Paramount Deal: As Show Closes, a Look at the Script : Media: Half a dozen key scenes led to the climax in $10-billion battle between victorious Viacom and QVC.
In the end, the biggest takeover war of the 1990s boiled down to five words penned personally by QVC Chairman Barry Diller: “They won. We lost. Next.”
Diller’s announcement on Tuesday will go down as one of the sharpest official concession statements in the annals of corporate takeovers. But his $10-billion battle for Paramount Communications Inc. actually may have ended a week ago, when Diller and his advisers met over sandwiches and pasta in investment banker Herbert Allen Jr.'s sleek Fifth Avenue office.
There, the home shopping network assembled some of the biggest Paramount shareholders in a last-ditch effort to rally support for its inferior final bid. As the meeting dragged on, someone casually mentioned that BellSouth Corp., QVC’s chief financial backer, could buy QVC shares after the merger to prop up QVC’s stock price. That would make the bid more valuable by boosting the value of QVC stock Paramount shareholders would receive.
Diller subsequently pinned his hopes on the plan, since he was unable to raise his bid any higher. But the strategy dramatically backfired in the days ahead, as rival Viacom charged that the stock purchase would violate the bidding rules and others talked about a possible federal investigation. Viacom’s victory was assured when a besieged Diller finally pledged that his bid would remain unchanged.
The Allen & Co. meeting was one of half a dozen key moments that helped decide the marathon Paramount battle, which technically ended at midnight Monday in New York, when more than 70% of Paramount’s shareholders tendered to Viacom. Along the way there were cameo appearances by CNN’s Ted Turner, cable mogul John C. Malone and others too numerous to mention. The two-way battle alternately fascinated and fatigued those following it. It also opened the way to a whole slew of deals that have already begun to reshape the communications landscape.
It all started with a friendly merger agreement between Viacom and Paramount on Sept. 12, followed eight days later by QVC’s hostile bid. By December, the Delaware Supreme Court had undone the merger, forcing Paramount to back QVC’s stronger bid. The balance changed again when Viacom arranged a merger with Blockbuster that gave it the financial wherewithal to take the lead, which led to Diller’s desperate consideration of the BellSouth stock purchase.
On Tuesday, Viacom Chairman Sumner Redstone was treated like a conquering hero, accepting congratulatory call after call from corporate chieftains such as Time Warner Chairman Gerald Levin.
“All the fatigue and all of the stress disappeared at about 9 o'clock last night when we heard we were over the top,” Redstone said in a post-victory telephone interview. “I picked up a glass of champagne and I said, ‘Here’s to us who won.’ ”
The Viacom chairman revealed that on Monday afternoon, as the shares were being tendered, he left his office to play tennis with a pro. Redstone then attended the opening of a Nickelodeon boutique at FAO Schwartz, before hosting a small birthday party for his wife, Phyllis, at New York’s “21.”
Diller spent Monday on a plane between Los Angeles and New York. In a brief phone call, he was philosophical about the loss.
“Of course we made mistakes,” Diller said in a burst of staccato sentences. “Life is mistakes. We, however, achieved exactly what we asked for. We created a level playing field against enormous odds. We had the chance to bid fair and clean. We got into an auction. We stopped bidding. We take the consequences.”
The Paramount that Redstone and Diller ended up fighting over was ripe for an acquisition, having blown several major opportunities in the last five years to arrange a major acquisition itself. Big ups and downs seemed characteristic of the company.
Founded by Adolph Zukor in 1916, Paramount in the 1920s was Hollywood’s most profitable studio, with such hits as Cecil B. DeMille’s silent classic “The Ten Commandments.” In the 1930s and 1940s, Paramount was home to such stars as the Marx Brothers, Gary Cooper, W.C. Fields, Claudette Colbert, Bob Hope and Bing Crosby.
The studio slid in the late 1950s and 1960s. A cagey Lew Wasserman at MCA snatched up Paramount’s pre-1948 films just when Paramount needed cash. Today, MCA’s vaults are home to such Paramount classics as the Marx Brothers’ “Duck Soup,” “Monkey Business” and “Coconuts” as well as a good portion of the Hope/Crosby “road” pictures.
Charles Bluhdorn’s Gulf & Western bought the studio in 1966, beginning the trend of conglomerates gobbling up studios. The company collected a variety of assets, from the Simon & Schuster publishing house--now Paramount Publishing--to the New York Knicks basketball team.
Paramount was revived in the 1970s and early 1980s, thanks largely to Diller and a team of talented executives he assembled to run the studio, among them current Walt Disney Chairman Michael D. Eisner and Walt Disney Studios Chief Jeffrey Katzenberg. When a heart attack felled Bluhdorn in 1983, onetime publicist Martin S. Davis took over. Diller, who frequently chafed under Davis, left for 20th Century Fox in 1984.
Davis launched Paramount on a corporate garage sale to whittle down Bluhdorn’s collection of companies. The restructuring culminated in the 1989 sale of its huge credit card operation, Associates, to Ford Motor Co. The $1.2-billion gain Paramount recorded on that deal gave Davis a war chest that instantly made him a feared predator in the entertainment industry. What’s more, the name was changed to Paramount Communications to reflect a more focused company.
Davis soon gained the reputation as a corporate tire-kicker, with critics saying he lacked the vision and guts to make a bold acquisition. One of the biggest failures, former Paramount executives said, was his inability to land a record company.
Scores of Paramount films, including “Flashdance,” “Saturday Night Fever,” “Top Gun,” “Grease” and “Boomerang,” produced wildly popular songs and soundtracks over the years for record labels belonging to Paramount’s rivals. All told, some former Paramount executives estimate that the company has missed hundreds of millions of dollars in sales as a result.
