Progressive Farmer Asiaweek Hippocrates Plus 50% ownership of McCall’s, Working Woman, Baby, Working Mother, Cable Television: 82% ownership of American Television and Communications 50% ownership of Paragon Communications Book Publishing: Time-Life Books; Book-of-the-Month Club; Little Brown; Scott, Foresman Video Programming: Home Box Office (HBO, Cinemax, HBO Video) Warner Communications, W (1988 revenues of $4.21 billion and profits of $423 million) Filmed Entertainment: Warner Bros. (motion picture production and distribution); Warner Bros. Television (made-for-TV films, series, mini-series and specials); Warner Home Video Recorded Music and Music Publishing: Warner Bros. Records; Atlantic Recording Corp.; Elektra / Asylum / Nonesuch Records Cable and Broadcasting: Warner Amex Cable Communications 42.5% interest in BHC Inc., which operates seven TV stations in large U.S. markets Publishing: Warner Books; DC Comics; Mad Magazine