'93 battle for the studio set off tremors that still reverberate
Just over 13 years ago, when Viacom’s Sumner Redstone thought his agonizing struggle to buy Paramount was done, he sent Herb Allen a $1 million check to thank the banker for his early efforts.
The studio was in Redstone’s grasp, a prize that would catapult him to the status of media mogul along with Rupert Murdoch, Ted Turner and John Malone, among others.
Then the check came back. Several days later, a Wall Street Journal story delivered the bombshell. Allen was helping Barry Diller weigh a bid of his own for the studio.
What transpired in the next few months would be a legendary battle for control of Paramount, one that Redstone would eventually win but that would have ramifications in the entertainment business and its players for years to come.
And a look back at the deal also provides clues as to why Redstone recently anointed Philippe Dauman to lead Viacom, his surprise pick to replace Tom Freston.
A soft-spoken lawyer, Dauman became Redstone’s point man in the 1993 takeover battle, one Redstone was so anxious to win that he said it would take a “nuclear attack” to prevent him from acquiring the company. Paramount was Dauman’s education and it made his career. It was early in the thorny negotiations with Paramount chief Martin Davis that Dauman was brought inhouse as Viacom’s general counsel. It was he who successfully orchestrated the dramatic bidding war that evolved against Diller.
“Without Philippe, Sumner would not own Paramount,” says Robert Greenhill, Viacom’s lead banker on the deal, then at Morgan Stanley. He knows Dauman well: Working on the deal, “We lived together for weeks,” he says.
The Paramount war is a big reason Redstone phoned Dauman 13 years later and asked him to run Viacom, to shatter an impression that the company is not tough enough and can’t get deals done. Redstone feels Viacom needs a driving force to muster resources, assess risk and forge alliances.
These were skills Dauman honed during that battle — a cosmic one that touched almost every aspect of the entertainment world.
- It forced other media companies to take note, ushering in a wave of media mergers in the mid-1990s including Time Warner’s acquisition of Turner Broadcasting and Walt Disney’s purchase of CapCities/ABC.
- When it was over, Diller never did build his media empire. Neither did his partners in battle, Comcast and John Malone’s Liberty Media. All went in other directions. The Philadelphia cabler abandoned attempts to make a grand foray into entertainment until its 2004 bid to acquire Walt Disney Co., also unsuccessful. Malone’s Liberty Media recently acquired a small studio, IDT Entertainment, and is talking about a major push into showbiz.
- Telephone companies emerged as key players — derisively labeled “pole climbers” by Hollywood. They lined up, waving cash to help finance the deal, for either camp. BellSouth gave Diller a bucket of cash. Nynex — now Verizon — poured money into Redstone’s warchest and its chair, Ivan Seidenberg, remained on Viacom’s board for years. Although he stepped down recently, the telco, along with other phone companies, has once again started moving into video programming after initial ventures fizzled.
- A strategically timed lawsuit by Redstone against Malone, who at the time owned the nation’s biggest cable operator, TCI, forced Malone to withdraw from the fray. In what turned out to be a landmark case, Redstone claimed abuse of power by TCI and got the ear of regulators in D.C. The FTC decreed TCI couldn’t own Paramount.
- The Paramount deal pushed Viacom to buy Blockbuster. It needed the video chain’s hefty cash flow to finance the purchase as the bidding war with Diller had jacked up the price by about $2 billion. Blockbuster made Viacom really big and turned Hollywood studios into customers. A few years later, Redstone, Dauman, then-deputy chairman Tom Dooley and Blockbuster chairman John Antioco developed the revenue-sharing formula that transformed the video biz.
At least initially, the deal itself was very simple. Redstone and Davis announced a friendly deal on Sept. 12, 1993. Viacom was buying Paramount in a cash-and-stock transaction worth $69.14 a share, or $8.2 billion.
Four days later, Sumner got the shock of his life.
His friend Diller, then chairman of QVC, backed by Comcast and Malone, offered $80 a share, or $9.5 billion. That upped the ante considerably. Viacom’s stock had slipped since it announced the acquisition, so its original offer was now worth only $7.5 billion. It needed another $2 billion. (For years, Redstone called Diller “my $2 billion ex-friend”).
