Monday, November 03, 2008

Les Moonves' Missteps At CBS

Friday's Wall Street Journal featured Les Moonves' CBS in its 'Heard On The Street' column. It's an instructive piece because it describes how much of a step up the job of CEO can be, and frequently is, from merely running a business unit within a multi-business company.

In Moonves' case, he was unhappy being cast as CEO of the slow-growth component that was spun out of Sumner Redstone's Viacom when that conglomerate failed to generate promised returns.
The nearby, Yahoo-sourced price chart for CBS and the S&P500 Index shows how badly Moonves has performed at the helm of CBS since its 2005-06 spin off from Viacom. A 50% loss in price, with a significantly faster decline in the recent market turmoil than the S&P hardly provides evidence of his successful leadership of the one-time radio and television network.

As the Journal piece notes,

"With radio and TV ad revenues declining sharply amid the slump, analysts are questioning whether CBS can maintain its generous dividend that has the stock currently yielding 11%. CBS dismisses such concerns. Indeed, CBS's indebted chairman, Sumner Redstone, can ill-afford a dividend cut.

Still, that the question is being raised at all suggests CBS hasn't husbanded its cash resources as well as it should.

Since splitting from Viacom at the end of 2005, CBS has generated more than $4 billion in free cash flow. Prudently managed, and together with well-timed asset sales, CBS should by now have accumulated a decent cash hoard to tide it comfortably through a downturn.

But CBS Chief Executive Leslie Moonves never made any secret of his impatience with CBS's slow-growth image. So while he raised more than $2.3 billion selling small radio and TV stations as well as theme parks, he has spent about as much buying digital businesses, including CSTV, and the $1.8 billion all-cash acquisition of CNET last summer.

Moreover, he squandered $3.4 billion on ill-timed stock buybacks last year, paying an average of $32, which was only a little below the stock's high point of $35 since the split and more than three times the approximately $9.40 where the stock is now trading.
Along the way, he also steadily raised the dividend. CBS is now paying $1.08 a share at an annual cost of roughly $725 million.

If Mr. Moonves wanted to build a growth business, he would have been better off jettisoning the "high dividend" promises. He then could have been more aggressive at reshaping the CBS portfolio, potentially through the complete sale of the fast-declining radio group two years ago.

By aiming for two goals at once, he is likely to fall short on both."

What seems clear is that it hasn't been simply Moonves' desire to pursue growth business in media that has caused problems for CBS.
The financial skills of managing balance sheet liquidity and squaring that management with the company's mix of businesses seems to have eluded Moonves.
Even if Moonves' defense is that Sumner Redstone imposed dividend policies, due to his continued role in CBS, that does not excuse the results.
It doesn't take much observation of technology- and growth-oriented companies to see that investors in those enterprises give up dividends in exchange for superior growth in value.
Unfortunately for Moonves, he pumped out cash for dividends and acquisitions just as systemic liquidity are at a record low for at least fifty years. Not only has Moonves gotten the mix of liquidity management and business mix wrong, but he got the timing of that mistake wrong, as well.
It's a good lesson in why it's actually rare to find a CEO and a company which fit together such that the former can manage the latter to consistently superior total returns for shareholders over time.

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