ENTERTAINMENT MEGA-MERGER : Wall Street Gives Paramount Deal a Rude Welcome : Media: Viacom faces a cash crunch. The impending departure of Martin Davis will leave studio with leadership void.

As Viacom Inc. officially secured victory in the five-month battle for Paramount Communications Inc. on Tuesday, Wall Street gave the new conglomerate a rude welcome.

Viacom shares fell sharply, reflecting concerns that it overpaid in the $10-billion deal and that it will have trouble successfully managing Paramount’s assets.

In a trend that began with the Viacom/Paramount merger announcement in September, Viacom’s Class B shares dropped $1.875 Tuesday, to $28--54% below their all-time high of $61.25 last year. Its Class A shares lost 75 cents to $34.125. Paramount was up 87.5 cents to $77. QVC Network Inc., which lost the takeover bid, rose $1.75 to close at $50.25.

Despite Viacom’s drop, Viacom Chairman Sumner Redstone and Paramount Chairman Martin Davis celebrated the deal as a bonanza for shareholders and employees alike.

“We remain resolute in our intentions and unwavering in our conviction that the combination of Viacom, Paramount and Blockbuster will create a global media powerhouse of unparalleled proportions in the entertainment industry,” Redstone said.

Redstone remained dogged in his pursuit of victory throughout the long, complex battle with QVC and its equally determined chairman, Barry Diller. In the final round, Redstone prevailed easily, with some 74.6% of Paramount shareholders opting for Viacom’s cash-and-stock tender offer over QVC’s rival bid.

The deal is expected to close in late April or May, following the completion of Viacom’s merger with Blockbuster. Redstone will be chairman and majority owner of the combined companies, which combines Paramount Pictures, Simon & Schuster, Madison Square Garden, MTV, Showtime and Blockbuster’s video stores. Viacom Chief Executive Frank Biondi will be CEO.

Davis, who had planned to stay on under the original merger deal, will not have a role in the new company. He sent a letter to Paramount employees Tuesday proudly recounting what he considers to be major successes in refocusing and then selling Paramount.

He declined to discuss his future plans in an interview but said, “You may look forward to hearing from me a great deal in the future.”

In the end, the biggest takeover battle of the 1990s was a disappointment for many stock traders: Although Viacom ended up paying nearly $2 billion more for Paramount than it originally planned, QVC never made the knockout offer that many expected after a court ruling in November forced a formal auction of the company.

Now Viacom is feeling the pressure of having paid dearly for a company that lost money in its most recent quarter. The slide in Viacom’s share price could even upset its merger with Blockbuster, a controversial alliance that gave Viacom the cash it needed to prevail in the Paramount battle.

“The pain for Viacom is going to be considerable,” said an institutional shareholder who declined to be identified. “They’ve paid a huge amount of money for Paramount, and Paramount’s operations are collapsing under people’s eyes . . . as the pain becomes greater, what happens to the Blockbuster merger?”

He noted that Blockbuster shares were selling for $34 before the Viacom merger agreement. They closed Tuesday at $25.25, up 37.5 cents.

Larry Haverty, an analyst at State Street Research in Boston, said Viacom needed to either increase the value of its stock somehow or renegotiate the merger with Blockbuster. “We don’t think our clients are getting a fair price for Blockbuster as it now stands,” he said.

Even if the Blockbuster merger goes ahead smoothly--which may happen, since Blockbuster Chairman H. Wayne Huizenga and other managers own large stakes--the combined companies will still be burdened with debt.

Furthermore, Viacom will have to move quickly to sort out the problems at Paramount and especially at the flagship movie studio. Although Redstone and Biondi are well-regarded managers, neither has any experience running a movie company.

It was Diller’s perceived ability to turn the studio into gold that led many to favor his bid for Paramount. Now, the expectation is that Viacom will try to recruit a top-rank studio executive to manage the prize property. Current studio chief Stanley Jaffe is considered sure to go.

“No question, there’s going to be a management shake-up at the studio,” said Christopher Dixon, an analyst at Paine Webber. He was confident Viacom would be able to find the necessary talent to turn the operation around.

Dixon was not bothered by Viacom’s debt. He said the combined companies would have more than $2 billion in cash flow--more than two-and-a-half times the estimated debt service costs. “That’s considerably less leverage than many media companies,” he added.

To make the merger worthwhile, though, Viacom will need to do more than put out better movies and maintain its interest payments. Jeffrey Logsdon, an analyst with Seidler Cos. in Los Angeles, said Viacom had promised at least $100 million a year in savings from eliminating duplicate functions and other efficiencies.

Far more important, however, is the theory that a large, vertically integrated entertainment production and distribution company will be able to take a bigger and bigger share of one of the world’s fastest-growing--and fastest-changing--industries.

“They’ll be a globally oriented, vertically integrated manufacturer and distributor of ‘copyrightable’ material,” said Dixon, who is bullish on Viacom shares.

Times staff writer Kathryn Harris contributed to this story.

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