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Should CBS Corporation Merge With Viacom?

By Leo Sun - Jan 25, 2018 at 9:31PM

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Will combining two losers make a winner?

Back in 2016, Shari Redstone -- whose family controls CBS (PARA 0.85%) and Viacom (NASDAQ: VIA) (VIAB) -- wanted to merge the two media companies. Last year, Redstone dropped the idea after CBS CEO Les Moonves convinced her that the two companies could thrive on their own.

However, a recent report from The Wrap quotes anonymous sources as saying Redstone is again pursuing a merger. Shares of CBS and Viacom initially jumped on the report, but neither company has commented on the matter. Would a merger actually benefit CBS and Viacom investors?

Two giant puzzle pieces placed in a city landscape.

Image source: Getty Images.

It's about staying competitive

The media industry is rapidly evolving. Streaming challengers like Netflix are persuading cable subscribers to "cut the cord," and the industry is consolidating with AT&T's planned takeover of Time Warner (TWX) and Disney's (DIS -1.20%) planned purchase of 21st Century Fox's media assets.

Analysts expect CBS and Viacom to respectively generate $13.5 billion and $13 billion in revenues this year. But they expect Disney and Time Warner, prior to their megadeals closing, to generate $58.6 billion and $31 billion in revenues, respectively. Comcast (CMCSA 0.66%) is expected to generate $84.4 billion in revenues.

In addition to generating much lower revenue, CBS and Viacom own less  blockbuster intellectual property than their rivals. Disney owns Pixar, Marvel, and Lucasfilm, and will soon acquire Fox's top assets. Time Warner owns Warner Bros. (including the DC films) and HBO. Comcast owns Universal and NBC, the highest-rated network in America among 18-to-49-year-old viewers.

CBS' mobile app.

CBS' mobile app. Image source: Google Play.

CBS is still the most-watched network in America by total viewers. But its top show, The Big Bang Theory, is arguably showing its age as it finishes its 11th season. Meanwhile, Viacom's TV business is struggling as aging youth-oriented networks like MTV, VH1, and Comedy Central lose relevance in a Netflix- and YouTube-oriented world.

Viacom's Paramount Studios still has a few likely hits on its slate, including a sixth Mission Impossible film, a new Transformers film, and a Bumblebee spi-off film. But there are also plenty of potential misses, including another attempt to revive the Terminator series and reboots of 1980s classics Top Gun, Beverly Hills Cop, and Friday the 13th.

Does merging two losers make a winner?

Shares of CBS and Viacom respectively declined 8% and 16% over the past 12 months as investors dumped both stocks on uninspiring growth.

CBS' revenues rose 3% annually last quarter, but that growth was uneven. Its ad revenues fell 5% to $1.1 billion, while its content licensing and distribution revenues plunged 22% to $860 million.

A hand holding a remote control that is pointed at a TV.

Image source: Getty Images.

Those losses were offset by a 52% jump in affiliate and subscription fees, which hit $1.15 billion on the strength of CBS' core programming, its Showtime cable network, and its growth in digital subscribers.

Unfortunately, its operating income still dipped 2% as its net earnings from continuing operations fell 10%.

Viacom's revenue rose 3% annually last quarter. Its Media Networks revenue grew 3%, lifted by worldwide growth, higher affiliate fees, and forex [foreign exchange] benefits. Its Filmed Entertainment revenues grew 2% as the growth of its licensing revenues offset a tough comparison with last year's Star Trek Beyond.

On the bottom line, Viacom fared better than CBS. Its adjusted operating income, which excludes asset sales, rose 7%, while its adjusted net earnings jumped 14%. But on an annual basis, CBS' and Viacom's growth estimates still look dismal relative to their top competitors.


Estimated Sales Growth/(Loss)
This Fiscal Year

Estimated Earnings Growth/(Loss)
This Fiscal Year










Time Warner






Source: Yahoo! Finance.

The key takeaway

Based on those figures, merely merging CBS with Viacom won't create a more competitive media company. But if they wisely pool their resources to acquire or create new intellectual property, while aggressively eliminating redundancies and generating synergies, the new company might start growing its revenue and earnings again.

But investors should take all these rumors with a grain of salt. CBS and Viacom originally split in 2006 because the conglomerate had become unwieldy under a single brand. Recombining the two halves could cause similar problems, so investors shouldn't think that a merger will alleviate the two companies' biggest headaches.


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Stocks Mentioned

Paramount Global Stock Quote
Paramount Global
$25.98 (0.85%) $0.22
Viacom, Inc. Stock Quote
Viacom, Inc.
The Walt Disney Company Stock Quote
The Walt Disney Company
$96.61 (-1.20%) $-1.17
Comcast Corporation Stock Quote
Comcast Corporation
$39.83 (0.66%) $0.26
Time Warner Inc. Stock Quote
Time Warner Inc.

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