Return To Sender

By John Greenwald

Steven Ross, 61, had been up late into the night helping to reassemble the pieces of the biggest deal of his life, but he was feeling particularly ebullient at noon the next day. As he met with reporters last Friday, the chairman of Warner Communications playfully handed out black-and-yellow Batman lapel pins, a promotional item for his studio's big summer film. Shunning a chair, the executive casually plopped himself down on the floor and began extolling the deal he hoped to see through. Said he: "There could not be a better fit in the world."

Ross was speaking of Time Inc. and Warner, whose planned merger has come to resemble a three-dimensional chess game, with the winner destined to become king of the global media board. Rumors and speculation ran wild, and stock prices gyrated, as directors of Time met last Thursday and early Friday to consider the hostile $10.7 billion takeover offer that Paramount Communications had put forward the previous week. After deliberating for ten hours on the 34th floor of the Time & Life Building in Manhattan, the board approved a double-barreled response that demonstrated Time's determination to complete its merger with Warner. Declaring that Paramount's $175-a-share bid was "not in the best interests of Time, its stockholders and its other constituencies," the board, which consists of four Time executives and eight outside directors, unanimously rejected the proposal. Said Time President N.J. Nicholas: "The $175-a-share offer does not come close to the true value of this company."

To proceed with the merger in the face of the Paramount attack, Time abandoned its earlier plan for a debt-free, tax-free stock swap with Warner, and instead launched a $70-a-share tender offer for 100 million of Warner's nearly 200 million shares. That would buy Time a controlling interest in its merger partner; the remaining Warner stock will be acquired later in exchange for cash and securities. The deal will cost Time the kind of debt it and Warner had hoped to avoid -- somewhere between $7 billion and $14 billion. Unlike the original Time-Warner arrangement, the initial acquisition will not need the approval of Time shareholders because the first part of the transaction will involve only cash.

Time took other steps as well. The company swapped some 7 million of its shares for 17.3 million Warner shares, or about 10% in each company. The exchange could have the effect of frustrating Paramount by placing a large block of Time stock in friendly hands, and it gives Time a head start in its acquisition of Warner shares. Time also asked a federal court in New York City to halt the Paramount bid on the grounds that it reflected a "campaign of deception and manipulation" to derail the Time-Warner merger. The suit alleged that Paramount feared the competitive impact of a Time-Warner combination and was intent on keeping such a merger from taking place. Said Nicholas: "I'm convinced that Paramount's was a spoiler bid."

Paramount attacked the revised Time-Warner merger agreement as "a defensive device, pure and simple. From the standpoint of Time shareholders," the company said, "we don't see how it begins to compare with our offer of $175 a share in cash for all shares." Declared Paramount's principal investment banker, Robert Greenhill of Morgan Stanley: "We consider this a very weak response." Paramount repeated an earlier offer to negotiate a higher price, and declared, "We will continue our efforts to acquire Time Inc. with firm determination."

On Wall Street investors took a cautious first look at the proposed Time- Warner cash bid. Time stock, which had closed at 180 on Tuesday on rumors that major new bidders might enter the fray, fell to 162 1/2 a share on Friday. Warner stock rose to 59 1/4, up 3 1/8 for the week, and Paramount, which was also the subject of takeover rumors, closed at 58 1/8, down 1. Many takeover speculators, some of whom own stock in all three companies, seemed perplexed at the growing complexity and unpredictability of the triangular struggle.

Critics of the deal complained that it would not quickly raise Time's stock to the level of Paramount's bid. "Time management had a plan to build an empire, and somebody threw a wrench into that plan by offering the shareholders a better price," said Ralph Whitworth, director of the United Shareholders Association, a Washington-based advocacy group. "It should have been left up to the shareholders to decide" how to vote on Paramount's proposal. Disappointed Time stockholders may be inclined to bring lawsuits accusing the company of failing to look after their immediate interests. Said a top Time executive: "Of course, there will be a lot of shareholder suits. But there will be a lot whatever we do." Many Wall Street analysts believed Time's new play for Warner could attract additional bidders for both companies, which helped explain why Time's stock price remained relatively high despite the board's rejection of the Paramount bid.

Some investors nonetheless expressed outspoken support for the deal. Said Gordon Crawford, a money manager at the Los Angeles-based Capital Group, the largest institutional owner of Time shares: "If you put Time and Warner together, you have what I think will be the greatest media and entertainment company in the world. I would rather be a long-term owner than cashed out of one of the world's most exciting companies at $175 a share." Concurred Kendrick Noble, who follows media companies for the Paine Webber investment firm: "After all the smoke blows away and we can look at the facts, Time's | shareholders should gain from this. The new company will produce higher income over the longer term."

The latest agreement replaced a March merger proposal that called for Time to acquire Warner in a swap of 0.465 shares of Time stock for each Warner share. But some on Wall Street had complained that the deal gave Time shareholders no immediate financial reward. "The marketplace has told us we can do better," said Time's Nicholas, 49. "We're still acquiring Warner, but now we're using cash." Nicholas acknowledged that the combined company's earnings would suffer in the short run, but he argued that the company's value will be evident to anyone who examines its assets. Under the earlier arrangement, the new company would have combined assets of $10 billion spread over 140 million shares. The revised agreement could spread that underlying value over about half as many shares.

The Time-Warner combination would take on a heavy load of new debt, as much as $14 billion. The company (estimated total revenues: $10 billion) would have an estimated cash flow of $2 billion, which would be tapped for loan payments. "These are great organizations with very good cash flows, so the debt doesn't have to be a negative," observes William Farley, chairman of Chicago- based Farley Industries, which took over West Point-Pepperell in a hostile bid this year. But, he adds, "it takes a certain kind of management to deal with that kind of debt. You're that much closer to the edge. You can't afford to make all that many mistakes."

In rejecting Paramount's bid and going its own way, Time contends that the $175-a-share offer was never really credible. Nicholas noted that it was contingent on "substantial conditions" that included Paramount's ability to obtain financing and the approval of regulatory agencies.

One of Paramount's biggest potential obstacles is the task of persuading the Federal Communications Commission and some 750 local governments around the country to transfer to Paramount the licenses and franchise rights for cable- TV units operated by Time's 82%-owned American Television and Communications. Getting approval for such transfers "would be difficult even without a hostile bid," says Ross, "but now we'll be challenging them every inch of the way." As the three-way takeover battle wears on, it is likely to be fought in just that contentious manner -- in the courts, the stock market and the corporate trenches.

With reporting by Frederick Ungeheuer/New York, with other bureaus