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Wall Street Has Mixed Response to Viacom-CBS Merger

As top executives from CBS and Viacom celebrate a new merger and the hard work behind it, Wall Street has questions about the combined company’s operating structure and next steps.

Analysts pressed the company Tuesday for more information about certain elements of the merged owners of the CBS broadcast network; Showtime pay-cable channel; Paramount movie studio and Nickelodeon kids-media empire. They are not convinced the current management structure, which puts CBS CEO Joe Ianniello in charge of CBS-branded assets and makes Viacom CEO Bob Bakish the head of the whole company, will allow for maximizing assets. And they want more information on expected results from using the combined company to boost revenue from streaming-video and new kinds of data-and-technology-enabled advertising.

During a call with investors, Bakish and Ianniello sketched a vision that includes generating new money from direct-to-consumer venues like the ad-supported streaming outlet PlutoTV and the CBS subscription-based CBS All Access product; from distribution outlets that will have to weigh the connection between various Viacom cable outlets and the CBS broadcast network; and from advertisers, who crave the ability to reach broad swathes of consumers while using different programming segments to aim speak to them in bespoke fashion.

“CBS and Viacom are two companies that share not just a common heritage, but a common culture built around content that drives strong connections with consumers and partners alike,” Bakish said during the call.

Wall Street is eager for more information, and is skeptical about certain elements of the new company – particularly how it will operate with an unorthodox executive structure. The new ViacomCBS looks much like the old one, where Sumner Redstone served as chairman of a company that essentially had two parts: Tom Freston ran cable operations while Leslie Moonves supervised CBS assets. The new version of the company will install Redstone’s daughter Shari as chairman, but leaves some questions about whether the combination will be able to maximize its efforts with the assignments given to Bakish and Ianniello.

“While we understand the need for a compromise, this is less than ideal, in our view, and is likely to become a hurdle for truly integrating strategy across these assets. Instead, a structure that would have fostered potentially a better operating environment would have been if Mr. Ianniello were appointed as the COO of the combined company,” said Kannan Venkateshwar, an analyst with Barclays, in a Tuesday research note. “The management structure is also likely to create unnecessary day-to-day operating friction as the CBS and Viacom silos and reporting structures are likely to skew incentives towards maintaining status quo. Therefore, we believe performance of the merged company could result in more operational volatility post-deal.”

Analysts also questioned how quickly a merged Viacom and CBS could scale new revenue. The new company “is going to go to market jointly,” said Ianniello, predicting new outreach would spark attention at next year’s “upfront” market, when U.S. TV companies grapple with Madison Avenue over the sale of advertising inventory for the next programming cycle.

As several of the companies’ rivals prepare to launch massive new streaming-video outlets like Disney Plus, HBO Max and an NBCUniversal product, one analyst fretted over the ability of CBS and Viacom to do so in a meaningful way. Todd Juenger, a media analyst for Bernstein, suggested that investment in a new direct-to-consumer outlet might not bear fruit. “More likely, we believe the pro forma company will invest the synergies in pursuit of some version of a DTC product – which we don’t believe would have meaningful consumer appeal,” he said in a Tuesday research note. “This investment (new original content, foregone licensing, cannibalization) would wipe out the synergies (and then some), with even a bigger impact on free cash flow.. But we doubt the return on investment.”

Despite some of the skeptical sentiment, shares of both companies rose in Tuesday trading. Shares of Viacom were up 68 cents, or 2.38%, to $29.21 a share. Shares of CBS, meanwhile, rose 64 cents a share, or 1.33%, to $48.70 per share.

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