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Redstones Give Up Merger Hopes

December 13, 2016, 4:21 PM UTC

Yesterday we got a reminder that the most valuable capital in any business is the human capital. Viacom stock plunged on the shock announcement that Shari Redstone no longer wants to merge Viacom with CBS. She and her 93-year-old father, Sumner Redstone, control National Amusements, which owns 80% of the voting shares in both companies, so what they say is what happens. But why did she change her mind?

It’s all about the CEOs. Last summer Shari forced out Viacom chief Philippe Dauman, who had overseen a three-year decline in the stock, while CBS stock under CEO Les Moonves has performed powerfully and is just shy of its all-time high. Shari’s idea was to combine the companies with Moonves in charge. But after Viacom named veteran executive Bob Bakish interim CEO last month, Shari reportedly liked his plans for the company; he was made permanent CEO yesterday. Perhaps just as important, Moonves didn’t like the prospect of merging with Viacom. He has some leverage; at age 67, with a pay package that has often ranked him among America’s highest paid CEOs for many years, he doesn’t need to be in this game.

Thus, Shari Redstone changes her plans, and Bakish and Moonves get to do what they want, at least for now. Ultimately, capital bows to talent.


The Dow didn’t quite break 20,000 yesterday, but it came within about 1% of it, and investors are breathlessly anticipating another milestone. The post-election “Trump rally” leaves CEOs of publicly traded companies wondering how they should respond. The right answer obviously depends on the company, but the answer that puzzles me most is a decision to buy back stock. Yesterday Dennis Muilenburg’s Boeing announced a mammoth $14-billon buyback. Ajay Banga’s Mastercard, Michael Corbat’s, Citigroup, Mark Zuckerberg’s Facebook, Matt Murphy’s Marvell Technology, and Steven Kandarian’s MetLife have all announced new or increased buybacks since the election. What gives?

Stocks overall are hardly a bargain. Nobel laureate Robert Shiller’s cyclically adjusted price-earnings (CAPE) ratio, based on inflation-adjusted earnings over the previous decade rather than just the past year, is at 28. While that isn’t as high as the record 44 at the peak of the Internet bubble, it’s the highest in over a decade and almost matches the 30 reached just before the 1929 crash. So why would a CEO buy back shares when prices are so high?

Sometimes there’s a good reason; to repeat, each company is unique. But buying back shares when prices are surging is a common pattern, and sometimes the ugly reason is an attempt to prop up the stock’s high price. The better course is finding strong operating uses for that money and having the courage to let the market appreciate the wisdom of doing so. Of course a company may hold mammoth amounts of cash, and the CEO may believe the stock is grievously underpriced, in which case a buyback could make sense – but only if the CEO’s bet on the stock price is right. History shows that CEOs are no better at timing the market than most other investors are.

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