The scant details provided by Westinghouse Electric Corp. on everything but its plans to cut costs after its $5.4-billion takeover of CBS Inc. has upset the network’s more than 200 affiliates and spread fear among its employees about their job security.
Westinghouse has yet to outline the roles of key corporate executives such as Peter Lund, the highly respected president of CBS Broadcast Group, or specify how it will grow the ailing network, which is in third place in the ratings and will face an even stronger competitor once Walt Disney Co. and Capital Cities/ABC Inc. merge.
Instead, Michael H. Jordan, the chairman and chief executive of Westinghouse, has focused almost solely since the takeover announcement Tuesday on how he will increase cash flow by merging broadcasting assets that overlap in many markets. If it can assemble the financing and sell $1.5 billion in assets, the company will have $6.5 billion in debt on its books after the merger.
“This is a network that has been through all the cost cutting it can take, at the hands of Larry Tisch,” said Ralph Gabbard, chairman of the CBS affiliate board, referring to the cost-cutting mentality that ruled under the current regime of investor Laurence A. Tisch, who owns 20% of CBS. “It is asinine to think you can cut any more at the station level. You have to invest money in programming and news at the network to get the maximum benefit out of the stations.”
Gabbard said no one from Westinghouse had informed him of its plans for the network, but that press reports of cost cutting at both the CBS corporate headquarters and in the broadcast group had made him nervous.
“The affiliates are up in arms,” said Gabbard, president of the broadcast group of Gray Communications Systems Inc. in Lexington, Ky., which owns three CBS and three NBC stations. “And what happens to Peter Lund? He’s the guy this network needs, and it would be a mistake if they didn’t do everything they can to keep him happy. But no one has told us the plan.”
Jordan declined Thursday to elaborate on his plans. But Westinghouse sources say a management structure will unfold as the company gets closer to securing the financing and regulatory approval needed to close the sale.
Most analysts expect the top position in broadcasting after the merger to go to Willard Korn, who helped Jordan engineer the CBS takeover and has made broadcasting the jewel of Westinghouse. He has improved the performance of the Westinghouse Broadcasting Co. since becoming its chairman in 1990, increasing operating profits to $203 million last year, from $145 million the year before.
That could rankle Peter Lund, who took the helm of CBS in February and is a favorite of affiliates because of his long history of running stations. Lund is credited with making necessary changes in news, dismantling the Connie Chung-Dan Rather pairing, and with the widely praised stroke of luring Leslie Moonves away from Warner Bros. to be president of CBS Entertainment.
Lund has a five-year contract, but he has an escape clause if the network changes hands. While executives close to Lund say he is interested in staying at CBS, that might not be the case if the seven stations under him are consolidated with the eight owned by Westinghouse and put under Korn.
And industry executives say he would have little trouble finding a new job: Rupert Murdoch recently tried to lure him to run Fox Broadcasting Co., although Tisch apparently refused to let him out of his contract.
Sources close to Westinghouse believe Lund will stay on. And one CBS executive said Lund was reassuring in a meeting with his top 15 CBS executives late Tuesday, after his meeting with Korn and Jordan, who by coincidence, both came from PepsiCo Inc.
But many employees were disturbed that Lund was in the back of the room rather than on the dais at Tuesday’s press conference announcing the deal at the Waldorf-Astoria Hotel. He had not even met with Westinghouse management before the announcement, despite the fact that negotiations have been ongoing for at least four months.
By contrast, even though the Disney deal was pulled together in eight days, after a three-year courtship, Michael Eisner, Disney’s chairman, found time to sign Robert Iger to a new five-year contract as president of Capital Cities.
Indeed, some CBS executives were appalled that Westinghouse executives made themselves so scarce after the announcement. The same day Barry Diller announced last summer that he would merge his QVC Inc. home shopping company with CBS, he scheduled a lunch with CBS’ top managers. “He had studied up on who we were and had something to say to each of us,” said someone who attended. He then strode through the news division to shake hands. (The Diller deal fell through.)
“They are not used to the stroking part of the entertainment business. Welcome to the joys of talent relations,” said the executive.
Instead, after the press announcement, Jordan and his crew met with analysts to go over the financial plan. Analysts, in fact, have been rather upbeat about Westinghouse stock, which closed Thursday at $14, about a $1 above where it traded before leaks of the negotiations two weeks ago.
Based on Westinghouse’s cash flow projections, Ann Schwetje, an analyst at Smith Barney, says the stock could rise to $19. She said that under the plan sketched out by Jordan, Westinghouse/CBS will throw off cash flow of $1 billion in 1996, and $1.5 billion the following year even if the network’s ratings do not improve. That is an increase of $300 million.
Half of that would come from improving margins at CBS’ 21 radio and seven TV stations, in part by collapsing real estate in markets such as New York where both have properties.
For instance, each of the companies has two radio stations in Los Angeles, New York, San Francisco and Chicago (where Westinghouse has three). Office space could be shared, and some radio executives say management could be reduced.
What is more, Westinghouse is known to run a lean station group. Said one radio executive who experienced the cost cutting after her station was purchased in 1990 by Westinghouse: “To get a pencil, you had to beg, and they are notoriously stingy with benefits. One HMO to choose from instead of 11 at ABC Radio.”
Indeed, under Korn, broadcast operating margins have soared to 25% this year, from 18.3% in 1991. “Cost cutting is the whole story at Westinghouse, although last year there was the kicker from election advertising and the general advertising boom,” Schwetje said.
The discrepancy between CBS and Westinghouse TV station performance is even more dramatic. By one measure of profitability known as EBITDA, Westinghouse stations outperform those owned by CBS by a factor of almost two.
Cost cutting and the elimination of redundancy will produce only half of the cash flow increases, under the Jordan plan. The other half will come from streamlining corporate management and the increased revenue flowing from the benefits of multiple-station ownership in several markets, and the ability to offer advertisers a more complete demographic package as a result.
And that is what worries Gabbard. He said Westinghouse’s broadcast mentality is to wring the highest profits from their stations and be second, third or fourth in the market, rather than spend the money to be first. He worries that Jordan’s failure to elaborate on his plan for the network means he doesn’t have one and therefore doesn’t understand the importance to the health of the stations of having a top-flight network with the highest ratings.
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