Former executives said that Paramount tried to cut deals to buy companies ranging from Geffen Records to Thorn EMI but that each time the deals fell apart. It also once held talks with fellow entertainment giant MCA, sources said.
Davis did launch an unsuccessful hostile bid for Time Inc., losing to Warner Communications. By 1993, Paramount was a ripe takeover candidate, and some, notably cable giant Tele-Communications Inc. and cable’s Turner, had been sniffing around.
Investors were impatient that Davis had done little with the Associates proceeds. Paramount’s film slate was sparse, and the company’s earnings were regularly full of unpleasant surprises. Its stock was trading at about half the value that Viacom eventually agreed to pay.
Diller, whose ambitions had become a hot Hollywood guessing game after he left Fox Inc. two years ago, surprised people by signing on to head QVC, a home shopping channel. Although he often touts home shopping as a place that allows viewers to “shop for underwear in their underwear,” his real goal was to use QVC as leverage to build an entertainment/technology company at the forefront of the “information superhighway” explosion.
Depositions filed in a Delaware court case show that he began holding discussions with investment bankers Allen & Co. shortly after taking the reins at QVC. Allen Executive Vice President Enrique F. Senior said in his deposition that Allen first suggested Paramount to Diller, although most believe that Diller had Paramount in mind for some time.
It wasn’t long before Davis was hearing Diller’s footsteps. In his deposition, he spoke of running into Diller in a restaurant and having lunch with him in July at Paramount’s headquarters, each time trying to squeeze information out of him to determine if Diller had anything planned. Acting carefully to avoid legal problems, Diller didn’t bite.
Viacom and Paramount, which had talked on and off for four years, finally reached an agreement in mid-September on a bid that was worth $9.2 billion at the time. A week later, QVC made its move, backed by partners such as regional cable giant Comcast and Liberty Media, a Malone and TCI affiliate. Its bid was worth about $9.5 billion then.
Viacom decided to make Malone the issue, painting him as no less than the John D. Rockefeller of cable, eager to control every part of the business. Viacom’s anger at Malone also was triggered by plans by the movie network Encore--backed by Malone affiliates--to launch a batch of movie channels that would pose a direct threat to Viacom’s Showtime and The Movie Channel. Malone eventually backed off the Paramount bid when TCI agreed to be bought by regional phone company Bell Atlantic.
Both sides then scrambled for partners. Viacom lined up regional phone company Nynex. Blockbuster Entertainment, long criticized for not diversifying fast enough from its video rental business, invested as well. Diller lined up BellSouth, cable and newspaper giant Cox Enterprises and Advance Publications, the last of which is owned by the wealthy Newhouse family.
Still, Davis stiff-armed QVC. That changed on Nov. 24, when a Delaware Chancery Court ruled that Paramount could not use as a defense its “poison pill,” a mechanism designed to make an unwanted takeover more expensive. That meant that Paramount had a duty to evaluate both offers. There were two ironies: QVC’s chief legal adviser was lawyer Martin Lipton, Wall Street’s godfather of anti-takeover defenses and the father of the “poison pill” strategy.
And the ruling seemed a direct conflict with a 1990 ruling in which Time Inc. was able to spurn a bid by Paramount itself, arguing that it fit better with Warner Communications. Just three years earlier, Davis was hailed as a shareholders champion. Now Diller was enjoying that role, as the Delaware Supreme Court found that Paramount failed to fulfill its shareholder obligations and voided a $100-million payment it promised to pay Viacom if the deal fell through.
“The turning point was very clearly the Delaware court system,” Davis said Tuesday. “The Delaware court is creating new law . . . to fit the climate. The Delaware decision is one that I respectfully and at the same time vehemently disagree with.”
Over the last two months, Viacom and QVC volleyed bids, changing the terms of their complex offers each time. “The last two months of it just seemed to take forever,” one investment banker said. “It was clear that both sides seemed to have lost excitement about bidding more . . . . It got to the point where you just wanted it to be over, no matter what happened.”
Hollywood agreed. Some referred to it as “The Neverending Story.”
Meanwhile, Paramount’s studio suffered under the uncertainty. Some executives defected. Some agents were reluctant to pitch projects because of not knowing who would be in charge. Although the summer film “The Firm” was a hit, Paramount’s Christmas sequels, “Wayne’s World II” and “Addams Family Values,” were disappointing.
Paramount disclosed that it would lose $35 million to $40 million in the quarter covering Christmas, naming “Addams Family Values” as one reason. If that wasn’t enough, the original negative to Paramount’s “Blue Chips"--set for release in March--was being processed when the Jan. 17 Northridge earthquake hit. Covered with water and debris, the negative was saved only after painstaking efforts.
Davis, who returned to his office Monday night after dinner to get word of Viacom’s victory, suggested in an interview that he felt vindicated that Paramount’s original suitor won. Of Diller, Davis said: “Barry conducted himself as best he could under difficult conditions. I don’t agree with what he did, but from a strategic viewpoint, he did what he thought was right.”
Redstone said he doesn’t know whether his old friendship with Diller can be repaired because Diller used QVC “to come after a deal that was done.” Nonetheless, he said, “I don’t have the slightest bit of ill will. Barry’s terrific and he’ll do something else and I’m sure he’ll succeed at it.”
And what did Diller mean by “Next” in his statement? He refused to say.
“One of the things I learned long ago about auctions . . . you have to remember it’s not ego or talent. It’s simply raising your hand for the next bid. You don’t always get to win,” Diller said.
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