Sumner's Last Stand
On a recent rainy afternoon at the Times Square headquarters of Viacom Inc., Chairman and Chief Executive Sumner M. Redstone huddles with his two vice-chairmen, Philippe P. Dauman and Thomas E. Dooley, over their regular weekly lunch. Redstone, who meticulously monitors everything he takes into his nearly 74-year-old body, sits down with just a plate of dry corned beef ("Sumner's protein diet," observes Dooley) and launches into the global and parochial issues he is tackling this week on behalf of Viacom, the media conglomerate he has assembled over the past decade.
First, Redstone says that News Corp.'s Rupert Murdoch just called, asking for a meeting the following week, when Redstone will be in Los Angeles. He suggested "we stop being perceived as adversaries," Redstone says to his two chief lieutenants. He wants to "see what we can do together." Dooley, a savvy financial executive who has been with Redstone for a decade and with Viacom even longer, outlines an area where Viacom and News Corp., already partners in Nickelodeon UK, might explore a deal. Redstone adds a suggestion of his own. After all, he notes, "I don't think he just wants to have a sandwich."
Next on the agenda is how Redstone will handle the "fluid" situation with Tele-Communications Inc. Chairman John C. Malone. Malone, who is under intense pressure to improve TCI's financial performance, has been threatening to toss popular cable networks off his systems unless programmers cut him a break on price.
Malone personally assured Redstone last summer that he would do nothing to harm Viacom's cable networks--MTV, VH-1, and Nickelodeon. But in the days leading up to this lunch, several TCI cable systems pulled the plug on VH-1 and MTV. "I had an absolute, positive commitment from him. He promised it would not happen, but it did happen," says Redstone. "I do not believe John Malone would cross Viacom. I just don't believe it."
Redstone and Dauman, a lawyer and Redstone's designated heir as chairman, review how Redstone will handle the issue. Their strategy worked: A week later, TCI reinstated the Viacom channels where they had been dropped. The potential crisis was quietly averted. But the episode illustrates a central tenet of Redstone's operating philosophy at Viacom: Why send a mere executive to do a mogul's job?
Of course, in the world of media giants, titans like to deal with one another directly, rather than through underlings. But until a year ago, Redstone had CEO Frank J. Biondi Jr. to shoulder some of the burden. Redstone fired Biondi last January, convinced that he alone had the energy, vision, and drive to lead the company. And Redstone is having the time of his life. He has few interests apart from tending to his beloved Viacom. With the exception of Murdoch's News Corp., no other media company is so intricately shaped, for better or worse, by the personal tics of the visionary at the top. "Sumner is a mad genius," notes a media industry investment banker. "At the moment, he's probably more mad" than genius.
To his credit, in the year since becoming Viacom's unpaid CEO, Redstone has made some impressive strides. He's a legendary negotiator, regularly able to extract terms and close deals no one thought possible. On Feb. 18, Viacom announced that it sold its radio stations for $1.1 billion--far more than analysts said they were worth. Redstone has traveled the globe brokering lucrative international deals potentially worth more than $2 billion. He sold Viacom's cable systems "in the nick of time," he says, as the industry foundered. He has overseen a turnaround at Paramount Pictures Corp.. He launched new international channels to carry Viacom's content into far-flung markets and hired a formidable executive
to head Blockbuster Entertainment Group. With his tirelessness, his passionate enthusiasm, and his laser-beam
intellect, Redstone has long been Viacom's greatest asset.
But he now may be something of a liability as well. While other industry giants are shuffling assets in a frantic bid to focus, Redstone is unable to state a clear, realistic vision of what precisely he wants Viacom to be. He can't afford that luxury. Winning the bidding war for Paramount in 1994 saddled the company with $10 billion in debt. But the company doesn't generate enough cash to cover his grand ambitions. Paying the interest while investing heavily in growth has forced the company into a position where it's actually increasing its debt to fund operations.
At the same time, Redstone's expanding role atop the company overshadows the contributions of Viacom's extremely capable operating executives, thereby exacerbating a widely held view that the company lacks executive depth. But most significantly, his hands-on approach and involvement in comparatively minor decisions has imposed a troubling management gridlock at the company, which swelled from 7,000 employees in early 1994 to 83,000 today.
