A Deal Heard Round the World

By Charles P. Alexander

Even in the era of the megamerger, this one was remarkable. No wonder the press and public were fascinated by the announcement that Time Inc. and Warner Communications would join to form the world's largest information and entertainment company. From Tokyo to Paris to Hollywood, media moguls sized up the new firm, trying to gauge its potential clout in the increasingly fierce international battle for the attention of readers, filmgoers and television viewers. The New York Times proclaimed that the union would "insure Time Warner a place in the 1990s as one of a handful of global media giants." Declared the Chicago Tribune: "The deal creates a corporate dynamo." In Munich the daily newspaper Suddeutsche Zeitung disagreed, predicting that the union would be a "Tower of Babel." And on Wall Street, where there had not been much excitement since the contest for RJR Nabisco, investors and speculators were agog over the proposed $9.5 billion exchange of Time shares for Warner's -- the largest stock swap ever.

The merger, which will result in Time Warner Inc., had a lot going for it. Who, after all, would have the money or the fortitude to stand in the way of a solid agreement between two of America's biggest companies? Yet Time and Warner have long been considered takeover targets, and speculation arose that a raider might go after one of them soon, before a merger could create a nearly invulnerable behemoth. Everyone from Rupert Murdoch to Warren Buffet, the shrewd Omaha-based investor, was mentioned as a possible buyer. But no suitor had come forward by week's end. Time's shares gained 6 5/8 for the week, to close at 115 3/4, and Warner's rose 2 7/8, to 48 3/4.

Time Chairman Richard Munro and Warner Chairman Steven Ross, who agreed to share power as co-chief executives of the new company, were confident that their deal would withstand any challenges. Said Munro: "We are not for sale." Time President N.J. Nicholas will take Munro's slot as co-chief executive of Time Warner if Munro retires in 18 months as planned. To strengthen their position, the two companies have also agreed to exchange some 10% of each other's stock in advance of the merger.

One big question mark is the stance of Herbert Siegel, the president of Chris-Craft Industries, which is Warner's largest shareholder, controlling 19% of the company's stock. He and Ross do not get along, largely because Siegel disapproves of the way Warner spends money on generous executive compensation (for Ross alone in 1987: $4.5 million in salary and bonus) and corporate amenities like the six-bedroom Acapulco villa for entertaining movie stars. Siegel also apparently believes that Warner is being undervalued in the merger agreement. When the proposed deal came up before Warner's board for a vote, Siegel abstained, while all the other members approved. Time and Warner officials, who are trying to convince Siegel of the merger's merits, admit that he could take legal steps to delay the transaction, but they insist he cannot stop it.

If approved by Time and Warner shareholders, the merger would create a company that will have annual revenues of more than $10 billion and a market value of $18 billion. It would combine Time's magazines and its hardcover-book publishing, its cable programming and its cable-TV operations with Warner's movie, TV and video production, music labels, cable systems, paperbacks and comic books. The new company would include not only Time's stable of talented journalists, spread over two dozen magazines, but also Warner's Mad magazine, Superman comics and such recording artists as Madonna and U2. The businesses are thus related, but largely complementary. "This is the first merger in a long time that makes a lot of sense," said Edward Atorino, a media analyst at the Smith Barney investment firm.

Time and Warner were moved to merge by the growing global consolidation in the communications business and by the many foreign acquisitions of American companies. In recent years, West Germany's Bertelsmann bought RCA Records and the Doubleday and Bantam Books publishing houses; Britain's Robert Maxwell took over Macmillan publishers; Japan's Sony acquired CBS Records; and Australian-born Murdoch (now a U.S. citizen) accumulated newspapers, magazines, a movie studio and a TV network. Said Time's Munro: "We see Maxwell, Murdoch, Bertelsmann and Sony coming into our market and raising hell, and we see this ((merger)) as an opportunity for an American company to get competitive." In fact, Time Warner would vault ahead of the competition. Bertelsmann, whose annual revenues are nearly $7 billion, would fall to the No. 2 spot among the world's media companies.

As with any large merger, the Time-Warner deal will be reviewed by the Government to see if it poses any antitrust or other regulatory problems. The only major overlap between the two companies is that they are both big operators of local cable-TV systems. After the merger, Time Warner will serve 5.6 million customers, or 12% of U.S. households with cable. The new operation will still be smaller than the largest cable company, Tele-Communications, which serves 24% of the industry's customers. Experts say that unless President Bush takes a tougher antitrust stance than the Reagan Administration did, the Government is not likely to block a Time-Warner merger.

Nonetheless, Ohio Democrat Howard Metzenbaum, chairman of the Senate antitrust subcommittee and a vocal critic of big mergers, immediately objected to the proposed combination. He acknowledged that the deal did not appear to violate the Government's guidelines for "horizontal concentration" within an industry, but asserted that those "guidelines are clearly inadequate for a complete evaluation of this merger." The Senator expressed concern about companies being involved in both the production and distribution of cable-TV programming. Metzenbaum noted that in most communities there is only one cable operator. He fears that such operators might rely too heavily on programs produced by a parent company, and thus offer fewer choices to their cable subscribers. Time and Warner executives do not think this is a real problem. "How does a cable operator make money?" asked Ross. "By offering the widest selection of programs to customers."

The merger raises the possibility of conflicts of interest among the various parts of the Time-Warner empire. Could, for example, a Time publication objectively review a Warner Bros. movie? Certainly, said TIME Editor in Chief Jason McManus, who pointed out that for years TIME and PEOPLE have been reviewing, both favorably and unfavorably, shows produced by the company's Home Box Office cable service. In forming their union, Time and Warner officials agreed that a commitment to journalistic and artistic integrity was absolutely essential. When asked what would happen when one of the Time magazines panned a Warner film, Ross replied, "They wouldn't hear from me at all. I'd just tell my people to make better movies."

To allow time for the two enterprises to get thoroughly comfortable with each other, Munro and Ross are planning to go slow in integrating the various divisions. Only the cable and books operations will be immediately combined. All others will continue to operate as separate units, with Warner's old divisions reporting to Ross and Time's to Munro and Nicholas. Five years down the road, according to the merger agreement, the management will be unified, with Nicholas as the chief executive. "We're not going to crash these two companies together," said Nicholas. Both Time and Warner believe their greatest opportunities for cooperation and growth lie overseas. Ross, for example, hopes to use Warner's worldwide film-and-TV-distribution network to market HBO programming.

Some industry observers have questioned whether Ross's Hollywood ways can easily coexist with the more conservative management style at Time. "Can they work together, or will egos get in the way of the dreams of managers?" asked a Wall Street media expert. Munro and Nicholas decided to go ahead only after many lengthy discussions with Ross dating back to early 1987, and they feel they know their man. "Over the past two years," said Munro, "we have probably spent more time with Steve Ross than with our wives. We feel very comfortable with him." As in all corporate marriages, the trick will be to keep the romance going after the courtship and honeymoon are over.

CHART: NOT AVAILABLE

CREDIT: TIME Diagram

CAPTION: Time Inc.

With reporting by Frederick Ungeheuer/New York