Telco Nynex came to the rescue with $1.5 billion. Blockbuster offered $600 million (before it was ultimately acquired as part of the deal).
In a victory for the Viacom camp, Malone threw in the towel, pressured by Redstone’s lawsuit and regulators.
But Cox Enterprises and Advance Publications joined Diller with $500 million each. And BellSouth arrived with $1.5 billion on the promise of a joint venture with QVC to develop interactive programming.
Paramount clearly favored Viacom, its original partner — and one that had promised Davis would keep his job.
As a result, Diller’s group felt its bid wasn’t being given proper consideration. So it launched a public tender offer — meaning it went over management’s head directly to shareholders — and also sued Viacom and Paramount in Delaware Chancery Court.
Viacom raised its offer to $85 a share, or $10.1 billion.
QVC boosted its bid to $90 a share. Then to $92. Paramount rejected QVC’s offer, calling Viacom a better fit. However, the Chancery Court stepped in, ruling that Paramount had to take the highest price — QVC’s. It did. That was the low point for Viacom. It needed even more cash.
Viacom inked the deal to buy Blockbuster hours before final bids were due. Redstone offered $105 a share in cash. Then $107.
Finally, in a key initiative driven by Dauman, the Viacom camp came up with a risky strategy. It called on a little-used type of security called a “contingent value right,” or CVR, which promised a big payout to Paramount shareholders if the shares of the merged company were trading below a certain threshold three years from the day the deal closed. That kind of security probably clinched the deal. But it risked a massive financial hit down the road. It was even scarier because Viacom shares were pretty low at the time.
In the end, the stock cooperated.
When the CVR was announced, it “basically saved the day,” says Greenhill — even as Diller was exhorting investors on a conference call, “You can’t give this company to that old man.”
“In hindsight, people forget the risk. They just remember that everything worked out,” Greenhill says. “Sumner trusted Philippe.”
The day bids closed, “I can remember standing with Philippe and Tom and watching the tape with bated breath to see if Barry would take the same risk. Would he do the same thing we did? And we breathed a sigh of relief. He didn’t. That was a critical moment in the life of Viacom,” Redstone tells Variety. “Today (Dauman) remains my principal adviser on all business matters. If I have an issue or question, I will generally consult Philippe and no one else.”
When Viacom prevailed, Diller’s famous comment was, “They won. We lost. Next.”
Dauman told Variety recently that, despite rumors Viacom would try to shed the studio, it remains very much a part of the Viacom fold.
“People were afraid I was going to sell Paramount. I gave my blood, sweat and tears for Paramount. There is no way I would sell it.”
Dauman, 52, was born in Manhattan of parents who’d just moved from France. He attended the Lycee Francais, then went to college at Yale and Columbia Law School. He’s fluent in French and lived in Paris for several years.
Before joining Viacom in 1993 as senior VP and general counsel, he was a partner at New York law firm Shearman & Sterling, where he served as Viacom’s principal outside counsel. He worked in corporate and securities law and w
as a senior member of the firm’s mergers and acquisitions practice.
Fresh off of helping Redstone fight his first big corporate battle, to acquire Viacom, Dauman joined Viacom’s board in 1987. Back then, Redstone owned a chain of theaters and was a large Viacom shareholder. But he balked when Viacom management under Terry Elkes tried, he thought, to buy the company out on the cheap.
Redstone made his own bid and he won in the end, but the fight was nearly as bitter as the one would be for Par.
“Philippe was quick, smart, insightful,” Redstone wrote in his 2001 autobiography “A Passion to Win.” “He spoke easily with a sharp intelligence and an understated wit. I evaluate people on their ability, judgment and confidence and he topped the list of all three counts. Philippe and I hit it off instantly.”
While lacking the dramatic presence of other moguls, Dauman is intensely competitive and decisive, people close to him say. Those who worked on the Par deal with him also say he’s extremely calm under pressure.
