Viacom CEO Dauman Loses $3.4 Billion Betting on His Own Company

Why Stock Buybacks Backfired at Viacom

Add a stock repurchase program that now looks like a dud to the woes of Viacom Inc. Chief Executive Officer Philippe Dauman.

Viacom spent $15.2 billion buying back shares over the past five years, at an average price of $60.62 each, according to data compiled by Bloomberg. The stock closed at $47.02 Monday, meaning the company, controlled by 92-year-old Sumner Redstone and led by Dauman, has lost $3.4 billion investing in itself.

Buybacks amplified the rebound at media companies after the Great Recession knocked down their stocks. The seven largest U.S. entertainment companies have repurchased more than $100 billion of their shares since 2010. Now the industry is showing signs of stress, and people are questioning whether the funds would have been better spent investing in new programming or technologies. That’s especially true at Viacom, the only one to pay an average price that’s higher than its shares trade today.

“What exactly are they doing to embrace the rapidly changing habits of youth culture,” wrote Jason Hirschhorn, the former chief digital officer of Viacom’s MTV unit and a frequent critic of Dauman, in his daily newsletter, mediaREDEF. “Buybacks? Without a plan just buybacks at a loss,” wrote Hirschhorn, who has also held senior roles at Sling Media and MySpace.

Jeremy Zweig, a Viacom spokesman, said the company declined to comment on its buyback spending.

Viacom, which also owns Nickelodeon, on Aug. 6 reported lower sales and profit, highlighting the loss of viewers and advertisers to online players that have targeted the company’s younger audience.

The shares fell 14 percent in one day, closing the week with a 20 percent loss, worst among its big media peers.

Dauman, 61, a former corporate attorney who has led Viacom since 2006, suspended stock buybacks in April after announcing a restructuring plan designed to boost profit. The company wanted to keep its debt within its targeted range, he said at the time.

Spending on Shows

Stock buybacks will resume in October “in a responsible way,” he told investors on a conference call last week, pledging to maintain Viacom’s investment grade debt rating.

The company is spending record amounts on original programming and investing in new tools to help advertisers better target their spending on Viacom’s networks, he said.

Viacom has spent more than $21 billion on shows since 2010, according to the company, and made acquisitions such as its $757 million purchase of Channel 5 in the U.K. last year.

“Viacom is seizing every opportunity,” Dauman said on the call. “We continue to do the hard work to confidently move forward and lead our industry through the latest pivot.”

Since 2009, U.S. companies have spent $2.4 trillion on stock buybacks, which boost earnings per share even if profits don’t change. Politicians, including Democratic presidential candidate Hillary Clinton, have criticized the practice, saying companies should use the money to hire workers, boost wages, build plants and fund research.

Disney Repurchases

Disney spent $24.1 billion repurchasing shares in the past five years, while Time Warner Inc. bought back $21.2 billion, according to filings. In terms of returns, Disney CEO Robert Iger ranks first among his big media peers, having paid an average of $51 a share for stock that closed Monday at $111.

Viacom’s purchases are notable for their relative size: 250.9 million shares, or 41 percent of the stock outstanding at the end of 2009. The company wasn’t earning enough to pay for those purchases, and debt doubled to $13.1 billion. Dauman’s company now has the highest ratio of borrowing to earnings before interest, taxes, depreciation and amortization of its counterparts.

The company could have spent some of that on technology to stay on top, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell, where he leads the Center for Industrial Competitiveness.

“There is a buyback bubble going on, and what will cause it to burst is not clear,” Lazonick said in an interview. “‘Companies are borrowing money, laying off workers. You see these companies losing competitive capability.’’

Tech Bets

Viacom placed a couple of early bets in nascent digital-first companies, buying a stake in the progenitor to Vice Media Inc.’s online video business. Viacom sold the stake and stood on the sidelines as 21st Century Fox Inc. acquired a 5 percent holding that doubled in two years. Disney and Hearst Corp. have investments in Vice Media, too.

‘‘We believe that the company should more aggressively look at digital M&A,’’ Ben Mogil, an analyst with Stifel Nicolaus & Co., wrote of Viacom in an Aug. 6 note. ‘‘The comedy space has a number of for sale properties.’’

Dauman, whose compensation totaled $44.3 million last year, is among the best-paid U.S. executives, ranking 61st, according to data compiled by Bloomberg.

Like many CEOs, Dauman has his pay partly linked to earnings per share. If Viacom’s stock performance lands in the lowest quartile of the Standard & Poor’s 500 Index, he can still reap his stock award if earnings per share growth, possibly helped by buybacks, beats the average company in the S&P.

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