BUSINESS

A NEW MEDIA POWERHOUSE

TIME INC. AND WARNER COMMUNICATIONS INC. PLAN TO JOIN FORCES IN A MARRIAGE OF CONVENIENCE

JOHN DeMONT March 20 1989
BUSINESS

A NEW MEDIA POWERHOUSE

TIME INC. AND WARNER COMMUNICATIONS INC. PLAN TO JOIN FORCES IN A MARRIAGE OF CONVENIENCE

JOHN DeMONT March 20 1989

A NEW MEDIA POWERHOUSE

BUSINESS

TIME INC. AND WARNER COMMUNICATIONS INC. PLAN TO JOIN FORCES IN A MARRIAGE OF CONVENIENCE

For Henry Luce, the innovative missionary's son who created Time Inc., journalistic integrity always came before profits. To ensure that his philosophy would live beyond him, Luce decreed in his will that the empire he created would be “principally a journalistic enterprise...operated in the public interest as well as the interest of its stockholders.” But on March 4, when Time announced that it was merging with Warner Communications Inc. to form the world’s largest communications company, Luce’s successors evidently were more concerned with the bottom line.

The new company, to be called Time Warner Inc., will be a global media powerhouse spanning films, television programs, records, books and magazines. But the deal remained incomplete at week’s end: a group of Warner Communications stockholders filed a court action to stop the merger, and Time and Warner shares climbed higher on speculation that a takeover bid by a third party could materialize for either company. And the size and scope of the company that Time and Warner propose to form has raised major concerns among smaller competitors—many of whom have already been forced to merge to survive against the big global media conglomerates. Analysts say that even huge Canadian publishers, including Maclean Hunter Ltd.—which owns Maclean ’s—and International Thomson Organization Ltd., will now find it tougher to expand more deeply into the United States.

For Warner and Time, the arrangement is a marriage of convenience. Warner, which is best known for its Warner Bros, movie studio—founded by four brothers, among them Jack Warner, who was bom in London, Ont.— Lorimar-Telepictures Corp. TV production company and its clutch of prominent record labels, narrowly escaped a takeover attempt by Rupert Murdoch’s News Corp. in 1983. Time, meanwhile, has long been a rumored takeover target because of its respected and lucrative magazines, which include Time, People, Fortune, Sports Illustrated, Money and Life, and its Home Box Office pay television operation. Analysts also say that Time has been chronically vulnerable to a buy-out because its shares have persistently sold at roughly one-half of what the company would be worth if it were broken up and its parts sold separately— despite determined efforts by Time’s managers to drive up earnings per share.

By joining forces, Time and Warner make themselves almost takeover-proof. And they will also create a $21.6-billion company that can compete with such aggressive foreign media giants as Murdoch’s News Corp., West German-based Bertlesmann AG, Sony Corp. of Japan and Robert Maxwell’s Maxwell Communications Corp. In the past five years, enterprising foreigners have invaded the magazine publishing and record industries that Time and Warner once called their own—in the process, snapping up media properties in America and abroad. Said Time chairman Richard Munro last week: “We see Robert Maxwell, Rupert Murdoch, Bertlesmann and Sony coming into our market and raising hell. We see this as an opportunity for an American company to get competitive.”

The courtship was a long one. Time and Warner had been discussing a possible merger since the winter of 1987 when Steven Ross, the flamboyant chairman of Warner, first contacted Munro about setting up a joint venture in cable television. Ultimately, the deal was only possible because Ross agreed to share the chairman and chief executive’s office with Munro. But the job of meshing the loose, freewheeling Warner Communications and the stodgier Time Inc. will fall to Nicholas J. Nicholas Jr., the president of Time Inc., who is the heir apparent when Munro and Ross—both approaching retirement age—step down (page 44).

Nicholas will inherit one of the few global media giants able to produce and distribute information in almost every medium. Because cable is the only major overlapping business, the opportunities for taking advantage of compatible businesses are endless. Warner’s television production company, Lorimar, could make shows for Time’s Home Box Office cable operation that could be broadcast over their combined cable-distribution network—now

one of the country’s largest. As well, Warner has a great deal of international expertise— about 40 per cent of its revenues were earned

abroad in 1988, through movie distribution and other operations. When that is combined with

Time’s cable and direct-marketing ability, analysts say that the company should be well situated to take advantage of opportunities outside North America, including the deregulation of television in Europe and Japan’s decision to introduce 24-hour television and to double the number of channels available.

But the sheer size of the new company raises troubling questions for smaller domestic competitors—cable operators and programmers, television networks, magazine publishers and movie studios. The New York Times has devoted considerable space to the merger, headlining stories three days in succession with variations on the “merger-raises-concerns” theme. Said one high-ranking Times man, who asked not to be identified: “That should read: ‘Merger Raises Concerns Among Sulzbergers,’ ” a reference to the family that is the biggest shareholder of the Times and also owns several cable television outlets.

Analysts said that the merger puts pressure on other North American media companies to consider alliances similar to the Time-Warner deal. Stock markets anticipated that possibility last week as share prices of many media giants climbed higher on takeover speculation. Said Gordon Crawford, an analyst with Capital Research Co., a Los Angeles-based money management firm: “There is a compelling logic, if you want to be a major player, to be vertically integrated and global in breadth.”

In Canada, because of Ottawa’s foreignownership restrictions, large foreign conglomerates are effectively banned from gaining control of Canadian publishing or broadcasting firms. But analysts said that Canadian companies, including International Thomson and Maclean Hunter, will now face heavy competition if they wish to add to their holdings in the United States. Said Laurel Slocum, a media analyst with Toronto brokerage firm Alfred Bunting & Co. Ltd.: “The players in the American market are going to get bigger. It’s going to get tougher for new entrants.”

There is also concern about the

implications of the merger among employees at Time Inc.’s flagship newsmagazine. Many said that they wonder whether the magazine will be run any differently when it becomes part of the huge entertainment-oriented conglomerate. Management at both companies contends that the magazine’s editorial independence will remain untouched. Still, critics point to last week’s issue of Time as a cause of concern: the merger involving their parent company was covered by competitor Newsweek, but went unreported in Time (although Time planned to cover the merger this week). And at Time, a joke making the rounds last week was “who at the magazine is going to do the final edit on Mad Magazine”—the only magazine property Time picks up from Warner.

JOHN DeMONT with LARRY BLACK in New York City, JOHN DALY in Toronto and ANN GREGOR in Los Angeles

JOHN DeMONT

LARRY BLACK

JOHN DALY

ANN GREGOR