Paramount Communications

Accounting

Paramount Communications

What do you think of Viacom's tactics in making the initial offer to Paramount? The price? The deal structure? The lock-up option? The termination fee? What did the market think of the initial offer?

Viacom's initial offer for a friendly takeover bid of Paramount Communications was largely an exchange of Paramount shares for Viacom shares with some cash thrown in or good measure. The initial bid was valued at $69.14 per share based on current closing stock price. As part of the deal, Paramount granted Viacom the option to purchase 23.7 million Paramount shares at $69.14 per share. This lock-up option gave Viacom the option to purchase a very valuable portion of Paramount's company at a very attractive price, but would lock up these shares so that they could not be resold without Paramount's permission. The termination fee in this deal was set at $100 million. This meant that if Paramount terminated the agreement because of a competing bid, or Paramount's shareholders did not approve the transaction or if Paramount's Board recommended a competing bid, then they would pay Viacom the fee. In other words Paramount shareholders would receive about $9.10 in cash and Viacom stock valued at $60.04 per share, with no protection against a decline in the price of Viacom's stock. The structure of this deal seemed to be beneficial to both sides as both boards met and approved the proposition. The initial reaction of the market to the deal was that Paramount's stock soared and Viacom's stock took a beating.

2. Why did Viacom change its bid on October 21?

Viacom changed its bid on October 21st, because of an announcement by QVC earlier in the day. QVC publicly announced that it would begin a tender offer for 51% of the shares of Paramount Common stock at $80 per share and, if successful, would propose a second-step merger in which the remaining shares would be converted into the right to received 1.42857 shares of QVC common stock. This offer was dependent on the cancellation of both the poison pill and the lock-up option. Announcing a tender offer without actually making the offer turned out to be a tactical mistake for QVC. It allowed Viacom to make a tender offer of its own first and, since federal law requires that tender offers remain open for twenty business days. Unless Viacom's offer was much lower than QVC's, Paramount's shareholders were likely to tender their shares into Viacom's offer in order to avoid receiving stock of uncertain value in the back end merger.

3. What do you think of the behavior of Paramount's board before the Delaware court decisions? What do you think of the auction procedure devised by Paramount's board after the Delaware court decisions?

Paramount's board has initially agreed to the deal with Viacom as a friendly takeover, meaning that they thought that Viacom was on the same page that they were and that it would have been beneficial for all parties involved. After QVC came on the scene the board backpedaled when they said that they would potentially consider a QVC offer. They seemed to be wavering as to what they really wanted to do. They said they would consider an offer from QVC and asked them for a lot of information, but failed to ever enter into negotiations with them. I think they really wanted to negotiate with QVC because their offer was better but they weren't sure about the validity of the offer from QVC because they were sure if they could get it financed and they didn't really want to force the termination fee and lock-up options that were present in the Viacom deal.

The purpose of the law suit was to prevent Paramount from completing the Viacom deal and lift the hurdles Paramount had placed in QVC's way: the poison pill, the stock option, and the termination fee. After the decision of the Delaware Chancery Court that blocked the acquisition of Paramount by Viacom, and the ruling by the Delaware Supreme Court that said that they must seek the best value available to shareholders, they didn't seem to have much choice but to do what they did with proceeding with an auction. The Supreme Court's decision required Paramount to abandon the deal with Viacom and start over. The court did not though instruct the board on how to go about the sale. An auction would give them the opportunity to consider QVC's bid as the court had said they had to do. Paramount finally realized that they could no longer favor Viacom in a deal. A situation that had started out as a friendly takeover bid had sure bloomed into a very ugly situation and this was seen as a graceful solution to a very political problem.

The auction called for any interested bidder to structure its bid as a tender offer followed by a merger and submit the bid to the Paramount board. The board would then endorse one bid and all bidders would start their respective tender offers. Each bidder would be allowed to sweeten its bid, resulting in a ten-day extension for all tender offers. The first bidder to receive 51% of the shares would be the winner and would have to extend its offer for ten days to allow shareholders who tendered into the losing bid to withdraw their shares and resubmit them to the winner. The latter requirement was designed to discourage bidders from pressuring shareholders by front-loading the tender offer while keeping the consideration in the backend merger low.

Although Paramount would endorse one the two bids that it received during the auction, it would ultimately be up to the shareholders to decide who the winner would be. This meant that the bids that were submitted would most likely be targeted towards the shareholders in order to assure their votes.

4. 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 their bids change as the likelihood of their winning changes.

During the time frame of September through the end of January, Paramount's stock increased. It started at 55.875 and ended at 79.625, with a high of 83 during that period, which occurred after QVC's second offer. In looking at the stock it went up after each new offer, no matter who the offer was from. It did not seem to make any difference to the shareholders who was making offer, just that somebody was.

Viacom stock during this time period significantly dropped in value. The Viacom Class A stock started at 66.125 per share and ended at 39 per share. The Viacom Class B stock started at 59.250 and dropped to 35.250. If you look at the trends it seems that after every Viacom offer the stock either went down or stayed the same. It also dropped after both Delaware court rulings. From this you can conclude that the stockholders where not overly excited about the offers that Viacom was making in regards to Paramount.

QVC stock took at hit during this time period as well. It had started out at 63 and fell to 44. After the first QVC offer the stock stayed the same, it didn't go up or down. After the second QVC offer it went down slightly. After the third QVC offer the stock went up every so slightly. It seems that the stockholders were really on the fence about the offers that QVC was making, since the stock wasn't moving much as at all, either up or down.

Overall, both Viacom and QVC took big hits over this entire situation, while Paramount realized good things from it. The Paramount stockholders were obviously in favor of some sort of deal, while the Viacom and QVC stockholders did not feel that any of the deals put forth were any good. In the end all the deals were overpriced and the stockholders were not quiet about showing that.

5. Why did Viacom's investment bankers recommend the CVRs? What do they add to the mix?

A Contingent Value Rights (CVR) is a type of option that is issued by the buyer of a company to the sellers. It spells out an event, which, if produced, lets the sellers acquire more shares in the target company. In this case it allowed Viacom after a year, to pay each CVR in cash or Viacom securities the difference between $48 and the average closing prices of Viacom Class B sock over each twenty trading days over the 60 days prior to the one year maturity, up to $12 per share. Viacom would offer a collar that would pay Paramount's shareholders extra cash if the value of the Viacom stock they received fell below certain thresholds within three years of the merger. Viacom wanted Paramount and the alternative of raising the bid at this point was too expensive. This optioned seemed like the best way to go at the time. The total value of the offer was $9.7 billion, which was lower than QVC's, but safer for Paramount shareholders. CVR's add to the mix a security blanket for the selling company and a big risk for the buying company.

6. Why did QVC change its final bid the way it did?

On January 21, Lazard Freres put forth that both the QVC and Viacom offers were fair, but that the Viacom offer was marginally better than the QVC offer. This information led QVC to change its final bid. They increased the price for 50.1% of Paramount's shares to $104 per share. It revised the Third QVC Second-Step Merger by providing for the exchange of a) 1.02361 shares of QVC Common Stock, b) .2386 shares of New QVC Merger Preferred Stock, and c) .32 ten-year warrants for each remaining Paramount share. QVC did this to try and make their offer more attractive than Viacom's offer. Basically QVC had increased the cash portion of its offer from $92 to $104 per share while reducing the stock portion to keep the total value unchanged and without matching Viacom's collar. Viacom also sweetened their securities portion of the deal while keeping the cash portion unchanged. Though the exact value of each offer was hard to ascertain it was estimated that both hovered above $10 billion. Both companies had seemed to loose site of price and where only concerned with winning.