Paramount Sets Rules to Heighten Bidding : Mergers: Observers say strategy not to divulge initial offers by Viacom and QVC will prolong the process.

Paramount Communications Inc., moving closer to a deadline on auctioning itself, Friday unveiled steps designed to attract the highest possible bids.

The New York-based entertainment conglomerate said it will not disclose the size of the offers it receives by Monday’s initial bidding deadline. By keeping bidders in the dark, Paramount will reserve its power to continue negotiations with its two main suitors: QVC Network Inc. and Viacom Inc.

Wall Street sources predicted that Paramount’s fate will not be resolved soon because there is no incentive for the companies to make their final offers in the initial round. Both QVC and Viacom have made two-tier tender offers, promising cash for 51% of Paramount’s stock and the remainder in securities.

“On Monday, you’re not going to get your best bid,” said one arbitrager, “and the loser is not going to play by these rules.”

The Paramount board, under court order to treat all bidders fairly, last week chose to run an auction that ultimately will allow shareholders to tender their shares to the bidder of their choice. Among other concerns, the board asked QVC and Paramount to offer shareholders some protection from a decline in value of the securities portion of the offers.

So far, neither QVC nor Viacom has tipped its hand. QVC directors have a board meeting scheduled for today but will guard their strategy carefully, a source said. However, there is a strong likelihood that QVC will disclose its bid before Tuesday’s stock market opening, the source said.

Still, a number of Wall Street executives say the auction is riddled with potential problems, and they predict that the rules will be revised before Paramount’s fate is settled.

In an effort to clarify its rules, Paramount said Friday that it will not use its “poison pill” against bidders if they improve their tender offers later than Monday, as long as they abide by certain rules.

Paramount wants all bidders to allow their tender offers to expire on the same date and to withdraw after a bidder wins 51% of the Paramount shares.

But critics foresee problems. If two bids are similar, neither may win the required 51% vote. Partial cash tender offers seldom attract 100% participation because some people misplace their stock certificates or prefer to wait for the “back end,” to exchange their shares for the acquiring company’s stock. (In a stock swap, the shareholder avoids taxes on the gain of his stock for cash.)

Another potential thorn: Paramount said that in order to enhance the bidding, it will consider awarding termination fees, stock options or expense reimbursement. Such fees--worth about $600 million to Viacom Inc.--were struck down by the Delaware court for different reasons last month, and QVC might challenge the fees again.

Paramount shares closed at $81.625 on the New York Stock Exchange, up 37.5 cents. Viacom Class A lost 62.5 cents to $50.25, and Viacom Class B added 25 cents to close at $46.25. QVC jumped $2 to close at $43.25.