Dauman has described his strengths as the ability to execute, to keep an eye on the old and the new, to allocate capital efficiently and to make sure the right people are in the right jobs. Wall Streeters see him and Dooley as a good “transactional” team — practiced in pursuing and closing deals.
About a year after Viacom won Paramount, Redstone fired his CEO, Frank Biondi, and named Dauman and Dooley deputy chairmen. They held the positions until 2000, a period when the stock flourished and one that Redstone calls Viacom’s golden age.
Fast forward to Sept. 5, 2006.
From Hollywood to Wall Street, the only thing more surreal than the abrupt firing of Viacom CEO Tom Freston may have been the fact that the longtime MTV chief was being supplanted by a guy known to many as Redstone’s personal attorney. It had been reported during his deputy chairman days that Dauman was the executor of Redstone’s estate and would become chairman for a three-year period if Redstone died.
“That’s an important position emotionally and an indicator of the depth of the relationship,” one Wall Streeter says.
The name was certainly familiar. Everyone remembered that Dauman and Dooley had been pushed out in 2000 when Viacom and CBS merged, to make room for Mel Karmazin. Both left with severance packages said to be north of $60 million.
Dauman remained on Viacom’s board, and he and Dooley launched a small financial firm called DND Capital Partners. Only three investments have been make public. Hip wireless company Amp’d Mobile is a winner. The other two, the Tennis Channel and Latino-themed network Si TV, are less so. As for the rest, the firm is private and does not have to reveal its portfolio.
But the general feeling is that Dauman and Dooley “didn’t leave a very big footprint in relation to the wider world of venture capital and private equity,” says one Wall Streeter. “But they didn’t have to,” he adds, given their massive payouts.
At Viacom, much happened in those five years. Karmazin was pushed out. The company split in half. Freston was as well liked and highly respected as ever. Redstone’s surprise firing of Freston and his talk of the golden era of Viacom under Dauman and Dooley was greeted with a collective, “Huh?”
Dooley has returned as Dauman’s No. 2, or chief administrative officer. Earlier this month, Dooley added the title of chief financial officer when Mike Dolan stepped down — the only other casualty of the new regime so far.
Since the duo never carried a CEO title, some questioned their operating experience. But they insist, as do executives who worked under them, that they were intimately involved in Viacom’s day-to-day operations, that they basically split the company between them and ran the businesses in collaboration with Redstone.
“Those guys had the kind of relationship where if you talked to one of them, you talked to all of them. They kept very close communication,” says Blockbuster’s Antioco, who joined the company in 1997. Dauman and Dooley interviewed him first. “I have always maintained a lot of respect for Philippe. He is totally trustworthy, direct but diplomatic, strategic and long-term-focused,” Antioco says.
“I’m not really surprised at all to see him (Philippe) back,” he adds. “I am as surprised as anyone to see it in conjunction with Freston’s removal. Nobody saw that coming.”
Former Paramount chief Jonathan Dolgen, whom Redstone hired in 1994, called Dauman and Dooley “smart guys. They understand the business, have good relations with Redstone and solid transactional skills.”
Antioco figures Freston’s departure and Dauman’s arrival were unrelated. While some Freston friends wonder, given Dauman’s closeness with Redstone, when Dauman knew about the exec shuffle, people close to Dauman insist he was as surprised as anyone when he got the call. They say he straightaway phoned Dooley, who thought he was joking.
Not that Dauman wasn’t thrilled.
Wall Streeters, who gave him a tepid welcome at first, are starting to agree. They liked the way he handled things when he first came in, reaching out quickly to top executives, calming the waters.
“He called around and pressed all the right buttons during the transition,” says one fund manager. “He reassured (Viacom execs and investors) that everything would be fine and he would be attentive to their needs.”
Some on the inside are warming to Dauman as well. “I wanted not to like them, to think they were mean and buttoned-up. But they’re not,” says one staffer.
One Wall Streeter sums up: “Philippe is a very capable fellow. Very astute. He was able to stay close to Sumner Redstone all those years without annoying him.
“That’s the only qualification you need. It does not mean you’re imbued with extraordinary management talent. (But) so far, there’s every indication that he did the right things, so let’s give him a chance.”