Are Big Egos, Illusions Worth Such Big Bucks?

As the epic, four-month takeover battle for Paramount Communications draws to a close, the simple fact to keep in mind--whether you’re directly involved as a shareholder or just an interested observer of business folly--is that billions of dollars are being blown here on egos and illusions. And those are not the soundest yardsticks for evaluating a business.

The illusion is that movie studios will be the heart of a vast new global business called multimedia, the envisioned convergence of television and computers, entertainment and information.

Talk about high concept! That illusion and the egos of the bidders, Barry Diller of QVC and Sumner M. Redstone of Viacom, have pushed the price of Paramount to almost $10 billion.

And that could be a record that stands for a long time. At that price, Paramount may be seen as a supernova of the movie business--a final burst of expectations before disappointment.

But first a few specifics, before we consider the realities of business and the dreams of multimedia.

If you’re a Paramount shareholder, the real message in the latest buyout offer is that your stock is not going much higher than it already has, or about $80 a share.

A new bid late Friday by Viacom, acting with its new merger partner Blockbuster Entertainment, offered what amounts to $78 per Paramount share in a package consisting of $105 cash per share for just over half of Paramount’s 120 million shares and a selection of Viacom securities for the balance.

The opposing bid by QVC Network consists of $92 cash per share and a package of QVC stock and warrants--for an average value of about $83 per Paramount share. The possible attraction in Viacom’s latest bid, which is lower overall, is that it contains more cash.

One way or another, the contest for Paramount could end this week.

So either you sell your stock on the open market--Paramount closed Friday at $79.25--or you wait to accept the winner’s package, which means you make an investment in Diller’s QVC, a home shopping channel company, or Redstone’s Viacom, a cable channel owner which is now scheduled to merge with H. Wayne Huizenga’s Blockbuster video rental chain.

But whoever the winner turns out to be, a great premium is being paid for Paramount--which was selling below $60 a share in September when bidding began.

The widespread belief is that a movie studio will be a great business in the new multimedia age because it will have a lock on providing entertainment for a world market of countless video channels and interactive, computerized television sets.

That multimedia vision has propelled an extraordinary increase in prices for movie studios in the last decade.

Consider: Paramount will sell for $9.7 billion to $9.9 billion, where only three years ago MCA sold for $6.6 billion and a year before that Sony paid $3.4 billion for Columbia Pictures. And yet in 1985, Rupert Murdoch was able to buy 20th Century Fox studios from Marvin Davis, a very shrewd seller, for $575 million.

Has anything changed in the last decade to make studios intrinsically more valuable? Not really. Paramount revenues and profits today are roughly identical to what they were in the early 1980s.

And the movie business is as it has been for decades. Studios such as Paramount have relationships with theater owners across the United States and worldwide based on their ability to produce and distribute 20 or so films a year. Because they can borrow on the strength of their film libraries, studios can finance roughly $600 million to $1 billion worth of movies a year.

Central to Paramount’s appeal is scarcity value--Paramount is just about the only independent studio left. Therefore, goes the thinking, it will be one of a handful of monopoly providers of entertainment for vastly expanded markets in the multimedia future.

But that’s where the thinking goes wrong. Whatever the multimedia future is, it will involve the computer. And--witness the decline of IBM--computer businesses are not kind to monopolies.

In the digital future, “there will be information and entertainment coming from many sources, hundreds of competing monopolies,” says Andrew Kessler, a managing director of Unterberg, Harris, a San Francisco investment firm specializing in new media issues.

Truth is, nobody knows what multimedia will amount to or what customers will go for. Telephone companies are experimenting now. American Telephone & Telegraph is running an experiment with Viacom in California’s Castro Valley. US West and Time Warner have an experiment in Florida.

Rupert Murdoch’s News Corp., owner of 20th Century Fox and satellite broadcast channels in Europe, last year paid $525 million for two-thirds ownership of the largest satellite system in Asia--where more movies are made, and far more cheaply, than in Hollywood. But despite Asia’s millions of potential customers, News Corp. knows it will wait years for a profit on its investment.

One thing is certain: With phone companies, broadcasters, movie makers, newspaper barons and outright entrepreneurs such as Blockbuster’s Huizenga vying for business, multimedia will be a very diverse industry.

And another certainty, after Paramount is sold for almost $10 billion, is that the resulting company, Paramount-QVC or Paramount-Viacom, will be burdened with debt for the immediate future. And the need to produce earnings to service that debt will constrict its flexibility in its present business, not to mention new ventures in multimedia. High concepts can be bold or foolhardy, but usually they’re expensive.