The Atlanta Journal-Constitution
Is exclusivity good in a merger?
Paramount’s proposed merger with Skydance has been the most tumultuous media deal in years. Now it has taken yet another turn after the exclusivity period for negotiations expired without an agreement in hand.
A month ago, a special committee of Paramount’s board agreed to enter into exclusive talks with Skydance — a Hollywood studio run by tech scion David Ellison — even as private equity giant Apollo Global Management reached out with a $26 billion offer. Paramount shareholders grumbled that granting exclusivity was a mistake, and that the company should have engaged with Apollo instead.
On May 3, the special committee told Skydance that it was letting the exclusivity period lapse. The end of exclusivity doesn’t alone kill the deal with Skydance. But it does allow Paramount to open up negotiations with Apollo and Sony Pictures Entertainment, which joined Apollo’s bid.
The so-far-fruitless negotiations raise a question that deal-makers have long debated: Why do companies such as Paramount agree to exclusivity?
Buyers often prefer exclusivity more than sellers
Exclusivity is a sign from the seller that it is committed to doing a deal and not just using a bid to drum up higher offers.
Sellers generally prefer to negotiate without exclusivity because it limits their ability to shop around for a higher price. And since they’ve already signaled to a buyer that they’re willing to make a deal, they’ve weakened their bargaining power.
Many big public company deals are negotiated without exclusivity, since shareholders expect the company to get the highest possible price.
Exclusivity can help sellers with thorny deals.
In addition to helping to cajole a potential buyer to spend millions on due diligence, committing to negotiate with just one party can obscure limited interest.
“An auction is a really good way of selling something when you have multiple bidders,” Edward Rock, a professor of corporate law at New York University, told DealBook. “It’s a really bad way of selling something if you announce an auction and only one person shows up, because now everybody knows there’s no one else out there interested in buying the company.”
For Paramount, other factors were most likely in play.
Shari Redstone, the company’s board chair, almost certainly prefers a Skydance deal, which would allow her to sell her shares at a control premium. It’s unclear whether the all-cash Paramount offer from Sony and Apollo would be as lucrative for her.
Redstone appointed the special committee to lead Paramount’s negotiations to avoid conflicts of interest. But that committee is aware that Skydance’s bid for National Amusements, the parent company of Paramount, was supported by Redstone, the company’s most influential shareholder. That was likely a factor in its decision to move forward with exclusive talks, said Steven Davidoff Solomon, a professor at the University of California, Berkeley, School of Law.
Solomon said the special committee might have seen Skydance’s offer as the only plausible deal on the table. “Let’s see if we can get it done,” Solomon said, articulating his interpretation of the committee’s approach. “If we can’t get it done, then 30 days later, we can go do another deal.”
But time is money.
The highly publicized 30-day deadline put a spotlight on the deal, adding an unwelcome level of dramatic tension as the two sides sought to hammer out a tricky agreement. The 30 days also coincided with the departure of Paramount CEO Bob Bakish, which left the company on shakier footing and potentially weakened its bargaining power.
Paramount has decided to formally open negotiations with Sony and Apollo, according to three people familiar with the matter, but it’s not clear that will result in a deal. It’s also not clear whether there will be any deal at all.