It appears increasingly likely that merger talks between CBS Corp. and Viacom will end without a deal, at least in the short term. But the end of the formal negotiation process between the boards of both companies won’t bring an end to the corporate soap opera, as both sides will be awaiting the next moves of Shari Redstone, controlling shareholder of CBS and Viacom, and Leslie Moonves, CBS Corp. chairman-CEO.

“The lack of clarity around the combined company’s management structure, and the risk of losing CBS CEO Les Moonves, continue to keep investors out of CBS’ stock. Let’s call the whole thing off?” analyst Michael Nathanson posited in a research note following CBS’ strong first quarter earnings report on May 3. “We think the overhang of a deal with Viacom will continue
to weigh on the multiple [that] investors are willing to pay for the stock until the dust settles.”

The stalemate in the merger talks only intensified last week after Redstone offered an alternative scenario on the management question that remains the biggest obstacle to a deal.

The CBS side continues to be wary of a proposal that would shift Viacom CEO Bob Bakish to a seat on the board of the combined company, with the expectation
that he would eventually succeed Moonves as CEO.

Redstone has been pushing for the two companies to merge and for Bakish to serve as the No. 2 executive to Moonves. That plan has been a nonstarter for Moonves and has complicated the deal talks by putting the focus on personalities rather than dollars and cents.

Redstone’s move was positioned as a concession to break the impasse in the talks. But Team CBS saw it as a strings-attached offer that would put a ticking clock over Moonves’ head if the companies were brought together under his leadership. There is great frustration at what Redstone sees as imperious behavior in Moonves’ reluctance to cede any power to Bakish.

The stalemate that has persisted for the past month has raised the specter of Redstone moving to replace CBS Corp. board members in an effort to clear a path for a deal with Viacom. Such a move would surely spur the exit of Moonves as chairman and CEO of CBS. There is increasing speculation among CBS watchers that Moonves could leave regardless, out of frustration with Redstone’s desire to reunite the companies, which were split up in 2006.

CBS and Viacom in February established special committees of both boards to pursue merger negotiations. Those talks have been difficult, by all accounts, but the sides have made progress on the price tag for a deal. The governance issue has remained the big hurdle.

“The lack of clarity around the combined company’s management structure, and the risk of losing CBS CEO Les Moonves, continue to keep investors out of CBS’ stock.”
Analyst Michael Nathanson

The CBS board and Moonves have insisted that the CBS management team led by Moonves and CBS chief operating officer Joe Ianniello need to be empowered to oversee the integration and operation of the companies. Viacom and Redstone have pushed for Bakish to have the COO role.

From CBS’ view, the prospect of Bakish waiting in the wings to succeed Moonves is a red flag. Some wonder if Redstone may cite the rejection of the Viacom board offer as a reason for a move to more dramatic steps to overhaul the CBS board. Redstone has the voting power to summarily replace CBS board members, although such a move would inevitably invite shareholder lawsuits. Redstone has already exerted influence in bringing Richard Parsons, former head of Time Warner, into the picture as a CBS board member. Parsons, who will be elected to the board at CBS’ annual meeting on May 18, is said to have already been pressed into service in a diplomatic capacity to help improve communication between CBS and Viacom.

Redstone sees the CBS board as being in need of greater diversity and too compliant with Moonves. From Moonves’ perspective, the prospect of Redstone replacing board members would be disruptive and against the interests of shareholders at a company that is performing well despite the challenges in the media landscape.

Redstone sees a larger goal of reuniting CBS and Viacom at a time when media players are looking for the scale and depth that comes with size. Sources close to the situation said Redstone was led to believe that CBS and Moonves were more receptive to the reunion this time around, after a failed attempt in 2016.

The will-they-or-won’t-they uncertainty surrounding CBS and Viacom has been a drag on both stocks — another factor that has made it harder for the sides to come to terms.

“Every indication suggests [CBS and its executives are] executing well and positioning themselves as well as could be expected, given the structurally declining environment they are operating within,” Bernstein & Co. analyst Todd Juenger wrote in a note following CBS’ earnings. “Imagine how different the investor conversation would be (and, we think, CBS stock price would be) if it weren’t for the Viacom situation. But, unfortunately, investors can’t wish that away.”