Paramount, in Flip-Flop, Backs Viacom Offer : Mergers: Board says it will terminate existing deal with QVC Network. QVC can still make a new offer, but its advisers are livid.

The board of Paramount Communications Inc. on Friday reversed itself and unanimously endorsed the revised tender offer of Viacom Inc. as the best deal for its shareholders, adding that it would terminate its existing merger agreement with QVC Network Inc.

The move now puts Viacom in the lead in the 19-week battle for Paramount and increases pressure on QVC Chairman Barry Diller to make a new offer, Wall Street traders said. Indeed, sources said, QVC was planning a new offer before the latest Paramount flip-flop.

QVC advisers, however, were steaming Friday evening and said their client might decide to drop out of the bidding altogether. Diller was not immediately available for comment, but one close adviser said anger was widespread in the QVC camp, which believes it still has the higher bid on the table and has not been “treated properly.”

That threat evoked disbelief in the Viacom camp. “I don’t believe it for a second,” said one executive, who speculated that “they’re trying to support their stock without putting in” guarantees that Paramount shareholders will be compensated if the acquiring company’s stock loses value after the merger.

The move by Paramount’s board surprised some observers, who at most expected the board to declare itself neutral on two bids that are exceedingly close. After the board was rebuked by two Delaware courts for failing to consider QVC’s unsolicited bids last fall, it has shown no overt favoritism to Viacom, despite the fact that the two companies signed a friendly merger agreement in September.

That agreement was scrapped in December in favor of QVC, which made the highest bid when an auction of the company began.

And in January, Viacom Chief Executive Frank Biondi Jr. was heralded as the future chief executive if Viacom acquired Paramount--an abandonment of the earlier plan to have Paramount Chairman Martin S. Davis serve in that capacity.

In a prepared statement, Davis left the door open for an improved bid from QVC, noting that Paramount’s auction rules will allow increased bids through the end of the bidding process on Feb. 1.

The final decision rests with shareholders, who will determine the winner by tendering it 50.1% of their Paramount shares.

Before Friday’s board meeting, QVC had alerted Paramount that it was preparing to sweeten its bid, QVC and Paramount sources agreed.

“We gave (Paramount) specifics on how we’re going to improve our bid. We’re going to do much more to create value,” the QVC adviser fumed.

But QVC’s willingness to raise its own bid undermines its argument that it was the high bidder, critics said.

When Paramount’s advisers studied the offers, one source said, “it was a very close call.” Viacom’s offer is “marginally superior, but there is enough daylight there that we were comfortable” recommending it, he said, speaking on condition of anonymity.

Based on recent market trading, QVC argued that its offer is $554 million higher than the Viacom bid, while Viacom advisers presented their bid as most favorable.

Viacom’s revised offer contains nearly $900 million more cash than QVC’s bid, but QVC has offered a greater package of securities in the “back end” of its two-tiered offer. With its latest bid, Viacom has agreed to provide Paramount shareholders some protection if the value of Viacom shares trades below expectations a year or two after a merger. For these reasons, a number of Wall Street traders said Viacom gained the upper hand this week.

On Friday, Viacom said its bid was worth $83.49 per share, or nearly $10.3 billion, while QVC said its offer was worth $87.07 per share, or about $10.7 billion.

According to the source close to Paramount, the Viacom bid measured more favorably on every index except one: recent stock market values, which determine the value of the securities offered in the two-tier tender offer.

Due to the “winner’s paradox,” the company that is perceived to be winning the auction loses ground on the stock market because its stock is expected to plummet if it wins Paramount and assumes more debt.

Viacom’s stock fell after it revised its bid Tuesday, while QVC shares climbed.

The board made its announcement after the close of trading Friday. Paramount rose 25 cents to close at $79.875 on the New York Stock Exchange.

Viacom Class A shares closed unchanged at $40, while Viacom Class B stock rose 12.5 cents to close at $37.75. QVC closed unchanged at $44.