HANDS ACROSS THE CABLE

By JOHN GREENWALD AND JOHN MOODY

THE PRIZE UP FOR GRABS, TED Turner's cable empire, was so enviable that two of America's most fearsome bosses tried to make pre-emptive bids for it. Both made their proposals in secret. First came General Electric's Jack Welch, who pitched a dramatic cost-cutting plan. Then, at almost the last minute, came Fox chief Rupert Murdoch, who offered Turner the chance to write his own ticket.

The courting finally produced a winner last week when the most ardent suitor, Time Warner, prevailed after five weeks of dealmaking. But not before two simultaneous and highly contentious board meetings took place in New York City, one at Time Warner headquarters, the other at Turner's law firm, each ending quite differently--one in shouts, the other in murmurs.

The board of Time Warner convened on the 29th floor of the company's headquarters in Rockefeller Center, attended not only by the directors but, according to board member Henry Luce III, by "uncountable lawyers and investment bankers" as well. Chairman Gerald Levin, says Luce, "very much was taking the initiative. There were many questions, incredibly difficult technical points." He admits, "It wasn't clear, at least to me, at the beginning of the meeting that the transaction would be approved."

The director asking the tough questions was Donald Perkins, former chairman of the Jewel food store company, who insisted that outside directors hire their own lawyer to help protect them against potential shareholder lawsuits. That irritated Levin, who seemed to feel that the outside directors were exhaustively scrutinizing his presentation of the facts, according to a board member. The biggest issue for Perkins was the uncertain influence of cable king John Malone, whose 21% holding in Turner Broadcasting would be converted via a complex structure to a nearly 9% stake in Time Warner. The discussions went on over three days, at times breaking into separate groups of inside and independent directors to discuss the minutiae of power and control. At the end, all 15 directors murmured either "aye" or "yes." Then, with little ceremony, they adjourned. Says Luce: "We had nothing further to say to each other."

The Turner Broadcasting board meeting, across town in the offices of the company's law firm, Skadden, Arps, Slate, Meagher & Flom, was anything but calm. "It was full of drama," says Robert Shaye, chairman of New Line Cinema and a member of the board. "The kind of stuff," he adds, "that good boardroom TV movies are made of." At one point, Brian Roberts of Comcast Corp. and Timothy Neher of Continental Cablevision, both directors of Turner with stakes in the company, walked out of the talks because they felt they didn't have the leverage to get the same kind of concessions in the deal as their competitor Malone. "After a lot of soul searching and caucusing, they determined that they were too conflicted to actually take part," says one of their colleagues. No, it was not true that they stormed out, says an executive who watched their departure, "but they weren't wasting any time in leaving."

At more than one point, Ted Turner made impassioned pleas to his board to keep the faith and vote positively on the deal. As the talks dragged on into Thursday night, gourmet Chinese food was served. But by 9 p.m. the directors needed a break. Reconvening at 7 a.m. on Friday, they finally moved to a vote after 8 a.m., little more than an hour before Wall Street opened for business. By a vote of 6 to 0 (nine abstained) the deal was approved. TBS would allow itself to be purchased by Time Warner. At that, Turner jumped up from his chair and exchanged high-fives with several directors, and the boardroom broke into spontaneous applause.

Once the news spread, so did a lot of other people. When the acquisition is complete, Time Warner will regain its rank as the world's largest media company, ahead of the newly combined Walt Disney and Capital Cities/ABC. "This is far and away the dream deal," boasts Levin, who called the merger with Turner "a sublime combination." The deal brings together a vast collection of brand names in Time Warner's movie, music and publishing divisions (including TIME magazine) and Turner's cable and TV news operations.

But the enterprise is fraught with peril. While the combined company will possess a legendary treasure trove, it also must deal with several crowned heads and princelings whose egos and territorial rights must be either respected or dealt with before they can cause trouble. The very size of the venture is likely to focus the regulatory eye of government on the transaction. And many wonder whether the growth Levin and Turner promised from the combined companies' assets can really be achieved.

The first immediate product of the merger was the spectacle of the irrepressible Turner at play on a larger, more conservative stage. Standing in the glare of TV lights, he conceded that the price of Time Warner stock had been languishing. "Just because you're flat for a while doesn't mean that you can't take off," he retorted. "I mean, look at the shuttle program. Every now and then one blows up. But they keep on going, Bubba. We might have a bad year or two. But overall it's going to be up and away, like Superman."

