updated 9/5/2006 5:47:22 PM ET 2006-09-05T21:47:22

The board of Viacom Inc., frustrated with the media company’s lagging stock price, has ousted Tom Freston as CEO and replaced him with Philippe Dauman, a former Viacom executive and longtime board member. Chairman Sumner Redstone said Tuesday he hopes the new team will be more aggressive and entrepreneurial.

Dauman’s business partner Thomas Dooley, another board member, is also assuming an active role with the newly created title of chief administrative officer. Freston had only been in the job since the beginning of the year, when Viacom split up with CBS Corp.

The news of Freston’s sudden departure got a poor reception among investors, who pushed the company’s shares down $2.08, or 5.6 percent, to close at $34.89 in heavy trading Tuesday on the New York Stock Exchange.

“We think that it was too early for the board to replace Mr. Freston, who is a seasoned media executive,” Citigroup analyst Jason Bazinet wrote in a note to clients.

Redstone told analysts on a conference call that the decision was a difficult one given Freston’s deep roots at the company, but that the board wanted a more aggressive management team that would have a closer relationship with investors.

“On the one hand we love Tom,” Redstone said. “On the other hand, the board felt that not enough was being done ... that the communication with Wall Street had been deficient, and the stock price reflected that.”

In addition to being Viacom’s chairman, Redstone, who is 83, is also its controlling shareholder. His daughter Shari, 52, also serves on the board and is Viacom’s non-executive vice chair. She has been tapped to eventually succeed her father, though Redstone said Tuesday her role at the company was still evolving.

Freston joined MTV in its early days and is seen as one of the key executives who helped build it into a global entertainment franchise and one of Viacom’s most valuable properties.

Dauman and Dooley have long worked closely with Redstone, but they were sidelined from active roles following Viacom’s purchase of CBS Corp. in 1999, when CBS’s CEO Mel Karmazin became chief operating officer. Karmazin later clashed with Redstone and departed the company, eventually becoming CEO of Sirius Satellite Radio Inc.

Viacom’s stock has underperformed that of CBS Corp. after the two companies split up at the beginning of the year, although Viacom had been billed as having faster-growing businesses than CBS including the cable networks Nickelodeon, MTV and VH1.

CBS, which has raised its dividend three times since the beginning of the year, has seen its stock appreciate 12.2 percent in the year to date, versus a 15.1 percent decline in the year to date for Viacom.

Jessica Reif Cohen, a media analyst at Merrill Lynch, downgraded Viacom’s shares to “neutral” from “buy” following the announcement, telling investors in a note Tuesday that the sudden shake-up creates “significant uncertainty” for the company.

Cohen noted that Dauman and Dooley don’t have significant experience running a large entertainment company, and said the shake-up would likely result in other management changes. “We think this move is likely to be regarded as an attempt by Mr. Redstone to reassert himself in an operating role, a development that is not likely to be warmly received in the investment community,” Cohen said.

On the conference call, analysts questioned whether the appointment of Dauman and Dooley was a stopgap measure or if it reflected deeper troubles in the company’s businesses. Like all media companies, Viacom is racing to adapt its traditional media businesses to rapid technological changes and the exploding growth of Internet advertising.

Redstone insisted, however, that the move was “not a short-term fix,” adding: “This company is in good shape, it could just be better managed.”

Viacom was seen as having missed out on an opportunity to buy the massively popular Internet site MySpace.com, which was bought by Rupert Murdoch’s News Corp. and has sealed a lucrative advertising deal with Google Inc. Redstone indicated Viacom would be more aggressive in pursuing digital deals, though he declined to comment on specifics.

Viacom’s businesses are focused largely on cable TV networks including MTV, VH1, Comedy Central as well as the Paramount movie studio. CBS Corp. owns the CBS network as well as a large TV station group, a radio broadcaster and an outdoor advertising business.

Freston’s departure comes just weeks after Redstone abruptly ended Paramount’s 14-year relationship with Tom Cruise, saying the movie star’s off-screen behavior was hurting box office returns. Redstone said Freston’s departure wasn’t related to the decision to sever ties with Cruise.

Freston, who is 60, became CEO of Viacom in January when it split from CBS. Both Dauman, 52, and Dooley, 49, have previously held a number of executive positions at the company. Since 2000, they have run a private equity firm specializing in media and telecommunications investments.

Dauman has been a director of Viacom since 1987, oversaw strategic transactions, legal and government affairs, human resources and administration and was general counsel from 1993 to 1998. Dooley held various corporate positions at Viacom from 1980 to 2000, was a board member from 1996 to 2000 and rejoined the board in 2006.

Freston, who spent 26 years at Viacom, said in a statement that he would do all he could to ensure a smooth transition. A company spokeswoman didn’t immediately return a call seeking further comment from Freston.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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