Can Redstone Fix Viacom?

Sumner Redstone fires friend, tightens grip to right his media ship
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By axing his longtime friend and CEO Tom Freston, Viacom Chairman Sumner Redstone tightened his grip on management and vowed to put the media powerhouse back on track. But the changes already executed by the 83-year-old mogul are having the opposite effect—at least initially—and interviews with investors, analysts and company executives suggest the conglomerate could be in relative turmoil for months to come. Like an early diagnosis of poison ivy, the symptoms may get worse before they get better. Redstone faces enormous hurdles with his two newly handpicked lieutenants Phillipe Dauman and Thomas Dooley, who themselves were forced out in 2000 when Mel Karmazin took the CBS CEO position. Karmazin later left from under Redstone's iron rule in 2004 to run Sirius Satellite Radio.

The dramatic ouster of a corporate leader as admired as Freston flopped on Wall Street, where investors worry about Redstone's decade-long habit of driving out highly respected presidents. Rather than impressing investors, Redstone alarmed them: Viacom stock dropped 5%, slicing its valuation by $2.1 billion.

Ironically, an earlier decline in Viacom's stock price helped lead to Freston's demise. Since Redstone split Viacom into two separate companies and spawned CBS Corp. in January, Viacom's stock fell as much as 18%. The share price bottomed out in July, but rebounded after investors saw the company's second-quarter earnings report. Before Freston's dismissal, Viacom's price was off around 8% for the year.

Analysts are skeptical whether Redstone has the ingenuity to keep Viacom competitive in an industry that has changed much since MTV reigned as the only cultural icon for young viewers. In a slow-growing advertising and movie market, media companies are betting billions of dollars on a business that did not exist 10 years ago. These new digital ventures, broadband channels and Websites represent what Wall Street craves more than anything: growth.

The firing of Freston, instrumental in launching the channel back in 1980s—and Redstone's subsequent comments about his management—have already rippled through the halls of the company as a bad omen, sending morale to new depths. More departures are expected. Management turmoil is almost guaranteed, as Dauman and his longtime sidekick, Tom Dooley, are expected to fire other senior executives who don't meet their litmus test for aggressiveness. Of course, other executives will have a shot to secure even more turf, such as MTV Networks Chairman Judy McGrath.

Perplexing strategy

Late last week, Wall Street analysts were still perplexed that none of the three— Redstone, Dauman or Dooley—seem to have a bold new plan for the change they say is desperately needed. The lack of tangible plans frustrates Morgan Stanley media analyst Richard Bilotti who asks: “What did Sumner bring these guys in to do? What's their mandate? What is the goal here?”

The biggest concern centers on Redstone's perception that Viacom is lagging in Internet ventures and whether that will trigger impetuous decisions on his part. “The 'Redstone discount' has emerged,” says Sanford Bernstein & Co. media analyst Mark Nathanson, explaining that the chairman's frustration “could translate into a slew of new media deals driven by anger as opposed to logic.”

Viacom's assets and Redstone's long-term track record are so strong, few on Wall Street see any major financial crisis looming, and even some critics of Freston's dismissal recommend buying Viacom's stock. Some say Redstone is crazy like a fox. Perhaps he needed to shake up management, say some investors, to jar the company into action. Indeed, Freston managed MTVN during a go-go period for all cable networks, and today those businesses are maturing or—in the case of the movie business—facing decline. Freston's a master schmoozer but had little appetite for courting Wall Street. He has little background in the movie business, but laid out a restructuring of Paramount that included hiring a division chief —Brad Grey—with no experience actually managing a studio.

Inside Viacom, executives and staffers are anxious. Between Freston's work at the creation of MTV, his 18 years as chairman of MTV Networks and the past two years as co-president and then president of Viacom, he engendered loyalty among his troops at a level rarely seen in corporate America. Freston was lauded for nurturing creativity and rewarding people for taking risks, taking a largely hands-off approach toward the myriad operations, ranging from MTV and Comedy Central to Nickelodeon Brazil and VH1 Thailand.

Spontaneous rally

That loyalty seen clearly last Thursday as word spread that Freston was clearing out his New York headquarters office for good. Alerted by emails and text messages, an estimated 2,500 staffers left their offices and cubes, poured into the hallways and lobby, then spilled out into Times Square. As Freston exited an elevator, the crown started clapping and cheering “Freston! Freston! Freston!”

If Freston were the only departure, the disruption to MTVN's culture might be brief. But a big factor behind MTV Networks' recent stumbles is the exodus of a string of key veterans.

Freston's initial rise two years ago from MTVN to Viacom corporate set off a two-year long round of political infighting that drove seasoned players to the exits. Those include MTVN President Mark Rosenthal, ex-Nickelodeon Networks Chairman Herb Scannell, Nick licensing and business development chief Jeff Dunn.

