A Question of Value

By John Greenwald

The meeting crackled with all the tension of a scene from Barbarians at the Gate. Two months before the battle for Paramount Communications lit up Hollywood and Wall Street this fall, Paramount chairman Martin Davis summoned Barry Diller to a lunch at Paramount headquarters in New York City. The two men had rarely spoken since Davis forced out Diller as head of Paramount's film studio a decade ago. Now Davis demanded to know whether Diller's QVC shopping network was planning a takeover bid for Paramount. Diller none-too- ingenuously denied it. According to Diller, Davis then ended the meal by shouting out, "I know you're coming after me!"

Diller did come after him, topping and then topping again the friendly offers from MTV-owner Viacom that Paramount had accepted. And in a ruling that Davis had clearly dreaded, the Delaware Supreme Court last week upheld a lower-court decision that ordered Paramount's board to give serious consideration to Diller's bid of $10.1 billion, or about $85 a share at recent market prices, along with Viacom's offer of $9.5 billion, or about $79.35 a share. The ruling struck down the defenses that Paramount and Viacom had erected against competing bidders and, in effect, placed Paramount on the auction block.

In the excitement of the moment, some Wall Street watchers speculated that new bidders might come forward and push the price of Paramount as high as $100 a share. But many experts on corporate value argue that Paramount is already overpriced at its current level. According to court papers in the case in Delaware, John Malone, the chairman of cable-TV giant Tele-Communications Inc., testified in a deposition that "one would have a hard time paying more than $75 a share" for Paramount. Malone is no casual observer: he reportedly offered Davis $70 a share for Paramount three years ago. Malone had also backed Diller's bid for Paramount through TCI's Liberty Media programming unit before Liberty agreed to sell its 22% stake in QVC last month.

What is Paramount really worth? To establish a price range, analysts tot up the cash flow produced by each of the company's lines of businesses and divide the result by Paramount's 118 million outstanding shares. The major holdings include Paramount Pictures (Wayne's World 2, Addams Family Values), the company's Simon & Schuster (now Paramount Publishing) book-publishing arm and Madison Square Garden. Running those numbers, Jessica Reif, an analyst at Oppenheimer & Co., has put the value of Paramount as low as $60 a share. (The stock closed at 81 1/8 last week after the Delaware court ruling.)

But the question of value is ultimately in the eye of the beholder. "The conventional wisdom on the street is that Paramount is way overpriced," says J. Kendrick Noble Jr., who runs his own media consulting firm. "But here you have enormous egos who think they can work wonders with this company; so anything goes." Sometimes the egos get it right: Wall Street hooted at Ted Turner for paying $1.2 billion for the MGM film library in 1986, but today that price is considered a bargain.

Paramount said its board would meet to set up a procedure to consider bids from all interested parties. So unless Viacom chairman Sumner Redstone decides to raise his bid, his company could be the loser. Diller, who watched the hearing on television from QVC's West Chester, Pennsylvania, offices, said he was "delighted" with the ruling. "Obviously he's very happy," said designer Diane von Furstenberg, a confidant. Yet neither she nor Diller was ready to declare final victory in the Paramount struggle. "Nothing is ever a fait accompli in life," Von Furstenberg said. "Only the future will tell. But so far, so good."

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CAPTION: PARAMOUNT'S WILD RIDE

With reporting by Thomas McCarroll/New York and Jeffrey Ressner/Los Angeles