Indeed, Redstone still runs Viacom as if it were a mom-and-pop operation, with him all but living above the store. Of course, he does own 28% of the equity and controls 67% of Viacom's voting stock. Still, he spends much of his time on such nuts-and-bolts tasks as addressing a meeting of school superintendents in San Francisco to help his Simon & Schuster unit sell more textbooks, doing his own background research on a man under consideration to become a marketing executive at Paramount, or engaging in prolonged debates over adding a few million dollars to a movie's budget. "There is a logjam there," observes Porter Bibb, an investment banker at Ladenberg, Thalmann & Co. "Viacom is drifting. As all the major entertainment conglomerates do their damnedest to focus in a changing, volatile climate, it's hard to know where Viacom is going. No strategic priority is emerging."
Indeed, Redstone has trouble articulating a comprehensible strategy for the company. He speaks in platitudes--"Growing Viacom to its maximum potential is the No.1 priority. That vision is never going to change," for instance--but he won't say just how that success will be achieved. "I now control, take my word for it, the best media company in the world."
A year after he took direct control, Viacom's reported results are beginning to improve, but the fault lines running through the base of the company are deepening. Viacom beat analysts' estimates with third-quarter gains in revenue (up 13%) and cash flow (up 6%), and Redstone promises that fourth-quarter results, due out the first week of March, will be similarly strong. Analyst Frederick W. Moran of Furman, Selz LLC expects the company to report 1996 revenues of $12.2 billion, up 9%, and cash flow of $2.2 billion, up 2%.
CRACKS. But peer a bit more closely, and cracks begin to show. Operating margins fell in each of the four major divisions in the first nine months of 1996. And if you look at the cash that the operating units are throwing off, after making their capital expenditures, you'll find there isn't any. Actually, there hasn't been any for years. Running the company at a deficit for so long has caused its total debt load to climb since the debt-financed acquisition of Paramount, despite about $3 billion in asset sales since then (charts).
What's ailing Viacom's businesses? Revenues are rising--at double-digit rates at some divisions. But costs are rising faster. Because of weakness in the music industry, Blockbuster Music is losing money, and Viacom will take a $100 million charge in the fourth quarter to cover its losses and close some stores. Spelling Entertainment Group Inc., which Viacom tried vainly to sell for about $1 billion a year ago, is losing money. And Viacom's healthiest business, MTV Networks, with MTV and Nickelodeon, is pushing hard to expand overseas, but spending large sums as it creates beachheads in new markets. Consider Viacom's $800 million annual interest expense, the $60 million it pays in preferred-stock dividends, and its roughly $800 million in capital expenditures, and it's easy to see why Redstone has to rethink his priorities.
Given the deterioration in Viacom's fundamentals, it's not surprising that its stock has lost half its value since 1993, amid a roaring bull market. Viacom looks no better when measured against Walt Disney, Time Warner, and News Corp. Its stock has trailed the combined performance of these three by 43% over the past two years. No one has suffered more than Redstone. In 1987, after he acquired Viacom in a $3.4 billion leveraged buyout, his stake was worth about $1 billion. By 1993, it was worth $6 billion. Now, it's worth just $3.5 billion, including the shares he bought recently for $250 million.
Redstone won't rest until he has redeemed both his reputation and his fortune. Proving that he was right to fire Biondi and restoring his reputation as a media visionary is Redstone's central mission as he strives to get Viacom back on track. He is remarkably fit: His tennis pro at the Beverly Hills Hotel says "no one plays as hard as he does at his age. He plays like a 55-year-old guy." Nonetheless, Redstone says he has "come to terms with my own mortality."
He can't escape the fact that he is running out of time to add the last chapter--that of a turnaround artist--to his remarkable career. "I hope the world will someday recognize that I'm not some old guy, over the hill," he says. "I really do think I do a good job. Next year, media companies will be the thing, and Viacom will lead them. The turnaround of Viacom is at hand." This is Redstone's last stand.
He's banking on a stock-price recovery triggered by financial results that will look even better measured against poor 1996 numbers and 6.1% fewer shares outstanding. In fact, he has already worked up a Hollywood-style description for his turnaround of the company: "We've been over the tough part," he says. "Maybe Redstone did accomplish Mission: Impossible."
