Book Excerpt: The deal from hell

May 28, 2001  •  Post A Comment

On September 20, 1993, a package arrived for me by messenger at the Carlyle. In a handwritten note, Barry Diller expressed the hope that the
enclosed copy of a letter being delivered simultaneously to Paramount’s board of directors wouldn’t affect our friendship. The letter contained QVC’s offer to acquire Paramount.
I was more than a little upset with Diller. Shortly after I had closed the deal with Davis, Barry and I sat in my office and I had told him, “This is not a casewhere you and I are competing. Davis and I have a deal. It’s a done deal and I can’t see you coming at it.”
Barry and I had been friends for a long time, we had consulted each other on various matters, [and] I had intervened on his behalf with Malone. But sitting in my office that day, he had been very careful about what he said. His face gave away nothing, but when he left I was convinced he would come after us. Had I been in his position, I would not have done the same. If Paramount had been available, if there were no deal in place, then I would have felt his offer was totally justified. But we had a signed deal and he was basically trying to break up a contract. He clearly had a different point of view and I questioned the honor, or lack thereof, of his position. Barry was supposed to be my friend.
On September 21, QVC Network, Inc., backed by as-yet unwritten commitments from its two principal shareholders, Malone’s Liberty Media Corporation (a spin-off from TCI) and Brian Roberts’s Comcast Corporation, laid on the table its bid of $80 a share-or $9.5 billion-for Paramount. Their per-share offer consisted of $30 cash and 0.893 share of QVC stock. The offer also stated that QVC’s financial advisors, Allen & Company, had assured QVC that additional capital would be readily available to complete the transaction. Our offer had put Paramount “in play.” As noted fund manager Mario Gabelli said, “Let the auction begin!”
I was incensed. This was a betrayal of the highest order. The acquisition of Paramount was critical to the fulfillment of my original vision for Viacom; there was no other way for us to get there. And I was confident we would get there.
But my confidence notwithstanding, Viacom stock had been in decline and shares that nine days earlier had been worth $69.10 were now at $63.175; our $8.2 billion offer was now worth $7.5 billion. Diller and Malone were outbidding us by $2 billion.
Fund managers Mario Gabelli and Larry Haverty, who held large stakes in Paramount, Viacom, QVC, Comcast and TCI, were loyal to the bottom line. “I’m neutral as to whether Redstone or Diller is better for the long-term interests of shareholders,” Haverty said, “though Diller does have the advantage of being twenty years younger.” I sputtered when I read that. Was that a reason to favor one company over another in a gigantic merger? Because its leader was younger? And not necessarily healthier or smarter.
How could any investor, particularly one in the entertainment industry, prefer QVC to Viacom? QVC is a shopping channel. Paramount and Viacom would be a true merger of equals; Paramount and QVC would be a travesty. Which was in the better position to grow the company, maximize its opportunities and make it prosper: Viacom, with the most valuable and dominant networks in the world plus cable systems and media outlets, or QVC, with its twenty-four-hour rummage sale? Cubic zirconia and stainless steel cookware, or Nickelodeon and MTV? You choose.
But no one in our industry is better at self-promotion than Barry Diller-not to diminish in any way his considerable ability. He had success heading both the Paramount and Fox studios and creating the Fox television network, and he is the best manager of press I have ever known, giving reporters access and asides and personality in the service of whatever project he is involved with.
It was all sizzle; there was no substance. QVC had nothing in place-except Diller. And the only thing Diller was bringing to the table, his greatest asset, was himself.
We needed to respond, but what was that response to be? The melding of Paramount and Viacom was so obviously in the stockholders’ best interest, the potential for growth so staggering, that I didn’t feel the need to jump in and raise our bid immediately.
Nevertheless, money was a problem. While QVC stock was skyrocketing and the Diller-Malone bid was now worth $9.9 billion total and $83.58 a share, ours rebounded slightly but remained at only $7.5 billion and $63.37. To counter, we pointed out that QVC’s offer was as yet unfinanced, and that an offer without a financing commitment was really not an offer at all, certainly not one you could depend on. Therefore, we told the press, we didn’t feel the need to raise our bid.
