Sumner Redstone and Leslie Moonves in 2012.
Photograph by Matt Sayles — Invision/AP
By Mathew Ingram
December 12, 2016

As it struggles to reinvent some of its aging entertainment assets under a new CEO, about the only thing that has been keeping Viacom’s share price afloat is the prospect of an imminent merger with its more successful sister company, CBS. That support was removed on Monday, however.

Shari Redstone, who controls the voting shares of both Viacom and CBS along with her father, billionaire Sumner Redstone, said that the family is no longer pushing for a merger of the two companies. Viacom’s stock (VIAB) dropped more than 7% on the news, taking it close to its 52-week low.

Shares of CBS initially also fell (CBS), but later rebounded, suggesting some investors are relieved there will be no merger.

The Redstones said in September that they were very much in favor of a combination of the two companies, which used to be part of a single company but were split up in 2006. The thinking at the time was that CBS, which has been performing strongly under CEO Les Moonves, may be able to help pull its sister company out of the doldrums.

So what changed? Shari Redstone said in the letter that she and her father have become more confident in Viacom’s prospects under new CEO Bob Bakish. But there’s probably a bit more to it than that.

The most likely explanation for the on-again, off-again merger is that Les Moonves wouldn’t agree to the deal. The CBS chief executive was less than enthusiastic about the proposal from the beginning, partly because Viacom reportedly wanted CBS to pay a premium for its shares. And he was said to be uninterested in taking on the challenge of fixing his sister company.

Viacom watchers say Moonves also wanted guarantees that he would be given control over the merged company, along with other potential deal-sweeteners such as an increased equity stake, and the Redstones may have balked at those terms. Viacom’s new CEO also reportedly wanted to be given a chance to fix the company on his own.

There’s no question that the Redstones could easily force a merger of the two companies if they wanted to because they control the voting shares of both through National Amusements. But strong-arming Moonves into a deal he isn’t in favor of wouldn’t be a smart move—keeping him engaged and on-side would be critical to making the merger a success.

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Although the Redstone letter suggests a deal is off forever, it’s possible that terms could still be worked out that might suit both parties. If Viacom’s stock continues to drift lower, the impetus for a merger could become even more unavoidable for the Redstones.

But what the latest news makes clear is that while Shari Redstone and her billionaire father control all the votes, Moonves still has a lot of power in his corner as well—enough to torpedo a deal if he doesn’t like it. That’s something the Redstones will have to come to terms with at some point if they want to move forward.

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