While his mission isn't impossible, it is certainly the toughest task Redstone has ever undertaken. He vows to get Viacom's $10.2 billion long-term debt down to between $6 billion and $8 billion by 1999, without selling any major asset except the radio stations. To meet that ambitious target, he will have to start making some hard decisions. Redstone wants to generate $200 million of free cash flow (cash from operations, minus capital expenditures) by 1998, compared with the $875 million deficit Montgomery Securities analyst John Tinker expects Viacom to post for 1996. That means he will have to cut the amount of money Viacom units have traditionally reinvested to expand. "The goal is to slow down the investment spending in the businesses," says Dooley. "We could literally pull $1 billion out of the machine if we wanted to [no longer reinvest in] our businesses. The risk you run there is: Do you open up the door for your competitors?"
UNEASY MOMENTS. That likely will mean fewer Blockbuster store openings, since Blockbuster has always been allowed to reinvest all of its roughly $680 million cash flow. The belt-tightening also could mean fewer new international channels for MTV and Nickelodeon.
Still, Redstone seems uneasy reconciling his need for austerity with his still expansive ambitions. "[I want] Viacom recognized as a growth company," he says. "We are a growth company." Indeed, Redstone insists that his new agenda of financial discipline doesn't mean that Viacom will relinquish its growth plans. "We can move the company forward, grow, and at the same time reduce our debt," he insists. "Maybe Blockbuster builds a few less stores. Maybe Simon & Schuster [forgoes] a few minor acquisitions."
Left to interpret and juggle Redstone's conflicting agendas are the men on his newly formed executive committee--Simon & Schuster's Jonathan Newcomb, Paramount's Jonathan L. Dolgen, MTV Networks' Thomas E. Freston, and Blockbuster's Bill Fields, plus Dooley and Dauman. And since Redstone says no outsider will run the company, it's likely that one of these men will succeed him as CEO.
UNWIELDY. But after extensive interviews with Viacom's executives and board members, as well as those in the financial and creative community who regularly deal with the company, it's clear that Redstone is loath to give up much, if any, real authority. He won't appoint a president or chief operating officer, and an unwieldy six executives report directly to him and four more report to the "office of the chairman." The divisions are run on Redstone-reviewed budgets and plans, and Redstone himself attends to matters both profound and picayune. Notes Nynex Corp. CEO Ivan Seidenberg, who sits on Viacom's board: "Sumner's got his finger into the whole thing. He's ubiquitous, all over the place. I'm not worried. What has the guy ever not run well?"
Even if he can't recall ever reversing an operating executive's decision, Redstone insists on being part of the dialogue. "I try never to tell our management what they are to do. We collaborate. We're all friends," he says. "They do not consider [my input] intrusive. People like the fact that I care about what they're doing." Maybe so, but working for him isn't easy. A Harvard-trained lawyer, he loves conflict and seems to encourage executives to spar. "He very much believes, as most good lawyers do, that truth comes out of debate," says Sherman & Sterling mergers and acquisitions lawyer Stephen Volk, who has closely advised Viacom.
Of course, Redstone's firing of the well-regarded Biondi reinforced his tough-boss reputation. Two executives close to the company say Biondi refused to debate with Redstone, and toward the end of his tenure would be stolidly passive in the face of Redstone's demands. Redstone is unrepentant over the matter. "His [less aggressive] style was not working. They think I didn't love Frank. I did." Biondi, now CEO of Seagram Co.'s Universal Studios Inc., declined to be interviewed.
But again, while it is to Redstone's credit that he likes his executives to have their own ideas and defend them when challenged, his exacting, argumentative nature can also be a liability. Redstone has over the years sued several media companies, including Time Warner and TCI, and he is currently suing--and being sued by--Universal, Viacom's partner in USA Networks. "Sumner's a very litigious guy. All things being equal, [other companies] would rather not deal with Sumner," notes a media industry investment banker. "He's extremely difficult, litigious, not a partner of first choice."
