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Once Again, Redstone Shakes Up Viacom

September 06, 2006|Thomas S. Mulligan and Sallie Hofmeister | Times Staff Writers

For the third time in the last decade, Viacom Inc. Chairman Sumner Redstone grabbed back the company's reins, abruptly firing his top executive Tuesday and installing a management team he said would be more aggressive in leading the media giant in the Internet age.

Unhappy with Viacom's lagging stock price and inability to keep up with rivals, the 83-year-old Redstone ousted Chief Executive Tom Freston, 60, and replaced him with two longtime advisors.

The ouster came two weeks after Redstone's public severing of ties between Viacom's Paramount Pictures unit and its top movie star, Tom Cruise. That Redstone personally announced the decision not to renew Cruise's film-development contract was seen as a slight to Freston and other company executives.

Analysts said firing Freston was classic Redstone. The media maverick has a reputation for showing impatience with top managers, seeking the limelight and being obsessed with his company's stock price.

"We think this move is likely to be regarded as an attempt by Mr. Redstone to reassert himself in an operating role, a development that is not likely to be warmly received in the investment community," Merrill Lynch analyst Jessica Reif Cohen wrote in a report to investors Tuesday as she downgraded the stock to "neutral" from "buy."

Redstone made clear Tuesday that he was unhappy that New York-based Viacom had failed to keep pace with its former corporate sibling, CBS Corp. Since he split Viacom and CBS into two publicly traded entities at the start of this year, the stock of the TV and radio network, which he also controls, has gained 9.2%, while Viacom's has fallen 16%.

Viacom, which owns cable channels, had been billed by Redstone as the faster-growing stock.

"I am convinced that within six months, there will be a sharp improvement in the company and a vindication of the split," Redstone said in an interview Tuesday. "Give me a chance to prove that the split makes sense."

Some analysts questioned the merits of the split in the wake of Freston's departure. Although Redstone justified severing the two companies as a way to unlock value, the unspoken motive was to prevent his two lieutenants, Freston and CBS chief Leslie Moonves, from bolting in the face of a succession plan that would have made one of them his heir apparent.

Under pressure from Wall Street to map out a succession plan, Redstone in 2005 named his daughter, Shari, vice chairman of the company. Her father had long said that she would not have an operating role in the company he built over 20 years.

Freston's replacements, Philippe P. Dauman and Thomas E. Dooley, are members of Viacom's board. Dauman, 52, is taking Freston's titles of CEO and president, while Dooley, 49, is filling a new post as chief administrative officer. The resulting team is the same one that led Viacom from 1996 to 2000, after Redstone fired CEO Frank J. Biondi. During those years, in the midst of a soaring bull market, Viacom's stock price tripled.

Tuesday's shake-up surprised and unsettled Wall Street, but there had been signs for some time that the hyper-competitive Redstone was upset at what he viewed as Viacom's failure to keep pace in the digital world.

In what some analysts at the time viewed as a desperate move but many now consider a coup, rival Rupert Murdoch's News Corp. last year paid $580 million for, a highly popular Internet social-networking site, beating out Viacom. MySpace now rivals Viacom's MTV Networks cable group as the hippest place in media for young people.

Redstone said he was particularly disappointed about missed opportunities such as the purchase of MySpace.

"It was there for the taking," he said. "This wouldn't have happened" under Dauman and Dooley, he said. "We could have had the thing for $500 million had we moved in before Murdoch thought about it."

But people close to MTV Networks said Redstone had only himself to blame for losing MySpace. Some analysts and Viacom insiders said that Redstone was making Freston a scapegoat.

Last summer, talks between MySpace and MTV became so serious that Redstone's corporate acquisition team had begun doing its so-called due diligence. Negotiations ground to a halt, however, when the team found that New York Atty. Gen. Eliot Spitzer was investigating MySpace's parent company for allegedly saddling consumers with hidden "spyware" and pop-up ads. After Murdoch swooped in with a preemptive bid, Redstone prevented MTV Networks from making a counterbid despite impassioned speeches from top executives including Shari Redstone.

At a news conference Tuesday announcing the changes, Redstone praised Dauman as a leader who would "let no opportunity pass and let no competitor ever beat us to the trophy."

Investors greeted Tuesday's news by pushing down Viacom's share price by $2.08, or 5.6%, to $34.89.

Dauman said in an interview Tuesday that Redstone first approached him three weeks ago about the CEO spot.

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