Investors and arbitragers Monday dumped shares of Viacom and drove down the stock prices of Paramount, Blockbuster and rival bidder QVC. The selloff, showing Wall St.’s profound disappointment with the latest moves in the Par saga , came as the broader market soared, with the Dow up almost 45 points to another record high.

  • According to arbs, Viacom plummeted mainly because of its proposed $ 8.4 billion acquisition of Blockbuster. The company’s Class A shares sank $ 4.25 to close at $ 41.875; its Class B shares fell $ 3 to finish at $ 38. Viacom, which currently has about 124 million shares outstanding, will need about 184 million additional shares to purchase Blockbuster.

    “That’s a lot of shares looking for a home,” noted one arb. Moreover, investors are questioning the long-term merits of a Viacom-Blockbuster union. While Blockbuster’s $ 500 million in cash flow will bolster Viacom’s balance sheet in the short term and allow it to proceed in its hunt for Paramount, that cash flow — and its impact on earnings — looks less certain as pay-per-view grows as a threat to Blockbuster’s core homevideo business. “People are scratching their heads, wondering why they are doing this deal,” said one Wall Street veteran.

  • Paramount was down $ 1.875 to $ 77.375 because Viacom’s new offer is still valued less than QVC’s and may indicate that bidding for the company has gone as high as it’s going to go. “We really expected a more substantial bid from Viacom and theyjust didn’t deliver,” said an arb.

    Based on Monday’s stock drop, Viacom’s bid is now worth much less than the $ 79.23 blended value the company ascribed to it Friday on a conference call with analysts; traders put the value at about $ 77.84, or $ 9.2 billion.

  • Blockbuster dropped 37.5 cents to $ 27.875 due to the perception that chairman H. Wayne Huizenga sold the company at a discount. Viacom will acquire Blockbuster for just $ 31 a share. The company’s stock closed Friday (the day the deal was announced) at $ 28.25; it was trading at a 52-week high of $ 34.25 as recently as Nov. 30.

    Meanwhile, Blockbuster’s $ 1.25 billion investment in Viacom may lead to ratings downgrades on its debt. Both Moody’s and S&P placed Blockbuster’s debt under review for possible downgrade.

  • QVC Network slipped $ 1.375 to $ 39.25 because it now appears the company has a very good chance of succeeding in its pursuit of Paramount. “A buyer’s stock always drops,” noted an arb. Money managers who control huge blocks of Paramount, such as Gordon Crawford of Capital Guardian, say they still prefer the QVC offer over Viacom’s new bid; they are expected to tender their shares accordingly. Based on Monday’s close, QVC’s bid is now valued at about $ 83.70 a share, or $ 9.9 billion.

Wall Street will now turn its attention to the Paramount board of directors meeting scheduled for Wednesday. The board is expected to hand down a recommendation to shareholders about which way they should tender their shares.

QVC, which has argued Viacom’s revised offer should not have triggered a new round of bidding since it’s still valued less than QVC’s, yesterday extended its tender offer to Jan. 21 and said it will wait to see how Paramount’s board acts before deciding on further action.

As of midnight Friday, approximately 26.8 million shares of Par common stock had been tendered to QVC’s offer. Sources said the company may take legal action if unsatisfied with the board’s handling of the situation.

Meanwhile, Viacom chairman Sumner Redstone used a presentation to the Smith Barney Shearson media conference in Palm Springs to stump the merits of both the proposed merger and its revised Par bid. “Our bid is not coercive,” he said. “Our bid is not cynical. Our bid is rational.”

Redstone stressed that the Viacom-Blockbuster bid’s cash component “is clearly superior to that of QVC”–$ 105 a share for 50.1% compared to QVC’s $ 92 a share for 51%. “Cash is king,” he said. “And the reason for this, as you all understand, is that cash is the only thing you can measure with certainty.”