Once Again, Redstone Shakes Up Viacom

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 MySpace.com, 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.

He and Dooley had left the Viacom executive suite to start a private-equity firm after Viacom acquired CBS in 2000 and, under the terms of the deal, installed CBS chief Mel Karmazin as CEO of the combined company. Karmazin quit in mid-2004 with the company’s stock price lagging and relations with Redstone growing increasingly fractious.

Dauman said his 19-year involvement with Redstone and Viacom, along with his recent experience in venture capital and private equity, position him to bring “a very entrepreneurial culture” to Viacom. He wants the company to focus on internal growth but also “to reach out early” to the next MySpace, “to be ahead of the curve.”

Independent analyst Harold Vogel said Freston was a victim of a changing economy and a dramatic slowdown in the cable ad market. Viacom was the market leader in cable and thus had the most to lose when the tide changed. Instead of growing at 20%, as the cable group did in its heyday, it slowed to less than 10% growth this year as advertisers steered more money to the Internet.

“Tom Freston took the heat for that,” Vogel said. “You can’t fight that trend. They promoted Viacom as the growth stock, and they thought MTV would grow forever, but that growth rate has shifted down significantly. They can bring in the biggest geniuses in the world, and they won’t be able to change that trend.”

Noting Freston’s eight-month tenure at the helm of Viacom and his role as the chief architect of the hugely successful MTV brand, the ouster “could have been premature,” said Anthony Valencia, a media analyst at TCW Group in Los Angeles.

“Every company needs to have a long-term, consistent strategy, and getting rid of your senior executives every few years by definition prevents that from happening.”

MTV Networks’ importance to Viacom can hardly be overstated. The unit -- home to cable TV’s MTV, Nickelodeon and Comedy Central channels -- accounted for more than 70% of Viacom’s $9.6 billion in revenue last year and almost all its $2.4 billion in operating profit.

Freston’s severance package probably will run into the tens of millions of dollars.

In July 2004, he signed a five-year agreement with Viacom that provided for a salary of $3 million a year. He also was entitled to deferred compensation starting at $2 million a year and increasing by $300,000 each Jan. 1.

Freston also was eligible for annual bonuses of 200% of the sum of his salary and deferred compensation, or about $10 million, which brought his earnings potential to more than $20 million a year.

The agreement states that in the event of his termination for anything other than cause, a term generally ascribed to misconduct, Freston will be entitled to “salary, deferred compensation and target bonus compensation” for the balance of his contract, which has three years remaining.

The cable channels still draw large audiences, but when MTV Networks went online, it stumbled badly. Despite spending about $600 million to acquire several small online film and game start-ups, the company has failed to attract a large Internet audience.

During the Tuesday news conference, Redstone said that his daughter was designated to succeed him but joked that the transition would come “in the far distant future, 20 or 30 years from now.”

In a later interview, Redstone said his biggest disappointment has been his inability to “get a guarantee that I could live forever.”

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thomas.mulligan@latimes.com

sallie.hofmeister@latimes.com

Times staff writers Kim Christensen, Charles Duhigg, Meg James and Richard Verrier contributed to this report.

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(BEGIN TEXT OF INFOBOX)

Tom Freston

Age: 60

Position: Chief executive, Viacom Inc.

Education: BA, St. Michael’s College, 1967; MBA, New York University, 1969

Career highlights: Joined Warner Amex Satellite Entertainment Co., the predecessor to MTV Networks, in 1980; joined MTV’s founding executive team in 1981; named vice president of marketing for MTV in 1983; took over marketing for Nickelodeon in 1984, giving the children’s cable channel a hipper image that immediately lifted ratings 30%; named senior vice president and general manager of MTV and VH1 in 1985; named president of entertainment for MTV in 1986; promoted to president and CEO of MTV in 1987; became chairman and CEO of MTV in 1989; became co-chief of Viacom in June 2004; lost out on the purchase of MySpace.com to News Corp. in 2005; named CEO of Viacom after it was split into two public companies in early 2006.

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Sumner Redstone

Age: 83

Position: Chairman of Viacom Inc.

Education: BA, Harvard University, 1944; LLB, Harvard University, 1947

Career highlights: Joined National Amusements, his family’s theater chain, in 1954. Became president and chief executive in 1967 and chairman in 1986.

Became chairman of Viacom when National Amusements acquired a controlling interest in the company in 1987.

Fired Viacom’s then-CEO Frank Biondi in 1996, then installed himself as CEO.

Viacom merged with CBS in 2000. Viacom bought out Time Warner Inc.’s 50% stake in Comedy Central, which was then integrated into MTV Networks in 2003.

Split Viacom into two public companies, one focused on fast-growing cable programming (Viacom) and the other on the more mature broadcasting business (CBS) at the beginning of 2006.

Relinquished the position of CEO at the time of the spinoff in 2006.

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Source: Times research