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Karmazin out at Viacom; co-presidents replace COO

June 2004

Karmazin out at Viacom; co-presidents replace COO

By Jon Friedman
Steve Gelsi 
6/1/2004

NEW YORK (CBS.MW) -- Mel Karmazin stepped down Tuesday as president and chief operating officer of Viacom, ending months of well-publicized bickering with Chief Executive Sumner Redstone and clearing the way for two new co-presidents to compete for the top job.

Setting the stage to succeed Redstone, Viacom executives Tom Freston and Leslie Moonves were promoted, with each holding two titles: co-president and co-chief operating officer.

Freston currently heads Viacom's MTV Networks unit, a position he has held since 1987. Moonves, the CEO of CBS since 2003, joined CBS in 1995 as president of its entertainment division.

Redstone, 81, said he'll step down as chairman and CEO by 2007, with one of the new co-presidents likely succeeding him. During a conference call with analysts, Redstone said he would be "amazed" if an outside executive took control of the company.

The chilly relations between Redstone and Karmazin, who came to Viacom (VIA)(VIAB) when it acquired CBS in 2000, prompted frequent reports about management clashes. However, Redstone dismissed any suggestion Karmazin, 60, was forced out.

"Nobody asked for Mel's resignation," Redstone said. He added Karmazin was "frustrated" about the stock price of Viacom, which sank to a one-year low of $35.69 after the announcement. The stock recovered later and was off only 6 cents at $36.83 in afternoon trading volume of 11 million shares.

Family affair?

Another candidate mentioned as a potential successor is Shari Redstone, Sumner Redstone's daughter, who runs National Amusements, a global chain of movie theaters that her family controls.

For his part, the elder Redstone sought to tamp the rampant speculation involving his daughter, which was fueled by a story in the New York Times earlier this year. He stressed that his daughter isn't in line to succeed him, and quipped "I may stop loving her" if the succession rumors persist.

Redstone said he envisioned a "swift and smooth transition" and reiterated that he has confidence in Viacom's other executives. Karmazin will serve as a consultant to Viacom for 60 days. Redstone noted Karmazin would be free to negotiate job offers from rival companies, but added: "I don't see the competition."

It's not clear, however, that Wall Street will give Viacom the benefit of the doubt in this move. "There is no way to describe Mel Karmazin's departure as particularly good for Viacom," said New York investment banker Ken Marlin of Marlin & Associates. "Companies need clear, unambiguous leadership. Mel Karmazin provided that leadership. However, it's probably not a disaster. For the intermediate term, Karmazin leaves a company in good shape, and recovering after a very bad recession."

"The advertising market has begun to return," he elaborated. "We see no near-term risk to the stock price. But Viacom is going to have to establish clear leadership quickly."

Tag team

Tom Freston and Leslie Moonves were rewarded for the strong showings of their respective divisions.

When Viacom acquired CBS, Redstone positioned Viacom to be a television-oriented company, a move that enabled it to take better advantage of advertising conditions.

Although the bursting of the dot-com bubble hurt the company's strategy, Viacom proved to have very strong TV brands.

CBS thrived with such hits as "Survivor," which revolutionized the reality-based TV genre, along with popular series like the crime-forensics drama "CSI" and the sitcom "Everybody Loves Raymond." CBS has since parlayed "CSI" into a cottage industry, with a successful spin-off and another, featuring actor Gary Sinise, planned to debut in the fall.

Meanwhile, MTV has been a cash machine. Viacom has used it as a programming missile around the world and as an anchor for Viacom's other cable brands, such as VH-1, BET and Nickelodeon.

Redstone said that Freston and Moonves both have each "presided over phenomenal growth stories, Les in broadcast and Tom at the cable networks, and each has served as an integral member of Viacom's senior management team."

Analysts indicated they weren't surprised that Redstone identified the two executives as the lead candidates to succeed him.

"It was important that they showed their bench strength by naming both Freston and Moonves," said Angela Kohler, global media analyst at Federated Investors in Pittsburgh.

"These announcements do remove an overhang that has been plaguing Viacom for years," observed Jill Krutick, a media analyst with Smith Barney.

Rocky relationship

Karmazin's resignation caps a string of reports of bickering between him and Redstone.

Viacom repeatedly denied that the difficulties between the two had reached a breaking point. While the tensions weren't a secret, it was never clear whether their disputes centered on how to manage the company or reflected ego conflicts.

Both men were used to running their own companies before Viacom bought CBS, so it wasn't easy for two such strong-willed executives to co-exist.

Karmazin ran into problems at Viacom in the past year when the company's radio division, his chief area of responsibility, reported subpar results. Karmazin got his start in the radio industry as a salesman and rose through the ranks.

The Viacom-CBS deal ushered in a series of other megamedia combinations - like the paring of America Online with Time Warner and Vivendi with Universal -- as global entertainment companies sought to lead the way in distribution and content.

Risks in executive shuffle

For Freston and Moonves, their promotion poses risks as well as opportunities. The arrangement of having co-presidents has seldom worked in American companies over the years. Egos invariably get in the way.

Viacom will likely focus on reassuring Wall Street that the dual-chief structure is going to work.

The appointments are part of a corporate succession plan that "will provide for the orderly transition to the next generation of senior management for Viacom," the company said.

Viacom added that it will continue to work with the board to identify Redstone's successor and to designate candidates for other senior positions. The company is a significant shareholder in MarketWatch.com, the publisher of this report.

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