NEW YORK -- Contrarian value manager David Dreman is throwing cold water on the idea that Westinghouse Electric Corp.'s transformation into the media company CBS Corp. should be stamped a success.
He also believes bet-the-ranch type deals like Westinghouse's purchase of CBS three years ago -- and AT&T Corp.'s recent agreement to buy Tele-Communications Inc. -- are not worth the risk, even if the deal eventually works out.
CBS, like AT&T, has "a CEO swinging for the fences. If he wins, he's a hero; if he loses, shareholders get hurt badly," said Mr. Dreman, chairman and chief investment officer of Dreman Value Management LLC, Red Bank, N.J.
Michael H. Jordan, chairman and chief executive of CBS and the old Westinghouse Electric, began the transformation in 1995 when Westinghouse agreed to buy CBS Inc., a television and radio company.
At the time, Westinghouse was an industrial and radio company hybrid, and it was unclear what Mr. Jordan's plan with the two companies was.
Since then, Westinghouse has shed virtually all of its nonbroadcasting units, with the last of its major industrial operations going to Morrison Knudsen Corp. under an agreement signed late last month.
As part of its buying and selling of businesses, CBS bought Infinity Broadcasting, bringing on the highly regarded Mel Karmazin in the process.
Mr. Karmazin now is president and chief operating officer, and was given responsibility for CBS' TV network, which has been suffering from poor ratings and unfavorable demographics, managers and analysts said.
Even though Westinghouse already was a major player in radio, Mr. Karmazin's big role in the company caught Wall Street's attention, and CBS' stock subsequently took off.
Last Thursday, CBS shares traded at about $34, after trading below $14 prior to the Westinghouse-CBS merger.
CBS' climbing share price and its prospects for future growth impressed several portfolio managers and analysts, although Mr. Dreman said the company's shares are overpriced.
CBS "really has transformed itself," said John Carey, portfolio manager for the Pioneer Equity Income Fund and the Pioneer Fund, both funds of Pioneering Management Co., Boston. Pioneering owned about 1.4 million shares of CBS as of March 31, according to public filings tracked by CDA/Spectrum, Rockville, Md. Mr. Carey declined to disclose current holdings.
The Westinghouse-CBS merger was "one of the most impressive financial transactions in many years," Mr. Carey said. "(Mr.) Jordan got quite a bargain."
"I look at CBS as an undervalued collection of companies," said John Schreiber, securities analyst for Janus Funds, Denver.
On March 31, Janus owned about 40 million shares of CBS, according to CDA/Spectrum.
Growth managers should be attracted to CBS' prospects, while value managers should be attracted to CBS' assets, which aren't being properly valued by the market, Mr. Schreiber said. Included in that are some valuable real estate and CBS' TV network, which basically is getting a value of zero, based on market multiples for the business CBS is in, he said.
But Mr. Dreman said he doesn't see any value in owning CBS, which has scant earnings and is priced at a high level relative to its cash flow.
Analysts project earnings of 21 cents a share for this year, and 46 cents a share for 1999, according to Zacks Investment Research Inc., Chicago.
Even if the transformation succeeds, Mr. Dreman said, owning shares isn't worth the risk.
CBS "may work out well," but "they've totally changed the company, and it's a CEO's gamble," Mr. Dreman said.
And CBS isn't the only company where CEOs are gambling with the fortunes of huge companies, he said.
In buying a company undergoing a complete makeover, he said, "we're betting a lot on the unknown.
"As a value manager, I think these guys are making too big a bet."
Real earnings aren't expected to come quickly at CBS, he said.
But analysts and managers who own CBS said cash flow measures are more important than earnings for a broadcasting company because accounting practices for depreciation don't reflect reality.
"This is a complicated story. The radio and television businesses require very little capital expenditures," said Walter Hunnewell, equity analyst in the global equity research division of Putnam Investments, Boston.
Free cash flow, which can be defined a little differently by different analysts, is a more useful number than earnings, he said.
Putnam owned about 39 million CBS shares as of March 31, according to CDA/Spectrum.
Even then, Mr. Dreman said, CBS shares are priced high relative to cash flow.
And whether Mr. Karmazin can turn around the network is debatable.
"CBS still has some work ahead of it in building up its programming strength," said Mr. Carey of Pioneer Funds.
The network is losing money, but is viewed by some as a loss leader for CBS' TV stations.
Nonetheless, analysts and managers said they were confident Mr. Karmazin will turn things around at the network.
Mr. Schreiber of Janus said Mr. Karmazin proved wrong those who doubted he could turn around CBS' TV stations.
Likewise, Mr. Karmazin will do the same with the television network, he said. And even if he can't, Mr. Schreiber suggested, CBS might sell the network itself to a company seeking distribution channels.