Wall St. Focuses on Film Companies. TIME-LIFE MERGER

Thanks to the merger announced earlier this week between Time Inc. and Warner Communications, Wall Street has suddenly discovered Hollywood, including such major film companies as Columbia Pictures, Universal, Paramount, and MGM. The prospective Time-Warner merger caught much of the financial community by surprise, although both companies have long been considered takeover candidates.

Indeed, the purpose of the merger is precisely to avoid a hostile takeover of either company, allowing both Time Inc. (which publishes Time, Fortune, and People, and owns Home Box Office on cable television, among other ventures) and Warner Communications, (which has record and cable operations as well as its film company, Warner Brothers) to retain their independence.

The new company would be the largest communications/media company in the world, with a stock value in excess of $15.2 billion.

Stockholders for both Time and Warner quickly welcomed the merger, which involves an exchange of stock rather than a transfer of cash.

That satisfaction could quickly change, however, if any third party decided to pursue either company in a leveraged buyout or takeover bid. ``This merger will very quickly flush out any potential buyers,'' says John M. Clair, a corporate bond expert with Salomon Brothers Inc.

One initial result of the proposed merger is a flurry of new interest in film companies. The stocks of several companies shot up following the announcement of the Time/Warner merger.

Wall Street tends to move in cycles in terms of acquisitions, experts note.

Last year, for example, there was a rush of mergers and acquisitions in the consumer food sector. There was also a scramble to acquire telecommunications companies. Now, the spotlight has shifted to communications/media companies.

``In the case of the large media and entertainment companies, you've got the problem of there almost not being enough players,'' says Jeffrey Sadler, an analyst with Butcher & Singer Inc., an investment house in Philadelphia.

At the same time, notes Mr. Sadler, some of the major players, such as Loews Corporation, a conglomerate in insurance, broadcasting, and watchmaking controlled by brothers Laurence and Preston Tisch, have large cash surpluses that could be used for acquisitions. Loews has a roughly 25 percent stake in CBS. Yet CBS remains the only network that is still independent. NBC is now owned by General Electric and ABC has merged with Capital Cities.

Columbia Pictures must definitely be considered a takeover target, says Mara Balsbaugh, who covers the entertainment industry for Smith Barney, Harris Upham & Co. Coca-Cola currently owns 49 percent of Columbia and wants to ``eventually cash in on its investment,'' says Ms. Balsbaugh. She also notes that Allen & Co., the investment bank that handled the original sale of Columbia to Coke, has been accumulating stock in the film company.

Balsbaugh believes that other possible takeover candidates include MCA (which owns Universal), and Gulf & Western (which owns Paramount).

Another potential acquisition target is MGM, although the company (now merged with United Artists) is considered a ghost of its former self, when it dominated the film industry in the 1930s through the mid-'50s.

Why are film and large media companies suddenly desirable? The reasons, say analysts here, are political, economic, and demographic:

Politically, many media companies are jockeying for access to Europe, before the economic integration of the European Community in 1992.

Demographically, the VCR has made movies once again important to millions of middle-aged and older people, who had fled theaters for the comfort of their living rooms - and television - during the late 1960s and much of the 1970s.

Films during that period were increasingly oriented toward younger audiences. But now, the VCR has enabled moviemakers to do an end run on theaters in terms of audience. One result has been that more and more films are being made for adult audiences.

Financially, film companies can produce huge cash flows over a long period of time. The original theater release, for example, is followed by cable, as well as videocassette release for VCRs. According to Kenneth Berents of Butcher & Singer, nearly 54 percent, or 48 million, of the nation's 89 million households in the United States, are wired for basic cable.