The WWE Makes a Match

In this episode of the Motley Fool Money podcast, Motley Fool analysts Dylan Lewis and Jim Gillies discuss:

• The terms of the WWE-UFC deal, and the media rights story.
• How Vince McMahon "wins."
• Antitrust questions for the new company.

Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp continue their conversation with Motley Fool analyst Asit Sharma about evaluating CEOs, and an understated leader for investors to watch.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 4, 2023.

Dylan Lewis: Step into the ring. Motley Fool Money starts now. I'm Dylan Lewis sitting in for Chris Hill, and I am joined by Jim Gillies. Jim, how's it going?

Jim Gillies: Going pretty good, Dylan.

Dylan Lewis: I was delighted to have you on today's show because this is so firmly in your lane, the topic that we're going to be talking about today. WrestleMania was this past weekend, but the big news in wrestling this week is that the WWE, the World Wrestling Entertainment group, is combining with Endeavor-owned UFC. This is one of those things that I think you've been watching and saying could happen for quite some time.

Jim Gillies: Yeah. We've recommended WWE in both Hidden Gems Canada, where I'm lead advisor, as well as Stock Advisor Canada, where I contribute, where our colleague Nick Sciple also contributes. And both Nick and I have been quite outspoken, I think, that we thought WWE was going to be acquired. And it sort of is, but it also sort of isn't.

Dylan Lewis: It's an interesting deal and we'll get into the terms in a minute. The overall value of the deal, $21 billion, it brings together leaders in wrestling and in the business of entertainment. It puts a sticker price on WWE of roughly $9.3 billion. Jim, you mentioned that you'd felt like this was a property that would get acquired at some point. Why does partnering up with UFC here make sense? What do these two dancing partners see in each other?

Jim Gillies: Sure. Well, I'm going to first caution that the deal value of $21 billion, the value of $12.1 billion they've slapped on UFC and the value of $9.3 billion on WWE -- those are guidelines more than hard-and-fast rules. Those are numbers they've decided to throw on to make the deal work from a tax perspective and to merge these things together. The cynical part of me, which is larger than I'd like to admit, says this deal makes sense because it's the best way for Vince McMahon, who is the controlling shareholder of WWE, he's got about just under 40% of the shares and just around 80% of the vote. This is a way for him to stay involved, frankly, because he's going to be the new executive chairman of the combined company, as opposed to just selling for a bag of money -- which was what we were hoping for.

Because this is an all-stock deal, the true value of the company is going to be whatever the market says it's going to be once all the dust settles. Now, that said, I think this is a very good deal for pretty much everyone involved. I'm not sure it's because of the companies being put together so much as the ecosystem they happen to find themselves in, which is very advantageous for the style of business that both of these companies do. That can probably be summarized in two words, and that would be "media rights."

Dylan Lewis: It's one of the large themes of streaming over the last five to 10 years. Yeah, they are incredibly differentiated in what they offer, UFC and WWE. Is this just two groups that are really good at a specific kind of entertainment getting together and saying we think we're better as a bundle here?

Jim Gillies: To a certain degree, yes, I think. As the streaming ecosystem has been developing, as you say, over the past half-decade, decade, what we've learned is as people have been cord-cutters and cable companies have struggled -- I couldn't tell you the last time I watched network television, but I will pay for my sports package because I want to see sports live. That is kind of what's happening here. We've all learned, we can wait for the next edition of NCIS-Whatever. But we want to see sports live, we want to see it as it's happening so we can participate in the broader social value of, "Hey, we've all watched WrestleMania last night," or the most recent UFC [bout]. We've seen media rights negotiated for all the big sports -- hockey, soccer, football, what have you -- just getting ever-greater values with the deals that they're negotiating. Like it or love it, WWE and UFC, they have a very specific niche market who still want to see it, similar to watching the most recent hockey game, watching the Super Bowl, or whatever your baseball game is, and people are willing to tune in for that, which makes it really valuable from the perspective of media rights and being able to advertise to the people who are willing to pay up for that.

So WWE has a couple of deals. They have a deal with Comcast NBCUniversal for their Monday Night Raw program and whatever night their minor league wrestling, NXT, shows up. They're affiliated with Peacock, which is where all of their premium live events take place, which we used to call pay-per-views. But they have a deal with Peacock and they also have a deal with Fox Sports to air Friday Night SmackDown. We were already expecting those rights would probably go for more than double what the last round was, which was almost five years ago. Now, don't discount the possibility that you could be negotiating for both WWE rights and UFC rights, because I believe those are up at the end of 2025.

