Paramount – 1994
What do you think of Redstone’s tactics in making the initial offer to Paramount?
The initial offer to Paramount by Redstone in September 1993 did not seem like a bad deal. The merger was a natural fit which would create synergies and a more robust programming entertainment company poised to pursue international businesses and explore technological innovations. In 1993, Viacom’s takeover bid included $69 per share, and a lock-up option for Viacom to purchase 23.7 million shares at the same offer price plus a termination fee of $100 million if the deal did not go through. The initial deal, which Paramount did not want to agree to due to the lockup option and termination fee, had a higher fee of 150mm and 20% of the 120mm shares outstanding. To this end, I think the revised proposition was a compromise. It would still be punitive to Paramount if the deal did not go through, but it also reduced some of the penalties which had initially seemed too egregious. By the end of 1993, Paramount’s stock was trading at highs of $55.5. On the news of the initial offer, Paramount’s stock jumped to $64-65 per share, which makes sense to be less than the bid – investors have to hedge themselves in case the deal does not go through; while Viacom’s stock dropped slightly. The market clearly thought this was a better deal for the Paramount shareholders than for the Viacom shareholders.
Why did Viacom change its bid on October 21?
By October 21, Viacom had seen rival bids from QVC (supported by TCI) for the acquisition of Paramount. In addition, Blockbuster had agreed to invest in Viacom ($600mm) conditional on the Paramount acquisition. Additional investments from Nynex provided them additional capital. QVC began a court action to forbid the merger between Paramount and Viacom (specifically to invalidate the purchase option of 23.7 million Paramount shares). At this point, they put in a formal offer to tender Paramount shares at $80 per share, contingent on the invalidation of the lock up option. This offer triggered Viacom to counter, and increase their value of the Paramount acquisition to $80 per share plus other structural considerations. The changed bid was directly related to the hostile attempts by QVC and Diller to acquire Paramount.
What do you think of the behavior of Paramount’s board before the Delaware Court decision? What is the purposes of Paramount’s poison pill? What do you think of the auction after the Delaware Court decisions?
Before the Delaware court decision, I think Paramount was being honest. They knew they were in negotiations with Viacom, but they were still being professional. They knew that competing offers would only further inflate the Paramount stock price and get them a better negotiation. I think if Paramount knew which deal they wanted to pursue, they could have gotten the deal done faster and avoided all the courtroom drama. The Delaware courts, however, decided that the directors should have considered the higher QVC bid – the ruling barred Paramount from using its poison pill defense. The court said the best value must be available to shareholders, thus upholding the 100mm termination fee but striking down the lock up. The purpose of Paramount’s rights plan (poison pill) is to protect the shareholders in the case of being acquired. Each holder of record of a Right (which was entitled to each shareholder of common stock) would have the right to receive a number of shares of Paramount common stock equal to twice the purchase price. It gave more value to stockholders at the time of an acquisition. Though the Delaware courts knocked this down, I think Paramount had been bid up enough that an auction was really the only fair and smart way to go. It was a neutral option and allowed for the best results for the shareholders. The bids submitted in the auction were, no surprise, much higher than the individual negotiations prior to these bids, and as such, the shareholders did receive the best treatment.
Explain what has happened with the stock prices of the three players from September to the end of January. Specifically, explain the movements of QVC and Viacom stock as the likelihood of their winning changes.
From September to January, Viacom and QVC’s stock prices both fell. The deal was clearly getting over bid and Paramount was receiving more than it was worth in all likelihood. As different court rulings came out, the stocks performed differently. On November 24, for example, the courts ruled in favor of QVC. Following this news, however, no one’s stock price increased. It led to additional uncertainty. January 7th was shortly after Viacom's offer #3, which led to a sharp drop off in Viacom’s share price as well as Paramount. It seems that although Viacom’s price continued to drop, QVC’s share price actually increased near the end of January 94. I think at this point it was clear that Viacom would lose more than QVC if the deal did not go through.