News: Analysis & Commentary
Viacom-CBS: "They Have It All Now"
But can Redstone and Karmazin make the colossus work?
It all started over lunch at Viacom Inc.'s Times Square headquarters on Aug. 11. On one side of the table was Sumner M. Redstone, Viacom's bristly 76-year-old CEO. On the other was fast-talking Mel Karmazin, CEO of CBS Corp. The Federal Communications Commission had just struck down the rule barring one company from owning two television stations in one market--a move that instantly jacked up the valuations of TV stations and may well have changed the dynamics of broadcasting. The meeting of the two CEOs was about how Viacom and CBS might swap some stations to take advantage of the new rule. But one meeting led to another, and soon, Karmazin upped the ante, proposing that CBS buy Viacom. Redstone said no. O.K., said Karmazin, Viacom can buy CBS.
So began the biggest media deal in history. After several more meetings, at Viacom and later, at Karmazin's apartment, where the men huddled to avoid prying eyes, the moguls and their minions worked out the details. On Sept. 7, Viacom agreed to pay $37 billion in stock to combine the two companies into a new megamedia empire capable of taking on the likes of Time Warner, Walt Disney, and News Corp. Keeping the Viacom name, it will encompass a major TV network, a Hollywood studio, top cable channels, including MTV, Nickelodeon, and The Nashville Network, TV stations, and Infinity Broadcasting, the biggest radio-station and outdoor-advertising group in the U.S. Add to that King World Productions (the game and talk-show producer CBS has agreed to acquire) and Viacom's theme parks, movie theaters, and publisher Simon & Schuster.CRADLE TO GRAVE. In total, it will be a $21 billion-a-year beast producing $4 billion in earnings before interest, tax, depreciation, and amortization. Despite its wide swath, some two-thirds of the new giant's cash flow will come from cable channels and radio stations after Viacom completes its previously announced spin-off of the Blockbuster video-store chain. That's all right with Wall Street--because cable channels and radio are among the fastest-growing sectors of the media world. And, perhaps most important, in an era of constantly splintering media outlets with narrowly focused demographics, the merger establishes Viacom as a cradle-to-grave advertising depot, stretching from cable channels for toddlers, such as Noggin, to MTV and VH1 to CBS' graying (and in Madison Avenue's view, less desirable) audience to a planned cable channel for seniors. "They have it all now," says Merrill Lynch & Co. media analyst Jessica Reif Cohen. "They are on the same playing field with Time Warner, News Corp., and Disney."
But as Disney has learned since it absorbed ABC in 1995, blending a TV network with a studio does not guarantee overnight synergistic success. The new Viacom's challenge is to push the mantra that Karmazin has pursued at CBS: a dogged cross-selling and cross-promotion strategy involving multiple media properties in hundreds of local markets while exercising strict cost controls back at headquarters.
The most intriguing twist in this tale is how Karmazin ended up the uncrowned king of the new Viacom domain. When the deal closes in mid-2000, Philippe P. Dauman and Thomas E. Dooley--top Viacom execs, both in their early 40s, and Redstone's closest advisers--will leave the company with severance packages worth more than $150 million each. While Redstone will retain his titles of chairman and CEO, the 56-year-old Karmazin, as president and chief operating officer, will effectively be running the show.
As part of his employment contract, which runs through 2003, Karmazin will have many of the powers that a CEO typically enjoys--such as having all divisions report to him. The contract also states that if Redstone ceases to be CEO during Karmazin's term, Karmazin automatically takes the mantle. One might be inclined to ask: How did that happen? "A lot of this is instinct," Redstone told BUSINESS WEEK. "He and I are so much alike--we're both entrepreneurs."
The deal has a certain ring of familiarity. In 1996, Karmazin sold the radio group he built, Infinity Broadcasting, to Westinghouse Electric, then CBS's parent. Karmazin eventually persuaded Westinghouse CEO Michael H. Jordan to let him run both the radio and TV operations in what became CBS after the spin-off of old Westinghouse assets. Before long, Karmazin was in charge--and Jordan took early retirement. Of course, the difference this time is that Redstone remains the controlling shareholder--and that counts for a lot.
Certainly, Karmazin is also the closest thing to a media Midas that Wall Street has at the moment: CBS's stock has tripled since he joined the company. Karmazin has built a loyal following among investors by consistently delivering on expected growth and earnings.AD-DEPENDENT. Karmazin, a cab driver's son who grew up in a Long Island City apartment project, is a master salesman who cut his teeth hustling radio ads in New York in the 1960s and 1970s. His sales acumen will be put to the test at Viacom: Roughly half of its revenues will be derived from advertising, making Viacom's income extremely sensitive to the ebbs and flows of the economy. By comparison, Walt Disney and Time Warner each generate less than a quarter of their revenues from advertising.
