TIME INC. STRIKES BACK : A Primer on the 3-Way War

QUESTION: What’s at stake?

ANSWER: The three-way battle involving Time Inc., Warner Communications and Paramount Communications will determine control of some of the nation’s most valuable cable television, movie, publishing and music assets.

Q: How did the battle over Time and Warner get started?

A: On March 4, Time Inc. and Warner Communications announced an agreement to merge through an exchange of stock valued at $18 billion. The merger was to have created the world’s largest communications company. The accord provided that an owner of Warner stock would receive slightly less than half a share of Time stock for each Warner share.

Q: Why do the companies want to merge?

A: The merger of Time’s cable television, magazine and book publishing operations with Warner’s movie and television production, cable and music interests would create a single big company capable of competing with foreign-based global giants. These include Rupert Murdoch’s News Corp. and European giants Hachette SA and Bertelsmann AG.

In addition, both Time and Warner were long viewed as potential takeover targets. If the merger succeeded, the new company would be less vulnerable to a hostile raid. And top executives of both companies stood to keep their jobs and reap substantial financial benefits.

Q: What happened next?

A: On June 6, just two weeks before Time and Warner shareholders were to vote on the merger, Paramount Communications Inc.--formerly called Gulf & Western Inc.--swooped in with a hostile bid to buy all of Time’s stock outstanding for $10.7 billion in cash, or $175 per share. The move capped weeks of speculation that the Time-Warner merger had put the companies “in play.” Paramount’s lucrative, all-cash offer put the Time-Warner merger in doubt.

Q: Why did Paramount enter the picture?

A: Martin S. Davis, Paramount’s chairman and chief executive, had restructured the company, selling off its manufacturing interests and turning it into a streamlined communications and entertainment company. Now Davis, too, wanted to head a giant U.S.-based communications company that could compete with other global giants. Paramount owns what is currently the leading movie studio. Time owns Home Box Office, the nation’s largest cable TV company. The two also have publishing interests that would be compatible.

Q: What happened Friday?

A: In an effort to fend off the Paramount bid, the boards of Time and Warner substantially sweetened the terms of their proposed merger. Instead of an exchange of stock, Time offered to pay $70 per share in cash for 100 million of Warner’s 200 million shares.

This raised the total value of Time’s offer for Warner to $14 billion, including the value of cash and securities that Time would issue for the rest of Warner’s shares. Time already owns 17.3 million Warner shares, or 9% of its stock, from an exchange completed Friday. Time’s board of directors on Friday also formally rejected Paramount’s bid.

Q: What’s next?

A: The courts will become a main focus of strategy on all sides. On Friday, Time said it had filed a lawsuit in U.S. District Court in Manhattan, claiming that Paramount is illegally interfering with Time’s merger agreement with Warner. Paramount, meanwhile, is concentrating on the Delaware Chancery Court, where it already filed a challenge to the Time-Warner stock swap agreement.

The Paramount bid also appears to hinge on whether the Federal Communications Commission will allow the acquisition of Time to go through even though the FCC would not yet have completed the steps needed for approving the transfer of cable TV licenses to Paramount from Time.

And the whole situation could change dramatically if new bidders appear for any of the three companies involved.

Q: How would new bidders change the situation?

A: Paramount is hoping that a “black knight” will appear for Warner. A bid for Warner that tops Time’s cash tender offer might thwart the Time-Warner merger. Time, meanwhile, wouldn’t mind if a bidder suddenly materialized for Paramount. And it’s possible that a new bidder will emerge for Time with a more generous offer than Paramount’s.