The obstacles will require some bounding over. Levin has incurred the legal wrath of financial partner U S West. The Colorado-based Baby Bell, which owns a 25.5% stake in Time Warner's film and cable holdings, filed a lawsuit in Delaware chancery court last week to block the merger. The phone company, which paid $2.5 billion for its partnership interest in 1993, has for months been in stalled talks with Time Warner, which wants to restructure the terms in order to split the cable from the content companies. U S West claims it has veto power over the merger with Turner, a position that Levin dismissed last week as groundless. In a flash of irritation, the Time Warner chairman declared, "Like the weather in Denver, the negotiations [with U S West] have gotten a little frosty."

Other potential opponents include Washington regulators. Consumers Union said it would ask federal regulators to review the deal because it could raise cable prices and restrict programming. Officials at the Justice Department and Federal Communications Commission are likely to scrutinize Malone's stake in Time Warner; as president of Tele-Communications Inc., he already controls the No. 1 operator of cable TV systems in the country; Time Warner's cable unit ranks as No. 2.

And then there are the internal power struggles. A concerned director says the internecine bickering at Time Warner is already turning the company into "a case of trophies without a team on the field." The executive most dislocated by the emerging new power structure is Michael Fuchs, the head of HBO and Warner Music, who is credited with helping defuse the furor over gangsta-rap lyrics that besieged the company earlier this year. Last week Levin indicated that Turner, who will become Time Warner's vice chairman, will also assume responsibility for overseeing HBO.

Levin, who has eschewed the old buzz word "synergy" for a new one, "teamwork," also indicated that he would have no patience for prima donnas. And Fuchs had been acting like one lately, leaking to the press his unhappiness with any potential loss of turf in the new company. Fuchs' public petulance during the negotiation of the deal became such a problem that Levin took him to lunch during the week after Labor Day and told Fuchs to start talking the company line or get out. At a separate meeting with board members, Levin told them that if the Turner merger had not been the main topic on the agenda this week, he would have wanted to discuss with them what to do about Fuchs.

To make the merger work, Levin says he has adopted a new management philosophy that he hopes will bring greater cooperation among the princes of his realm. Says he: "With Time and Warner, I thought we'd get more mileage out of running businesses separately. But with the Turner transaction, things have changed dramatically. We'll make things happen together. Ted didn't win the America's Cup without being a team player." Turner, whose personal fortune is estimated at $1.7 billion, will be handsomely rewarded by his new employer. In addition to receiving options for 1 million shares of Time Warner stock when the deal closes, he will receive the same base pay as Levin gets, plus an amount equal to 90% of the chairman's annual bonus. (Levin earned $1.05 million in salary and $4 million as a bonus last year.)

Levin's relationship with Captain Outrageous has improved since 1985. At that time, Turner's grab for the MGM film library left him desperately short of cash. To the rescue rode Malone's TCI and Time Inc. (which later merged with Warner to form the current company). The stakes Turner gave them in return for the bailout, however--18% for Time Warner and 21% for TCI--left him beholden to the companies and unable to make major moves without their consent. When Levin vetoed a Turner plan to acquire NBC last year, Turner publicly complained that Time Warner's treatment of him was the equivalent of female genital mutilation.

Nevertheless, both Time Warner and Turner have talked intermittently for years about a closer alliance that would bring together such brand names as HBO and CNN. In an interview last week, Turner disclosed that he himself had initiated merger talks with Levin several years ago, only to have them spurned. "I do it every five years," Turner said. "I take him the proposal to merge, but he wasn't interested then." Responds Levin: "Circumstances were different, and philosophically we were different." Levin even considered selling some or all of Time Warner's interest in Turner Broadcasting to help pay down Time Warner's $15 billion in debt. Levin wanted between $1.8 billion and $2 billion for the stake, but when Turner and Malone proposed a smaller amount that did not satisfy Levin, a frustrated Turner resorted to goading Levin about the prospect of CNN's falling into the hands of a powerful competitor. "Don't you care where CNN goes?" he is said to have asked.

Late last summer, the threat was becoming real. GE chairman Welch met with Turner at Atlanta's Ritz Carlton Buckhead Hotel to propose a deal. He laid out his proposal for buying TBS and concentrated his pitch on the combination of NBC with CNN. Welch predicted consolidation would save the companies $200 million, in part by laying off hundreds of people. Turner told colleagues he hated the idea, largely because shrinkage and layoffs are against his nature.