Karmazin has blithely predicted before that he can cajole his sales forces into 10% top-line growth annually no matter what. Add to that his obsession with excess overhead and disdain for corporate perks, and one quickly sees why analysts are pumped about his taking the reins at Viacom. Merrill's Cohen thinks Karmazin can wring some $300 million out of the combined companies.
Merging the two companies also presents the opportunity to meld the broad collection of Internet businesses CBS has taken stakes in--mainly in exchange for on-air promotion--with Viacom's Web efforts. Music, in particular, could be a big opportunity: Already, MTV.com is the most visited music site on the Web, and CBS has been working on plans to bring content from its 80%-owned Infinity Broadcasting Corp.'s 160 radio stations online.
But Karmazin's biggest test is going to be whether he can really build a cross-selling platform that offers advertisers a one-stop shop of media in any demographic and in any market. So far, Karmazin's cross-selling efforts at CBS have received mixed reviews from Madison Ave., though others, including News Corp., have pursued similar strategies. "When it comes down to it, it's very difficult or almost impossible to execute," says Aaron Cohen, executive vice-president at Horizon Media Inc., which places $475 million worth of advertising every year.
Meanwhile, with Viacom's healthy balance sheet--capable of borrowing $20 billion--Karmazin can keep shopping guilt-free. Analysts say likely follow-up buys could include the TV stations owned by Chris-Craft--Viacom's partner in United Paramount Network--or the station group owned by Tribune Co.
Meanwhile, the Viacom-CBS deal will certainly encourage other couplings--especially those that take advantage of the new FCC rules. NBC has previously talked with Sony Corp. about combining their entertainment assets and is currently in talks with Paxson Communications Inc. about an investment that would give NBC access to its 73 UHF TV stations. Also high on the deal mill is Barry Diller's USA Networks Inc., which has 13 UHF stations to its name and has been talking with Disney's ABC. And hot again in the wake of the CBS deal are radio giants AMFM Inc. and Clear Channel Communications Inc.
Certainly, Karmazin and Redstone are two moguls who usually get what they go after. A former lawyer, Redstone operated a low-profile theater chain before deciding he wanted to vie with media giants such as Rupert Murdoch by buying Viacom 12 years ago. And Karmazin has proven yet again his acumen at selling a deal--and himself. Redstone clearly likes his style and says he asked Karmazin to come with CBS. Although Redstone and Karmazin say Karmazin never insisted on being made successor, another person familiar with the deal says it "would never have happened" otherwise.ENTRENCHED. Certainly, the documents suggest that. Although he must consult with Redstone on all major decisions, it would take 14 directors from a board that consists of 10 Viacom appointees and eight from CBS to change any of Karmazin's responsibilities.
In any case, Karmazin's arrival means that the long-watched succession race between Deputy Chairmen Dooley and Dauman is suddenly over. Redstone says he gave his deputies veto power over the deal and "begged them to stay." They declined but opted instead to stay on the Viacom board. Dauman remains the trustee of Redstone's estate and in the event of Redstone's death would become Viacom's chairman.
Redstone and Karmazin were all smiles and accolades at the announcement. "You can print this if you want to," says Karmazin, "but the deal really was about getting a ticket to the MTV Music Awards." Redstone, meanwhile, has allayed investor concerns about the future of a company where a septuagenarian chairman has never identified a clear successor. "In my experience, Sumner has always loved the deal more than running the company, and in Mel Karmazin, he has a first-class operator," says ex-Viacom CEO Frank J. Biondi, whom Redstone fired in '95.
That said, Biondi's demise, as well as the departures of Dooley and Dauman, suggest that nothing is certain under Redstone. In financial terms, both Redstone and Karmazin have identical new employment contracts: $1 million in salary and up to $10 million in bonus next year, plus options for 2 million shares issued at the share price when the deal closes. But Karmazin's contract has extra provisions, such as the one barring him from working on any "books, articles, etc." about Viacom during the employment term. This is ironic since Karmazin once insisted on contracts for radio stars Howard Stern and Don Imus that barred them from mentioning him on the air. It shows that Redstone, though he jokes he was "seduced" by Karmazin, hasn't surrendered entirely.By Richard Siklos in New YorkReturn to top