Karmazin's Future Still Not Set

Lack of agreement on his status takes a toll on Viacom stock price

No deal yet between Mel and Sumner. That was the word from the latter—Viacom Chairman and CEO Sumner Redstone—last Wednesday morning during a conference call to discuss Viacom fourth-quarter and full-year earnings.

And the market didn't like it. Over the next two days, the stock dropped $1.39, or 4%, to $36.14. Analysts attributed part of the drop to fourth-quarter underperformance by Viacom's cable division.

Sources say that Karmazin, who currently has operating control of the company, wants the title of CEO under any new agreement to stay. Redstone, who now holds that title, does not want to give it up. And he wants to take back some of the power given Karmazin under his initial employment contract.

As CEO, there would be no question as to Karmazin's authority—even though, under the current deal, as chief operating officer, he reports to the board and not Redstone. Karmazin is also said to be seeking job protection similar to the kind he has under the current deal: It would take a "super-majority" of the board to oust him.

Last week, both Redstone and Karmazin joined a conference call with analysts and investors, but only Redstone addressed the issue of Karmazin's future at the company. Noting that a new deal had not been reached, he said that "we're very sensitive to the fact that a timely resolution is desirable. But we believe that it is better to get it right. Mel and I are working cooperatively with a committee of independent Viacom directors to reach a resolution as soon as possible."

On that committee are Viacom board members Ivan Seidenberg, chairman and CEO of Verizon; William Schwartz, counsel to the law firm of Cadwalader, Wickersham & Taft; and David McLaughlin, chairman of Orion Safety Products. "Basically, what's happened is members of the board have stepped in between them and are trying to broker a deal," said a source familiar with the situation. "They are no longer negotiating this directly."

It's a sensitive subject for several reasons. The Street loves Karmazin, and the company's stock is likely to take a bigger beating if he goes. But there's also the corporate-governance issue. "This has to be resolved in a way that it doesn't look like the board is pandering to Redstone," said one observer. "And there are members of the board who want this resolved quickly and in favor of Karmazin."

Meanwhile, the company had record revenues and profits for fourth quarter and full year 2002.

But, noted Merrill Lynch media analyst Jessica Reif Cohen, the company got there with some fairly drastic cost-cutting. In the fourth quarter, she said, the cable segment performed "below expectations," with profit margins contracted in part by higher programming costs. For the year, companywide ad revenues were up 5%, and total revenues were up 6% to $23.2 billion while operating income tripled to $4.5 billion.

In the conference call, Karmazin stressed that the owned-TV-station group was improving. Full-year revenues were up 12% (5% of that coming from KCAL-TV Los Angeles, acquired last April). Fourth-quarter profit margins at the station group grew to 43%, from 37% in the prior year, with margins at the CBS stations (which excludes the UPN owned stations) growing to 50.2% from 47.5%.

He credited the growth to better network lead-ins from 10:30 to 11 p.m., with a resulting 9% average gain across the group's late newscasts, as well as better performances from syndication properties like Dr. Phil. Never one to be satisfied, though, he said, "we still have a long way to go."