At about the same time, Levin was deciding that the stake in Turner Broadcasting was too precious to part with and that what he really wanted was Turner's whole company. Levin popped the question on Aug. 19 after inviting himself and his wife Barbara to lunch at Turner and Jane Fonda's Montana ranch, saying only that he had a proposition to discuss. "Once he told me what he had in mind," Turner remembers, "I was shocked, and it took a while to sink in, but basically it didn't take me long. I accepted on the spot." Adds Levin: "When he gave me a hug, I knew things were going to be different around here."

Levin's opening gambit led to five weeks of shuttle diplomacy involving Turner and Malone. "What took time was the technical requirements to unravel old agreements and put a new one in place," Levin says. News reports portrayed Malone as stringing out the deal with endless demands. The TCI chairman dismisses those stories as "bullshit." The days and weeks stretched out, he says, only because all sides were consumed with the humdrum intricacies of meshing operations, not because of any real sore points.

In the midst of all this, a media mogul was feeling left out. Turner told friends that News Corp. chairman Rupert Murdoch sent an offer to Turner through Michael Milken, the former junk-bond king and convicted felon. Murdoch's proposal was that Turner and Murdoch would merge and share power. Turner would keep control of all TBS enterprises and take control of Fox TV and the Fox studio. Murdoch would run all his print-journalism properties and other chunks of his empire. The price at least matched Time Warner's offer, and when Turner resisted, Murdoch told him to name his own conditions. Turner finally turned down the offer because of Murdoch's mania for control. Given Murdoch's nature, says a source close to the negotiations, "[Ted] thought he would be swallowed whole." (Through a spokesman, Murdoch denies he made such an offer via Milken but acknowledges telling Malone, "If the deal falls through, I'm in the wings.")

Yet it was Malone who created the most anxiety among Time Warner board members, primarily because of the idea that he might try to launch a takeover attempt from within by teaming up with Turner and another major stockholder, Edgar Bronfman Jr. of Seagram, who will control about 8% of the merged company. But Levin reassured the directors, at one point comparing Malone with Warren Buffett, the billionaire investor whose huge holdings of companies such as the Washington Post have made them raider proof. By the time the deal was done, directors seemed more sanguine about Malone's role. Says director J. Richard Munro, a former Time Inc. CEO: "I hope John will not be a passive investor. In an industry of very smart folks, he's proved himself to be the smartest. Over the past 20 years, he has more than often beaten us to the punch and done things we wish we had done. On top of that, he's a very decent guy."

In the six to nine months it may take to complete the deal, Time Warner will face the difficult task of structuring its parts so that they work together. There was some initial nervousness about redundancies and possible job losses. But Levin indicated that cost cutting was not his primary objective, arguing that the merger will instead speed the growth of all of Time Warner's businesses.

One of the most tantalizing prospects involves meshing the online capabilities of Time Warner and Turner. Another is the pooling of already dominant brands. In cartoons, for example, Turner's library of The Flintstones programs and other Hanna-Barbera hits can run alongside Time Warner's Bugs Bunny and Friends on Turner's 24-hour Cartoon Network. Also united will be Turner's library of more than 3,000 films (including Casablanca and Gone With the Wind) with Time Warner's stable of 3,000--all of which can be shown on the Turner channels.

And then there are the Time Warner stockholders. Shares of Time Warner have dropped some 6% since the merger talks became known, as investors worried that the 178 million shares that Time Warner plans to issue for Turner Broadcasting will dilute the value of their holdings. But because the merger will bring Time Warner $2.8 billion in new revenues and $600 million in fresh cash flow, some analysts view the deal as a net plus and expect the new company's ratio of debt to cash flow to improve. That view seemed to prevail on Wall Street, where Time Warner closed 1/8 higher last Friday, at $40 5/8, after the merger was announced.

One shareholder who expresses little worry is Malone; he insists the benefits of the merger could push the price of Time Warner to $80 a share. He claims to be patient about that, though skeptics think he could become restless and demanding if the trend does not materialize. Turner last week was entertaining no such second thoughts. "Now I'm Ted Time Warner," he declared. "Hey, let's get the cash flow up, the stock price up, and live together happily ever after." Wall Street, however, will have the final word.

--Reported by Suneel Ratan/Washington, Barbara Rudolph/New York and Richard Woodbury/Denver

With reporting by SUNEEL RATAN/WASHINGTON, BARBARA RUDOLPH/NEW YORK AND RICHARD WOODBURY/DENVER