In 1989, Time Inc. and Warner Communications, Inc., announced plans to merge. Before the deal could close, however, Paramount Communications, Inc., intervened with a cash tender offer for Time valued at $200 per share. Time responded by recasting the Warner deal as a tender offer and implemented various other efforts to ensure that Paramount would be unable to close its offer before Time could complete its offer for Warner. Since Paramount would be unable to raise funds to buy the combined Time-Warner entity, the restructured deal would put an end to Paramount's intervention.
When Paramount and Time shareholders challenged the restructured deal, Time's management justified its decision on grounds that pursuing the deal with Warner would in the long run produce higher returns to shareholders. As famed Delaware Chancellor William T Allen wrote:
In the longer term, Time's advisors have predicted trading ranges of $159-$247 for 1991, $230-$332 for 1992 and $208-$402 for 1993. ... The latter being a range that a Texan might feel at home on.
Paramount Commun. Inc. v. Time Inc., 1989 WL 79880, at *13 (Del. Ch. July 14, 1989), aff'd, 565 A.2d 281 (Del. 1989).
In a decision I still teach in my Mergers and Acquisitions class, the Delaware Supreme Court held that Time's management had not violated their fiduciary duties to Time's shareholders. Time was thus able to complete its merger with Warner.
Thus began a long and winding road, which the WSJ illustrated as follows:
All of which prompted me to post this tweet:
I wish some finance guru would answer the following question: If you were a #Time shareholder back in 1989 and had held through all the changes, would you be better off today than if they had taken the Paramount deal and you had invested your proceeds in a S&P500 index fund. https://t.co/dKpXSu9NWA
— Steve Bainbridge (@PrawfBainbridge) May 18, 2021
In response to which, a friend reminded me of a 2003 WSJ article observing that:
By now, even schoolchildren know of Time Warner's folly in merging with America Online. However, the story of shareholder value destroyed through acquisition starts much earlier, back in 1989 when shares in Henry Luce's empire, Time Inc., traded for around $100. That spring, Time tried to combine with Warner Communications in what M&A practitioners call a "merger of equals" -- neither party paying a premium for the other's shares. ...
The executives of Time Inc. got to keep their jobs but the shareholders didn't fare so well, particularly with the double whammy of the AOL combination. If you were a shareholder of Time back in 1989 and held your shares through various splits over the years, they would now be worth $113.76 each, about where they were trading more than 14 years ago and far below the Paramount offer. Meanwhile, if you'd just bought the stocks in the S&P 500 index, you would have almost tripled your money.
Meanwhile, I calculated that if you had taken the Paramount deal in 1989 and invested the $200 per share in the S&P 500, you'd have $5,182.69 today. I'd still love to know what those who held their Time shares all these years would have today. I'm betting it's a lot less than $5,000.
You might think that I'd be critical of the Delaware Supreme Court decision that made all of this loss of value possible. And I am, but not for the reasons you might think. I think the Court reached the right result via hopelessly muddled thinking.
If you're interested, I refer you to my article Unocal at 20: Director Primacy in Corporate Takeovers. Delaware Journal of Corporate Law, Vol. 31, No. 3, pp. 769-862, 2006, available at SSRN: https://ssrn.com/abstract=946016 or my book Mergers and Acquisitions.
In the latter, I explain that:
Time’s defensive actions depended almost wholly on the combined entity’s great size. While the extent of the combined entity perhaps made it unlikely that a subsequent bidder would emerge to unwind the transaction, the possibility existed. The market for corporate control thus could exert some constraining influence on Time’s board, which reduced the likelihood that the board was acting for improper motives, especially in comparison to the defensive restructurings just described.
In addition, it’s critical to the outcome here that Time’s business strategy was motivated by a desire to advance legitimate corporate interests; it had not been cobbled together simply to justify takeover defenses. As a result, Paramount was essentially asking the court to enjoin Time’s board from continuing to operate the corporation’s business and affairs during the pendency of the takeover bid. The Delaware courts were properly reluctant to do so, as a hostile bidder has no right to expect the incumbent board of directors to stop an ongoing business strategy in mid-stream.
In sum, Time presented a highly unusual set of facts, which rebutted the inference that the board acted from improper motives and rendered the result—if not the reasoning—in that particular case relatively unobjectionable.
