Viacom Board Works on Deal for Karmazin

A special three-person committee of Viacom Inc.’s board has been established to negotiate a new deal that would keep President and Chief Operating Officer Mel Karmazin from leaving the company when his contract expires at the end of next year, sources with knowledge of the situation said.

A renewal of Karmazin’s contract would be applauded by Wall Street, which considers Viacom among the best run and financially sound media companies, in part because of Karmazin’s strong management. With most rivals plagued by operating difficulties, debt crises, questionable accounting, or management upheaval, Viacom has in recent months surpassed Vivendi Universal and AOL Time Warner Inc. as the world’s most valuable entertainment conglomerate, even though its own stock has declined 10% over the last year.

If Karmazin were to stay at Viacom, which is by no means certain, it would be a surprise ending to one of the most public corporate power struggles in recent memory. Tensions between Karmazin and his boss, Viacom Chairman and Chief Executive Sumner Redstone, have loomed over the company since the two became a team in mid-2000.

Karmazin, 58, has been widely expected to leave Viacom when his contract expires in December 2003.

Reached at the Bel-Air Hotel on Sunday, Redstone refused to comment. A Viacom spokesman said that Karmazin also declined to comment.

Karmazin became Redstone’s second-in-command as part of a merger between Viacom and CBS Corp., where Karmazin was chief executive. In addition to CBS and its billboard and Infinity Broadcasting radio groups, Viacom owns MTV, BET, Nickelodeon, Paramount Pictures, UPN and Blockbuster.

The two executives have had difficulty sharing power from the start. The conflict became public and was so disruptive to Viacom’s stock that in January independent board members intervened, ordering Karmazin and Redstone to reconcile their differences for the good of the company.

There have been no public eruptions between Redstone and Karmazin since then, and the executives agreed to table any discussion about the issue until the end of this year. At that time, Viacom would announce that Karmazin has a new contract or would leave the company when his existing contract expires.

But just last week, at two dinners with a dozen investors in New York and Boston, Redstone said he was “hopeful that a deal would be struck” with Karmazin, according to executives present.

News of Redstone’s remarks set off a new wave of speculation on Wall Street that Karmazin would be staying put.

“Sumner realizes that Mel has enormous value and significant contributions to make to this company,” said one guest at a dinner hosted by investment banker Gerard Klauer Mattison. “But Sumner is not willing to give up his role. So, the task of this [special board] committee is to find a way for everybody to end up with roles and responsibilities they’re personally comfortable with.”

At the heart of the conflict are the broad powers that Karmazin negotiated as part of the CBS-Viacom merger. Karmazin has complete authority over the company’s day-to-day operations, including the power to hire and fire executives without Redstone’s approval. He also cannot be ousted from the company without a two-thirds vote of the board, which consists of an equal number of CBS and Viacom directors.

Under the merger agreement, Redstone will be allowed to restructure the board next May. Some believe he could reduce its size in a way that could undercut Karmazin and even oust him from the company.

In recent weeks, however, Redstone has softened his position, sources say, because he is mindful of Karmazin’s reputation on Wall Street, and he is now willing to allow Karmazin to stay on as long as he relinquishes some of his authority.

Redstone, 79, who controls more than 60% of Viacom’s stock, makes no secret that he wants to regain control of the company and have the power to fire Karmazin if he so desires. These sources say that the newly formed board committee will approach Karmazin about narrowing the scope of his powers, including giving up majority board protection.

One factor in Redstone’s moderating position toward Karmazin, according to sources familiar with the situation, is the instability at the top of rival media companies including AOL, Vivendi and Walt Disney Co. Recent management upheaval has punished stocks of these companies, a reminder to Redstone of the negative effect such drastic changes could bring to Viacom.

But the turmoil elsewhere in the industry could give Karmazin leverage in his negotiations with Viacom, some analysts say.

Speculation has mounted in recent weeks that Disney chief Michael Eisner could be vulnerable because of the company’s sagging stock price and underperformance at its theme parks and ABC network. Karmazin’s name has been circulating as a possible successor to Eisner, and some large Disney investors have been lobbying directors about such a possibility.

“Mel would get more power, not less, because he could go anywhere and run the show,” said Jessica Reif Cohen, an analyst at Merrill Lynch. “He would have his pick of jobs. If he went to AOL Time Warner, the stock would double or triple.”

She predicts that Viacom’s stock would take a temporary 15% to 20% hit if Karmazin leaves.

Viacom stock closed Friday at $42 on the New York Stock Exchange.

Redstone would be unlikely to risk having Karmazin show up at a rival media company.

In any case, Karmazin would not be free until his current contract expires.

The special board committee, which was set up within the last month, is led by board director Ivan Seidenberg, co-chief executive of Verizon Communications; David T. McLaughlin, chairman of Orion Safety Products; and William Schwartz, a lawyer with Cadwalader, Wickersham & Taft.

Sources say it’s unclear whether the committee can strike a compromise pact agreeable to both Karmazin and Redstone.

So far the committee members have just been talking among themselves, and have had no formal meetings with either Redstone or Karmazin, Viacom sources said.

Whether or not Karmazin stays, sources inside Viacom say Redstone would like to reinstate an executive committee at the company similar to one that pre-dated the CBS merger.

Some Viacom managers have warmed up to Karmazin after initially being put off by his combative and bottom-line-oriented style. Company sources say Karmazin, a radio entrepreneur and inveterate advertising salesman, has mellowed over the last two years and adjusted to managing some of Viacom’s more creative managers. A compulsive workaholic who had lived across the street from CBS headquarters, Karmazin has been married, bought a vacation house and seems more relaxed since the merger, according to some Viacom executives.

Redstone spends about 60% of his time in New York and 40% in Los Angeles and recently purchased a $14.5-million house from actor Sylvester Stallone in the posh Westside neighborhood of Beverly Park, where a number of other entertainment industry figures also reside.