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'Mel Watch' Afflicts Viacom Stock

1/26/2003 7:00 PM Eastern

More speculation about chief operating officer Mel Karmazin's potential departure put pressure on Viacom Inc. last week.

Shares in Viacom — usually one of the more stable media stocks — dropped more than 5 percent ($2.13 per share) on Jan. 21, to $39.13, after reports in several national publications claimed Karmazin and Viacom chairman Sumner Redstone had reached an impasse in negotiations to renew Karmazin's employment contract. The stock continued to slide on Jan. 22, to $38.04.

Karmazin, who became president and COO of Viacom after its merger with CBS Corp. in 2000, has a three-year employment deal set to expire Dec. 31.

Sources say Redstone would like to curtail some of the authority Karmazin obtained in his current deal, including clauses that give the former CBS chief complete control over hiring and firing executives. Redstone also wants to end a stipulation that would make it virtually impossible to fire Karmazin, sources say.

Karmazin's contract requires a vote of 14 of Viacom's 18 directors to oust him.

Redstone and Karmazin have clashed in the past, and tension surrounding Karmazin's employment deal is nothing new. Earlier last year, after speculation ran rampant that Karmazin would leave, both men made it a point to show that they were still on good terms.

According to sources, Redstone and Karmazin attended a Bear Stearns & Co. analyst dinner together last year, possibly as a show of unity.

But the two haven't been holding hands lately, fueling additional speculation the executives are at loggerheads.

Karmazin is a highly respected executive whose name frequently appears when top media jobs become open. He's been touted as a possible replacement for The Walt Disney Co. chairman Michael Eisner and outgoing AOL Time Warner Inc. chairman Steve Case. The latter story was short-lived: AOL Time Warner CEO Dick Parsons was selected to succeed Case this coming May.

Despite last week's dip in Viacom stock, analysts are actually a little less pessimistic than they were a year ago about how devastating a loss of Karmazin would be.

Not so bad, maybe

One of Karmazin's biggest cheerleaders — Merrill Lynch & Co. media analyst Jessica Reif Cohen — is now saying his exit would "only" depress the stock by 15 percent to 20 percent, a loss that could be recovered in less than a year.

The Wall Street mavens appear to be soothed by the strength of Viacom's assets and the bench strength of its management team.

Three executives most likely to take over operations if Karmazin departs are MTV Networks chairman Tom Freston, CBS Television Network CEO Les Moonves and Viacom Entertainment Group chairman Jonathan Dolgen.

"The assets don't change and the operating executives don't change if he [Karmazin] leaves," said one fund manager, who asked not to be named.

But the fund manager still sees a chance that Karmazin and Redstone can work out their differences, although he put the odds at Karmazin staying at less than 50-50. If Karmazin doesn't renew, he could be in limbo for the rest of the year, because Redstone has said privately he would hold him to the current contract.

Also, the fund manager said, unlike other corporations, Viacom's No. 2 executives are not angling for the top spot.

"I never thought of Viacom as being like GE [General Electric Co.], where everybody is trying to be CEO," the fund manager said. "These guys [Freston, Moonves and Dolgen] are good at what they do."

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