A good bit of Redstone's iron-willed reputation is drawn from a now famous story about how he survived a 1979 hotel fire by dangling by his fingertips from a third-story ledge until he was rescued. But much like the apocryphal tale about George Washington and the cherry tree, the lesson from this one--that Redstone is awesomely tenacious--is true, while some particulars are not. A Boston Fire Dept. spokesman who was there that night says that Redstone was standing inside the room's large window, not dangling outside, when he was rescued.
BIG BOOST. But there is no dispute that Redstone was horribly injured in the fire. The event had a profound impact on his plans for the rest of his life. "He went through a terrible time after the fire," says longtime friend and Viacom board member George S. Abrams. "I've got to say it came from all the introspection, all the pain. He was imprisoned for a while by the pain. He emerged from it thinking he could do more."
As Redstone turns his steely resolve toward a turnaround, he will get a big boost from some strategic bookkeeping. For the past year, Redstone and other top Viacom executives have blamed the company's poor performance on eroding margins at Blockbuster--which provides a third of its cash flow.
Indeed, on the surface, Blockbuster looks like a troubled company. In 1994, before it was acquired by Viacom, margins ran in the high 20s. In 1996, Blockbuster's margins hit the low 20s. Redstone says that bringing in Bill Fields, once heir apparent at Wal-Mart Stores Inc., means that Blockbuster will soon be back on track. It likely will, but the reason for the imminent turnaround has little to do with the very capable Fields.
When Viacom acquired Blockbuster in the fall of 1994, it immediately wrote off about $318 million, or two-thirds of Blockbuster's tape inventory. The write-down wildly inflated Blockbuster's margins, to as high as the low 40s, for the next four quarters. Viacom desperately wanted superior financial results in 1995, because the terms of the acquisition of both Paramount and Blockbuster would have required it to issue 39 million new shares and pay up to $680 million to shareholders if the company's stock failed to achieve certain price targets. The last of the crucial price-target hurdles was cleared at the end of '95's third quarter--just as the inflated Blockbuster margins based on the accounting-adjusted comparisons disappeared.
For the next four quarters--the last of '95 and the first three of '96--margins began to fall back toward their historic average. Compared with the inflated 1995 results, it seemed Blockbuster was in deep trouble as its margins fell by as many as 14 percentage points.
The doings with Blockbuster's accounting have led to some tension between Redstone and former Blockbuster owner H. Wayne Huizenga. At last summer's Allen & Co. media executives' conference in Sun Valley, Idaho, the pair discussed the matter beside the lake one day. Recalls Huizenga: "I said, `Sumner, you keep saying Blockbuster is not doing well, and Blockbuster is doing fine. It's just the accounting. Blockbuster is being made the culprit when it shouldn't be.' I told him I didn't think it was right." Redstone doesn't remember discussing the merger's accounting with Huizenga: "This is much ado about nothing."
"Things didn't go to hell in a handbag like people have been led to believe," says Huizenga. "In my opinion there was more [merger-related] accounting than Wall Street knew and [Viacom] didn't know how to handle it." Oppenheimer & Co. analyst Alan S. Gould agrees: "I believe the 1995 numbers were not as good, and 1996 was not as bad, as people originally thought. The 1995 numbers were artificially high." Dooley, Viacom's top finance executive, says that the company had no choice but to write down the value of the tape inventory as part of the required purchase accounting for the deal, and that the stock triggers had nothing to do with the decision. Gould says that Blockbuster's old accounting was not unusual, and that Viacom "could have justified leaving it the old way."
DEPRESSED. As the distorted Blockbuster comparisons fade into the past, Viacom is again making a concerted effort to court big institutions that have shunned the stock. And there are signs that institutions may well be ready to take a chance on Viacom again--if only because the stock is so depressed that it is trading at about book value. Disney trades at 3.3 times book value.
It's a rather perverse setup for Redstone's grand turnaround. Thanks to the Blockbuster accounting and the lackluster performance posted by many of his units in 1996, this year's comparisons are bound to look terrific, and the stage is set for Redstone to collect popular acclaim for piloting Viacom to a stellar 1997.
If investors see only the improved cash-flow comparisons and ignore the toubling fact that Viacom still has a long way to go before it actually generates more cash than it spends, it should make for quite a closing shot: The dashing entrepreneur, having taken charge and stood his ground, saves the day. But like a lot of Hollywood fare, it's not such an enchanting tale if you read the script closely.
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