You Can Be a Stock Market Genius by Joel Greenblatt
Author:Joel Greenblatt [Greenblatt, Joel]
Language: eng
Format: epub, mobi
ISBN: 9781451628067
Publisher: Touchstone
Published: 2010-11-02T07:00:00+00:00
CASE STUDY
PARAMOUNT COMMUNICATION/
VIACOM
Well, as long as everyone has a hula skirt on, let’s take a look at a knock-down drag-out takeover fight that hit the front pages for nearly six months. Luckily, the fight ended in a multibillion-dollar sea of merger securities. Despite the huge amount of press the battle for Paramount Communications received, most investors missed the biggest opportunity to profit from this highly publicized situation.
In September 1993, Viacom agreed to purchase Paramount Communications for stock and cash. Viacom, a media conglomerate controlled by Sumner Redstone, was the owner of cable services (like MTV, Nickelodeon, and Showtime), cable systems, broadcast stations, and television distribution and production divisions. In what appeared to most analysts to be a good fit with Viacom, a combination with Paramount would contribute a leading producer and distributor of motion picture and television programming, a book publisher (Simon & Schuster), more cable channels, more television stations, and two sports teams. Particularly attractive to Viacom was Paramount’s extensive library of past movie and television hits as well as access to the future output of Paramount’s film and television studios.
Also trying to expand his media empire, Barry Diller, originator of the Fox television network and chairman of the QVC home shopping service, launched a competing bid for Paramount just one week after the Viacom announcement. After a five-month bidding war, Viacom finally prevailed, but not before significantly raising and changing the nature of its initial bid. During this period, in an effort to increase the strength of its offer, Viacom announced a merger with Block-buster Entertainment. That merger was scheduled to close shortly after the successful acquisition of Paramount. Because of the high-profile nature of all the companies involved, and the high-powered machinations of a slew of lawyers and investment bankers, the battle made interesting reading until a winner was determined in February 1994. At that time Viacom was able to purchase, for cash, 50.1 percent of Paramount’s shares outstanding. Although the contest was over and the Paramount story faded from the headlines, the opportunity to profit from the merger had only begun.
The closing of the deal would not take place until after a Paramount shareholder meeting in July 1994. Since Viacom had purchased 50.1 percent of Paramount in February, the vote to approve the merger was a mere formality. What wasn’t so formal was the method of payment for the remaining 49.9 percent of Paramount. While cash was the sole form of payment for purchasing the first half of Paramount’s stock, practically everything except cash, was the form of payment for the second half of the merger—known as the back end of the merger. Mentioned but certainly not focused on in The Wall Street Journal the back-end payment for each share of Paramount consisted of (1) Viacom common stock, (2) exchangeable subordinated debentures of Viacom, (3) securities known as contingent value rights (one for each share of Viacom common stock received in the merger), (4) three-year warrants to purchase Viacom common stock at $60 per share, and (5) five-year warrants to purchase Viacom common stock at $70 per share.
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