Follow Up: CBS, Viacom, A Lawsuit, & Verizon

In a follow up to the earlier coverage on this merger, the drama around CBS and National Amusements (parent company of both CBS and Viacom) took a disastrous turn on Monday. The board at CBS took a harsh tactic in the negotiations by suing National Amusements in a Delaware court to block the potential merger with Viacom.

The suit seeks to dilute the authority that National Amusements has in CBS by reducing their voting stock percentages and other high level business machinations which are involved in certain situations when a company is going into a defensive mode to avoid consolidation.

The lawsuit also involves CBS seeking the protection of the CBS Board of Directors from being altered by National Amusements at any point now or in the future. This is a maneuver intended on preventing Shari Redstone from removing certain board members at CBS who have indicated that they are against the Viacom merger, and having her “stack the deck” with people aligned with her in pushing through the merger.

Furthermore, the suit also seeks protection for CBS so that they essentially do not have to accept a “bad merger” deal. This news on the lawsuit comes from Forbes, CNBC, and USA Today. Redstone, has stated that she had no intention of making changes to the CBS board, and both sides are pointing fingers.

This situation is getting ugly, to say the least, and it is unusual too because National Amusements has a hand in both entities already. The normal circumstances of other mergers or acquisitions are between two sides that have no prior affiliation. The ruling of the court in this situation will provide some insight into the potential path that this merger will take in the months ahead.
The court ruling will also provide a legal precedent for the future for M&A activity of this type. In my earlier feature length piece on this merger, the variables were presented regarding the differences of strategic vision that Ms. Redstone and Les Moonves (who runs CBS) had regarding the future of the company.

The merger makes some degree of sense because the assets of Viacom, particularly the cable television outlets, would provide CBS with more content to control and also a wider footprint in cable TV. The recent industry report that was published yesterday touts that cable television revenues have increased by about 10% nationally would seem to indicate that this potential merger is timely for CBS.

However, in my experience covering M&A activity, I kept returning to the rationale behind why CBS would take the option on Monday to sue National Amusements (which some in the media call “the nuclear option”). The only scenario that made sense to me was that CBS had another deal forthcoming or another potential partner for a deal they were trying to work out in back channels.

The one potentially fit in my mind was Verizon, because it had been rumored before, and I wrote about that possibility in an M&A “roundup” type piece I did on media companies. The synergy between Verizon and CBS makes sense for both parties given the other acquisitions and consolidations surrounding both of those entities.

Verizon is under pressure from AT&T, who is attempting to merge with Time Warner, and the federal government has a lawsuit in place currently to block that merger. Comcast is in the process of a bidding war with Disney over the assets of 21st Century Fox as well.

In fact, some within the financial news media suggested that Verizon may have backed off from making a formal proposal to CBS because of the federal government response to the AT&T deal with Time Warner.

The news broke about three hours ago today that Verizon has had contact with CBS and that there is some renewed interest in a potentially deal. That makes sense given the steps that CBS has taken with the lawsuit here against National Amusements. They may not want to take the Viacom deal if they have a better deal with Verizon.

The rather limited cable presence of CBS (Showtime and a couple of smaller channels) would be enhanced by a partnership with Verizon. The network shows on CBS are tremendous ratings drivers, which along with the NFL and other sports content, makes CBS a desirable commodity for Verizon as they seek to keep up with their competitors in the marketplace.

The Verizon potential involvement could be the “wrench” that gets thrown in the CBS – Viacom negotiations that causes a rift that cannot be repaired. The decision of the court will loom over this merger and will be pivotal to which direction it takes in the months ahead.

In the meantime, if the AT&T lawsuit with the government gets resolved that will determine the strategic direction that Comcast will take in the bidding war with Disney over Fox and will provide guidance to Verizon as they determine their commitment to acquire CBS. It is similar to a giant game of dominoes, except that billions of dollars are at stake as well as the careers of many seasoned industry executives, and the fate of consumer choice hangs in the balance.

Follow Up: CBS Merger With Viacom Gets Contentious

The back and forth nature of the proposed CBS merger with Viacom has taken a turn that is very contentious. The discord centers around Shari Redstone, who controls National Amusements which owns Viacom, and Les Moonves the current top guy at CBS.

Redstone and Moonves had initially discussed, according to CNBC that Moonves would run the combined new entity for a period of two years. The reports widely distributed point to the source of the contention being control over the top management team selections. Moonves wants the authority to assemble his own team of people to run the newly combined company.

In addition, Moonves wants his longtime colleague, Joe Ianniello , to be his second-in-command at the combined venture. However, Redstone wants Bob Bakish (the current Viacom CEO) as the second-in-command to Moonves at the newly merged CBS-Viacom.

This comes down to relationships, which frequently is the lowest common denominator in these situations but also the most important one. Shari Redstone holds a great deal of authority here in this situation and she obviously feels strongly that Bakish deserves a “seat at the table” in the new entity.

