Viacom to Spin Off Blockbuster

question 59

Essay

Viacom to Spin Off Blockbuster
After months of trying to sell its 81% stake in Blockbuster Inc. undertook a tax-free spin-off in mid 2004. Viacom shareholders will have the option to swap their Viacom shares for Blockbuster shares and a special cash payout. Blockbuster had been hurt by competition from low-priced rivals and the erosion of video rentals by accelerating DVD sales. Despite Blockbuster's steady contribution to Viacom's overall cash flow, Viacom believed that the growth prospects for the unit were severely limited. In preparation for the spin-off, Viacom had reported a $1.3 billion charge to earnings in the fourth quarter of 2003 in writing down goodwill associated with its acquisition of Blockbuster. By spinning off Blockbuster, Viacom Chairman and ECO Sumner Redstone statd that the firm would now be able to focus on its core TV (i.e., CBS and MTV) and movie (i.e., Paramount Studios) businesses. Blockbuster shares fell by 4% and Viacom shares rose by 1% on the day of the announcement.
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-Why would Viacom choose to spin-off rather than divest its Blockbuster unit? Explain your answer.

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Definitions:

Corporate Veil

The legal concept that separates the personality of a corporation from the personalities of its shareholders, protecting them from personal liability for the corporation's debts and obligations.

Corporate Debts

Financial obligations or loans undertaken by corporations, which can include bonds, loans, and other forms of financial liabilities owed to creditors.

Golden Parachute Agreements

Contracts that provide executives with substantial benefits or compensation if they are terminated following a merger or takeover.

Public Policy

Principles and standards considered by the government in making decisions that affect the public.