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The Ending Of Paramount's Script May Not Be Written Yet


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THE ENDING OF PARAMOUNT'S SCRIPT MAY NOT BE WRITTEN YET

That loud thud on Sept. 12 was the sound of the biggest shoe in the media world dropping. The noisy buzz that followed came from a thousand media mavens guessing whether another one would follow.

After years of resolutely refusing to do a deal, Martin S. Davis finally agreed to merge Paramount Communications Inc. with another media company. The chairman of Paramount succumbed to the blandishments of Sumner M. Redstone, billionaire owner of Viacom Inc., which will acquire Paramount in a stock-and-cash deal worth $7.7 billion. The new Paramount Viacom would be a multimedia colossus that could redraw the competitive map in media.

PRICELESS GEM. That is, if the other shoe doesn't drop first. Executives close to Barry Diller, chairman of QVC Network Inc., say he has considered making an offer for Paramount for some time, possibly with the backing of his partners, cable titan John C. Malone and operator Comcast Corp. Many observers believe Davis acceded to a merger in part to head off such a bid. Now, insiders say Diller is weighing a counteroffer. And other U.S. and European media companies could come out of the woodwork.

Why such a stir? Mostly because Paramount is a priceless asset for companies hoping to compete in digital media. But rival bidders may also be goaded by Viacom's stock, which dropped from 66, when Davis and Redstone set the terms of the deal, to a recent 61 1/2. Since most of the offer is in the form of stock, that reduces the value of the deal from $69 for each Paramount share to about $65. Stock declines are not uncommon in such deals. But Viacom was also hurt by charges that Redstone buoyed his stock with heavy share purchases in the two months before the deal. Viacom insists Redstone abided by all regulations.

Still, if the value of the deal sinks to $60 or lower, a competing bid could look plausible. Friends argue that Diller, who once ran Paramount Pictures Corp. under Davis, is superbly qualified to steer the company into new ventures, such as a fifth broadcast network. Wall Street seems undecided about the likelihood of a bid. After an early surge, Paramount's stock retreated, but then closed up 1 3/8 on Sept. 15, at 64 1/2.

Indeed, most observers see Viacom and Paramount as an inspired match. The company would be the world's leading cable programmer, with networks such as MTV and Nickelodeon; the No.1 book publisher, with Simon & Schuster Inc.; and one of Hollywood's premier producers, with Paramount Pictures. With cash flow of more than $1 billion and only $3.3 billion in debt, Paramount Viacom may be better positioned to capitalize on multimedia technology than even Time Warner Inc. or Rupert Murdoch's News Corp. (table).

"GREAT CASE STUDY." For all its logic, though, the merger still seems a hurried affair. The agreement, for example, gives no job titles to the current presidents of Viacom or Paramount. Nor does it provide a timetable for the retirement of Davis, 66. Even with a much clearer definition of roles, the 1989 merger of Time Inc. and Warner Communications Inc. was later dogged by clashes in the executive suite.

Observers doubt the strong-willed Davis can coexist for long with the equally tenacious Redstone. "This is going to make for a great case study at Harvard business school," says one of the bankers involved in the deal.

For now, Davis will be CEO, reporting to the 70-year-old Redstone, who owns 69% of the new company's voting stock. Viacom President Frank J. Biondi Jr. and Paramount President Stanley R. Jaffe will be members of a transition team that will figure out how to combine operations. Most observers predict that when Davis retires, Redstone will elevate his protege Biondi to CEO. But Redstone doesn't mind leaving such matters open: "What we decided is that, rather than facing those issues now, we'd just do the deal," he says.

Beyond such details, Redstone will have to contend with a partner with views different from his on how to prepare for the digital future. Davis generally eschews strategic partnerships that involve selling equity stakes, such asU S West's $2.5 billion alliance with Time Warner. "Why should we sell off 25% of our assets to anyone?" he asks. Yet Redstone recently considered a $2.4 billion deal that would have given Southwestern Bell Corp. and Crown Media Inc. each a stake in Viacom's cable properties. That deal fell through. But Redstone says he is talking to three other phone companies about alliances.

MORE FLEXIBLE. Of course, with Redstone owning a majority of the stock, such disagreements may be moot. And observers note that--given their reputations for mulishness--Redstone and Davis have already shown remarkable flexibility: "Both guys had to cross a Rubicon," says Steven Rattner, a general partner at Lazard Fr eres & Co., which advised Paramount. "Redstone had to accept paying a premium. Davis had to accept giving up control."

Sheer willpower has allowed Redstone to assemble a giant, and Davis to preempt a bid from his former employee, Diller. But as other warriors-turned-partners have found, living together is the true test of any marriage--especially one that's hastily arranged.Mark Landler in New York with Ronald Grover in Los Angeles


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