Merger talks between Viacom Inc. and CBS Corp. plunged into chaos Wednesday following a report that controlling shareholder Shari Redstone would oust CBS' combative chief executive, Leslie Moonves, if he refuses to go along with a merger with Viacom.
CBS' stock immediately dropped after CNBC published its report, and CBS quickly fired back.
"The industry and the marketplace know Leslie Moonves' record and we think it speaks for itself," CBS said in a defensive one-line statement that was issued soon after the CNBC report.
By day's end, CBS and Redstone were both trying to lower the temperature to get the deal talks back on track. But the flare-up highlighted the tensions and suspicions between the two sides as Redstone pushes for a shotgun wedding of CBS and Viacom.
Her father, Sumner Redstone, built Viacom into a powerhouse; the company now owns MTV, Comedy Central, Nickelodeon and the Paramount Pictures film studio in Los Angeles. Redstone believes Viacom and CBS would be stronger together as they compete against streaming-video titans such as Netflix and Amazon, which are grabbing viewers away from traditional television channels.
Before Wednesday's fireworks, the merger effort appeared to be losing momentum, in part because of CBS' lack of enthusiasm to get a deal done. CBS, the more successful company, has not formally rejected Viacom's offer — submitted last week — nor has it proposed a new counteroffer to combine the two media companies. But talks have been ongoing between the special committees of the boards of Viacom and CBS to find ways to bridge the gap.
The two companies remain far apart on a valuation on Viacom, which has struggled over the last few years although it is encouraged by signs of a turnaround. But the main sticking point is over whether Redstone would be heavily involved in managing the combined company.
The Redstone family — through its investment vehicle, National Amusements Inc. — controls nearly 80% of the voting shares of Viacom and CBS. Shari Redstone, 63, wields that leverage now that 94-year-old Sumner Redstone is ailing and largely unable to communicate.
CBS is pushing back, demanding that Moonves be given the latitude to run the combined company as he sees fit — and that includes picking his own management team.
"That's how it's done with most mergers and acquisitions," said one person who is familiar with the situation but not authorized to speak publicly. "I don't think anyone believes that it's going to be easy merging these two companies, so shouldn't he be allowed to have his own team to help him try?"
On Wednesday, CBS appeared convinced that Shari Redstone might have planted the CNBC report to undermine CBS' management, even though a person close to Redstone denied that the she was making plans to get rid of the executive who built CBS into a television juggernaut — and successful standalone company.
"We are not there yet," insisted the person close to the Redstone camp.
Redstone, through National Amusements, also tried to cast doubt on the CNBC story.
"National Amusements has tremendous respect for Les Moonves and it has always been our intention that he run a combined company," National Amusements said in a statement.
Nonetheless, Redstone has the power to immediately shake up CBS' board, should she opt to go that route, and a new board could fire Moonves, who has run the network since 1995 and served as chief executive of CBS Corp. since 2006. National Amusements' controlling stake gives it the ability to unilaterally reconfigure CBS' board with members who are more aligned with Redstone's thinking.
The Redstone family used a similar tactic in 2016 when it wanted to unseat Viacom's then-CEO, Philippe Dauman: National Amusements sent a letter to Viacom's board announcing that it was replacing several longtime board members with its own handpicked slate.
That power play proved successful, eventually leading to Dauman's resignation. In a compromise, Redstone allowed Viacom's chief operating officer — Thomas Dooley — to become interim chief executive. Dooley thought he would have a chance to rebuild Viacom, but four weeks later he abruptly announced he would be stepping down.
Dooley left the company three months after being named interim chief, and his departure cleared the way for Redstone's pick: Bob Bakish, who then was Viacom's international chief and now is its CEO.
Earlier this year, Redstone proposed that Bakish have a senior role in the merged company and she thought Moonves was on board with the plan, according to the person close to National Amusements. Redstone wants to see the two companies recombined after 12 years of operating separately but her earlier effort to unite the two companies in 2016 collapsed.
Management structure and a fair valuation for Viacom were the main obstacles to a deal in 2016, and those issues again loom large today.
Viacom and CBS have agreed that Moonves, 68, should serve as chief executive of the combined company for at least two years. But CBS wants its Chief Operating Officer Joseph Ianniello to continue in his No. 2 role. Viacom and Redstone want to install Bakish as the chief operating officer and heir apparent — not Ianniello.
Two other episodes have fueled the distrust.
In August, BTIG Research analyst Richard Greenfield, who has been bullish on Viacom, appeared on the Fox Business Network and said that if Moonves didn't get on board with a CBS-Viacom merger, the CBS chief should lose his job.
Then, on Jan. 17, the Wall Street Journal reported that Redstone wanted "fresh blood" on the CBS board and that she was busy lining up new board candidates.
CBS then began looking warily at the merger talks.
Greenfield said Wednesday that he still believes Moonves might be overplaying his hand.
"It is scale up or die," Greenfield said, adding that CBS and Viacom are each too small to compete well, so they need the merger. "For Les Moonves to be trying to slow this down doesn't serve his shareholders or Viacom's."
And if Moonves isn't supportive of the merger, then maybe he should go, Greenfield said: "Why start a new company with an executive who hates half the company?"
CBS shares fell 2.1% to $51.01 on Wednesday. The stock is down more than 10% since news of the proposed merger surfaced in January. Some investors worry that Viacom's assets would be a drag on CBS. Viacom shares slipped 1.7% on Wednesday to $30.51.
Last week, Viacom asked CBS to raise its bid by about $2.8 billion in a move that would value Viacom at nearly $15 billion. The Viacom offer recommends an exchange ratio of 0.68 CBS shares for each share of Viacom class B stock. CBS had offered 0.55 of its shares for each Viacom class B share, according to the knowledgeable people — an amount lower than Viacom's current stock price.
"When Viacom responds to CBS and says 'needs to be higher,' normally we'd expect CBS to say, 'No thanks, good luck on your own,'" Todd Juenger, media analyst with Bernstein & Co. wrote in a Tuesday report. "But here, essentially the parent has told the two children: 'work it out.'"
5 p.m.: This article was updated with comments from analyst Richard Greenfield.
2:50 p.m.: This article was updated with comments from people who were not authorized to speak publicly, analyst comment and additional background information.
10 a.m.: This article was updated with more information, including a statement from National Amusements Inc.