If Barry Diller was point man in the battle against us, John Malone controlled the artillery. We wanted them both out of the way. But we had a specially good reason to rid ourselves of Malone; he was trying to destroy us.
Malone had the power to cause ruin and recently he had been using that power to try to crush Showtime/The Movie Channel.
The Showtime/TMC contract with TCI had lapsed earlier in the year, and rather than negotiate to renew, Malone had stalled and attempted to force a merger between Showtime and the Encore channel, which he owned, on particularly unfavorable terms. We, of course, had resisted. Malone, however, was completely willing to squeeze us, and he set about replacing our channel with Encore on his systems. There was no subtlety to his actions. If he persisted, if we were prevented access to TCI’s subscribers, Showtime would be largely without viewers and would soon die. Knowing that, he hardened his bargaining position. It was the essence of monopoly.
Malone had been very effective in expanding his monopoly power. He had used the same tactics time and again throughout the industry. And there was no end in sight. If a man like Malone, who had exceptionally keen predatory instincts, could get control of enormous software and programming capabilities at the same time he controlled access, that power would grow wildly. If he owned Paramount and set his sights on Columbia, who knows if that studio or others in his way would have continued to see the light of day.
Many programmers felt the way I did-that Malone’s behavior was unconscionable-but not one of them would ever dare to file a lawsuit against him. The reason was obvious. The very power he wielded instilled fear. What if he knocked them off the system? He had a grip on the throat of every cable programmer. But we were going to lose Showtime unless we acted.
As often as I have been accused of doing the contrary, I never get involved in litigation unless the issue is extremely important and unless we are right. Acquiring Paramount was extremely important, and there was no question in my mind that Malone’s behavior violated basic antitrust laws and was prototypically monopolistic. We had been studying the legal aspects of a potential case against him. Was the timing of this lawsuit accelerated by the Paramount acquisition?
The complaint began, “In the American cable industry, one man has, over the last several years, seized monopoly power. Using bully-boy tactics and strong-arming of competitors, suppliers and customers, that man has inflicted antitrust injury on Viacom and virtually every American consumer of cable services and technologies. That man is John C. Malone.”
The writing was flowery for a law document. We planned to disseminate it to the press and I wanted to get my point across.
When word got out among the Viacom managers that we were planning to file a lawsuit against Malone, they asked for the opportunity to express their concerns to me before we took such drastic action. We called a meeting and assembled in a conference room near my office. The divisional executives were uniformly opposed to suing Malone. I understood. Their businesses-MTV, VH1, Nickelodeon, Nick at Night-were doing well. In fact, because our networks were so strong, these businesses were the building blocks on which TCI constructed its progra
mming, and they were being positioned respectfully by Malone, not torn down. Furthermore, cable operators ran the cable world like a tight-knit club and that club did not like being involved in litigation; it put all of them under scrutiny. Our executives were afraid of retaliation. One by one they lined up to ask, “How can you file a lawsuit against our biggest customer?” Even Tony Cox, who as CEO of Showtime was being severely victimized, was thinking about the greater good of the company and was nervous about the effect such a suit would have on the rest of Viacom. “We are worried that they are going to kill us,” I was told.
I cut them off quickly. “Look, I understand your concerns, but let me give you the reasons we have to do this. The future of our business depends on it.” If Viacom’s most powerful executives were reluctant to oppose Malone, other less successful programmers had to be living in fear. I laid out the facts. “We have a deal with Paramount and Barry Diller comes after it. I would never try to bust up somebody else’s deal. I’ve been his friend, and now he’s coming after our deal and John Malone is coming with him. Malone controls cable. We had a contract with TCI and now he won’t give us distribution. He wants to do a joint venture and steal Showtime. If he can do that with one channel, he can do it with all of them.”
Viacom’s executives looked at me, stunned.
“If we don’t stop it here, if we don’t fight back now, what you’re all afraid of is truly going to happen. It is going to happen! The only way it’s not going to happen is by filing the lawsuit that you fear! We can’t not file a lawsuit!”
We filed suit in federal court charging John Malone and TCI, along with several related companies, with antitrust violations in an attempt to monopolize the cable television market.