Viacom to Spin Off Blockbuster

question 83

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.
:
-In your opinion,why did Viacom and Blockbuster share prices react the way they did to the announcement of the
spin-off?

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Definitions:

Stock Closed

The final price at which a stock is traded on a given trading day.

3-day SMA

A short-term moving average that calculates the average of a security's prices over the last three days.

Stock Prices

The cost of purchasing a share of equity in a company, which fluctuates based on market conditions.

Shares Outstanding

The total number of a company's shares that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.