More heads are likely to roll. Insiders quickly cite a list of possibilities: Brad Grey, Freston's hand-picked chief of chaotic studio Paramount; Michael Wolf, president of MTV Networks and the chief of digital efforts that are subject of Redstone's criticism; CFO Mike Dolan, whose major responsibilities are likely to be usurped by Dooley, who was at one time Viacom's CFO; Wade Davis, senior vice president of mergers and acquisitions.

'Unconventional choices'

“All changes in senior leadership have the potential to disrupt operations as they ripple through an organization,” Merrill Lynch media analyst Jessica Reif Cohen told clients in a report. “However, the impact is likely to be greater than usual at Viacom given the length of Mr. Freston's tenure and his yen for unconventional choices for his management team.”

Viacom executives say that Dauman and Dooley spent much of Wednesday wooing Judy McGrath, the longtime Freston lieutenant and friend who he picked as his MTVN successor. McGrath has the same kind of loyalty from her charges at MTV, where she grew up in the company. There's more friction on the Nickelodeon side of the house, where chief Herb Scannel quit in frustration earlier this year.

“Judy's freaked out,” says one friend of both McGrath and Freston. “But she knows this is a moment where she has lots of leverage.” Other potential winners include Stacey Snider, who is running Paramount's recently-acquired DreamWorks, and who could move up if Grey is squeezed out. Van Toffler, president MTV Networks Music Group, is well liked by Dooley and his portfolio could grow. Doug Herzog, president of Comedy Central and Spike, who could get more turf, too.

Freston's firing would have been more palatable for Wall Street if Redstone, Dauman or Dooley articulated a new plan of action to send Viacom and its stock into overdrive. Instead of a detailed strategy, the two men's first presentation to analysts was filled with buzzwords. In a conference call with investors, Dauman said that Viacom can develop strong results “by refining and aggressively implementing our digital strategy with energy, focus, and speed, and by nurturing an open, transparent, and entrepreneurial culture.”

There were scarce details about what needs to be fixed. Is the long overhaul of Paramount misfiring? The ratings at MTV Networks tanking? Apparently not. Dauman says that “I know of no operational reasons that would affect the (earnings) guidance that currently stands.” He also says he sees no major acquisitions.

The Dauman-Dooley regime has vowed to make a more aggressive push into digital media, despite a pretty healthy stable of digital ventures. Some operations relate to their networks such as MTV Overdrive, which offers music videos and some MTV programming on demand. Others are acquired properties that happen to be in one of Viacom's demographic sweet spots, such as kid-oriented Neopets, where anyone can adopt and nurture virtual pets.

Dauman believes Viacom needs to do more small acquisitions and quickly. Overall, “I believe we are on the right track,” Dauman says, “but we need to move to the fast track.”Redstone has complained that Freston missed an opportunity to buy MySpace. Last year, while Viacom was studying the social networking site, Rupert Murdoch's News Corp. swept in with a preemptive $600 million bid. Neither Freston nor Redstone wanted to chase the deal. Redstone blamed Freston.

On the conference call, Redstone didn't specify MySpace but declared that Dauman and Dooley “were not going to let any deal pass that they wanted, although they would be financially restrained and disciplined. They would not let competitors capture the booty before we did.”

Redstone also believes that “the communication with Wall Street had been deficient.” Freston and CFO Dolan hadn't convinced investors that the company was on track. Pointing to Viacom's decent second quarter report, “The fact the stock didn't move after good earnings suggested to the board that Wall Street may not have confidence in that management team.”

Longtime Allies

Dauman and Dooley are veterans of Viacom's corporate politics. Dauman has been a close counselor to Redstone for years, first as an outside attorney then, beginning in 1993, as Viacom general counsel and a deputy chairman. During his years as deputy chairman, he worked closely with Viacom's division heads and insiders say he has a fairly good relationship with executives such as MTVN's McGrath. However, he was also instrumental in the 1997 ouster of Viacom President Frank Biondi. Dauman was designated in Redstone's will as his successor at Viacom.

Dooley came up on the finance side. Dooley was a low-level executive when Redstone bought control of Viacom in 1987, then rose through the ranks. He was CFO, then also a deputy chairman alongside Dauman. Their demise at the company came in 1999 during Viacom's negotiations to acquire CBS. Until the final stages of those talks, Dauman and Dooley had envisioned themselves at the top of the merged companies alongside Redstone and CBS CEO Mel Karmazin. Karmazin didn't only want to be president, but he wanted Dauman and Dooley to clear out. The pair was startled that Redstone acquiesced. They exited quite rich, each getting a $34 million cash buyout in addition to the $60 million worth of options they already held. Dauman has remained a Viacom director and close to Redstone.

Redstone feels the pressure to perform. “There isn't any time to waste,” he said on last week's conference call. “The landscape is changing rapidly. Those that don't move quickly will be left behind. That is why we believe that it's extremely important at this juncture that Viacom has a leader with the skills and experience to capture those opportunities, to catapult us to the next level.”

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