Was the Viacom split a mistake?

When Sumner Redstone, the founder and controlling shareholder of Viacom, announced the split of the Viacom empire at the start of 2006 into two narrowly focussed firms, he declared that the age of the diversified media conglomerate is over. Viacom was broken up into two separately traded pubic companies. One was CBS Corp, which mainly included the CBS broadcast television network, a group of affiliate stations, and a major radio broadcasting and outdoor advertising group. The other entity retained the Viacom name, and included a large array of cable networks including MTV, VH1, Nickelodeon, Comedy Central, BET as well as the Paramount movie studio.

The move to break up the company essentially undid Viacom's acquisition of CBS Corp. in 1999.

The justification was to unclock the shareholder value and give investors a chance to invest in two narrowly focussed stocks: the Viacom unit would attract investors seeking fast-growing cable businesses, while those seeking dividends and higher cash-generating businesses can buy shares in the new CBS Corp.

It's funny how investment bankers can use the argument of "synergy" vs "focus & unclocking shareholder value" respectively to convince management into mergers and breakups, over and over again, while collecting their fees either way.

Well, within two years of the split, both businesses have openly indicated their desire to move into each other's territories. With TV & radio showing little or no growth, CBS has created a new entity called CBS Films to make movies, while Paramount has indicated it may get into the television business.

While I definitely don't think we need another film studio, CBS Films is trying to play in a niche space. Instead of mega-budget productions like "Indiana Jones" (Paramount's staple), they're starting with a focus on the under-served, mid-size movies, with a plan to release four to six movies a year. CBS also hopes to get efficiency in marketing cost (a significant portion of the total cost of film making) through its other media assets (spare ad inventory on TV, outdoor & radio).

Only time will tell how CBS Films performs. But don't be surprised if in another two years, Redstone, who's still the Chairman of the board that oversees both CBS & Viacom, merges the two businesses. Bankers can always make a case for synergy, with one studio making both big budget and mid size films.