The view and position of Les Moonves is also understandable, he and Bakish do not work together every day. Moonves and Ianniello work together daily at CBS and have a loyalty to each other that would most definitely serve the combined company well.

Furthermore, the rumor mill is swirling with media reports of Shari Redstone being prepared to let Moonves go and create a whole new CBS board. These developments make an already turbulent situation even that much worse. The executives at CBS have thought from the onset of the negotiations that the Viacom offer for CBS is undervalued.

Therefore, in addition to feeling “low balled” on the offer, they also feel like they are under attack by Redstone, and they are getting defensive in their posture of response. These are natural human emotions that are taking place with a mega-merger hanging in the balance.

The sticking point, from a business perspective and a public relations/investor relations perspective is to have an experienced executive at the helm of such a large and complex operation as the proposed entity of CBS-Viacom would represent. The analysts on Wall Street have confidence in Les Moonves in that spot, with Bob Bakish in that position or someone else with less experience, that would not produce a favorable response from Wall Street.

The other scenario at play here behind the scenes is the sentiment that Viacom needs this merger more than CBS does at this point. This notion has degrees of truth because Viacom has the need for a partner for their basic cable networks in order to gain better leverage in negotiations with cable and satellite providers. Viacom also has the Paramount movie studio which is losing money seemingly by the minute.

Conversely, CBS needs to position itself to compete within an ever-changing climate in the television industry. The merger would provide CBS with more content to drive on their CBS All Access streaming platform. It would also provide CBS with more “pull” with advertisers that are looking to gain exposure for their brands across multiple cable networks as well as national broadcast programing.

The faster they realize that they need each other, the faster this deal will come together. They need to solve this acrimony which exists around the selection of key appointments to the management team of the new entity. The two sides should consider some type of compromise because the experienced leadership Moonves could provide to the new combined company is not easily replaced. I would think they could find some type of important role for Bakish to play in the combined new company.

These connections, the loyalty, and the relationships that these key people have with each other could serve to make this merger be one of great success. It can also have the reverse effect and create a massive mess for a merger deal of this type and carry over through the initial years of the new entity. It remains to be seen which direction that this situation will head down in the weeks ahead.

CBS & Viacom Explore Merger Again

The news on Wednesday that CBS and Viacom were once again exploring a merger opportunity should come as no surprise given that the same person, Shari Redstone, is “running the show” at both corporations because her father, who is the chairman of CBS is very ill.

The potential merger is being driven by a strategy to get ahead of the likely merger of AT&T and Time Warner which would create an enormous media conglomerate. The recent merger that is likely to meet full approval between Disney and FOX is another reason for CBS and Viacom to view each other as a potential “port in the storm” scenario.

The combination of the two entities would combine television/media content creation and broadcasting with the expertise Viacom has in distribution of that content. The ability to have expertise in both areas is becoming a necessity in the mainstream media in order to be able to negotiate profitable distribution agreements.

Furthermore, the synergy of content creation/broadcasting and distribution is becoming crucial for the smaller players in the industry to be able to stay relevant with the competition from Disney/FOX and AT&T – Time Warner (AT&T also owns DirecTV).

This is especially relevant when you consider that AT&T has a market cap of over $200 billion and CBS has a market cap of $23 billion. In the event that AT&T merges with Time Warner that number could be close to $300 billion. The Disney and FOX deal will put that combined corporation at around $250 billion in market cap.
The CBS – Viacom deal might become a necessary move to ensure their own survival in the changing media landscape. The distribution of content is critical, and control of content is also an integral part of the connection between content and profitability. The two companies have several areas of cross-compatibility which is suitable for a merger opportunity.

The merger, if approved, would potentially bring together a more robust stable of networks that are widely available on basic cable packages that would provide leverage for CBS & Viacom when negotiating the carriage fee agreements.

This same principle would apply outside of the U.S. domestic market where a combined entity would be a serious player in the international media / television broadcasting space. My own depth of knowledge is not in the international market but plenty of coverage is out there on that area of this potential deal.

The streaming service that CBS operates called CBS All Access would gain a significant increase in content by merging with Viacom. CBS would also obtain the control of the Viacom owned Paramount movie studio, which should be noted is struggling at this point.

Wall Street is not keen on this deal, according to Forbes they do not see the synergies or the market caps of the combined entity being significant enough to make a difference in the media industry at this point. It also notes, as other major financial news outlets have noted, that CBS is a ripe target for being obtained themselves by Verizon.

The Verizon-CBS rumor has been long running now and it remains to be seen if Verizon wants to take that strategic dive into the network television arm of the industry. The resources of Verizon would be a significant deal within the media industry that would create some serious ripple effect.
However, for now, at least for the next few weeks the focus will remain on CBS and Viacom and if they can determine the parameters of a deal. The combination will not reshape their industry segment but it will have an impact on the way content is controlled and distributed. In that sense, this deal is significant because with the meteoric rise in streaming television programs, content rights are king. CBS would hold the keys to some important properties. Stay tuned.

(some background provided by CNBC, Recode, Forbes, CNN Money.com)