Dylan Lewis: Yeah, that's what I have in my head and in my notes here too, Jim. I think that that's one of the interesting elements of this. The WWE is already making a pretty healthy amount of money on its entertainment rights based on those past deals. I believe it's about $1 billion a year coming in. We've seen the value of them only go up. The timing of this -- you can't help but see everything from the WWE as somewhat theatrical. They announced this right after WrestleMania, and they announced this deal right before they're heading into these big negotiations. I feel like it only gives them more leverage as they're trying to get as much value as they possibly can out of those deals.

Jim Gillies: Oh, absolutely. I mean, if you know anything about Vince McMahon -- and I know an unhealthy amount about Vince McMahon, I wish I could use that brainpower for something else -- but he's a fascinating guy, and he does generally win on deals. Now, there's some unsavory elements to the man's character as well. But as a businessperson focused on the wrestling business, he has been spectacular. He put everyone else pretty much, if not out of business... I mean, he is the top dog in the industry.

But if you also know Vince McMahon, you know that he's been desperate to move beyond wrestling. He started the XFL twice. He started the World Bodybuilding Federation in, I believe, the early '90s, something that probably no one besides me remembers. He's got all kinds of movies, like WWE pictures. He's desperate to be not wrestling. Look at this, he's just signed a deal, and now he's moving into real fights ... he will be the chairman of the board for a company that does real fights as well. I believe he's 77. At this latter stage of his life, he's almost getting to a spot where he's been trying desperately for years to move -- beyond wrestling. He doesn't even like to use the term wrestling or wrestlers. He likes to call them sports entertainers.

I've always admired the fact that, as our colleague Bill Mann likes to say, sometimes I refer to someone who's had a lot of success in a business, you don't really think about it as, that's a public company. Vince McMahon took over a mountain no one else wanted. That's Bill's line. And no one else realized they wanted it, except now you look at it and he's just striking a deal that values his company at $9.3 billion, at least on paper. Maybe a few other people should have fought for that mountain, that's all I'm saying. 

Dylan Lewis: If I'm not mistaken, he bought the WWE from his father for $1 million back in the '80s.

Jim Gillies: $1 million. Yeah, 1982.

Dylan Lewis: Granted, he does not own the entirety of that $9.3 billion that you're talking about there, but that is a very healthy CAGR on that initial investment.

Jim Gillies: Yes.

Dylan Lewis: One of the things that I wanted to talk about with you is, anytime we look at mergers, acquisitions, any major deals like this, we have to briefly entertain antitrust and whether anything is going to be viewed as monopolistic. You talked about this being, from the WWE's perspective, a move to get broader than wrestling. Do you see anything here that could get in the way of this deal happening?

Jim Gillies: I am very, very bad at predicting what legislators will choose to do, mainly because I try to live my life through logic, and occasionally I question theirs. So I will just say this: I don't see this as problematic, but again, I'm not the one who will ultimately decide here. I don't see it as problematic because, first off, there are alternatives to UFC, there are alternatives to WWE. But I would argue that -- and I would presume they would have lawyers who would argue this point far better than me -- these are entertainment brands, these are sports brands, or sports entertainment brands, and as such you are lining up against not just WWE versus Impact Wrestling, or AEW, or New Japan, or whatever. You're lining up against Monday Night Football, you're lining up against 162 games of Major League Baseball, you're lining up against the Stanley Cup playoffs starting in a few weeks. As entertainment brands, even together with UFC, this is a relatively small entity at about $20 billion, $21 billion -- again, on paper. We'll see. Do I think that antitrust regulators will look? Of course they'll look. Do I think it will block the deal? I would be betting no.

Dylan Lewis: The truth about antitrust is it always comes down to how you define markets, right?

Jim Gillies: Baseball says hi.

Dylan Lewis: Well, that's a look at potentially wrestling's future. But before we wrap, Jim, I have to look back to this past weekend and ask you, I know you're a fan of the WWE: Do you have a favorite moment from WrestleMania?

Jim Gillies: I would say night 1 where Kevin Owens and Sami Zayn defeated the dastardly Bloodline to become the tag team champions because both Sami Zayn and Kevin Owens are proud Canadians. So I'm going to raise the flag. 

Dylan Lewis: Listeners, if you don't know those names, you're just like me. I did a lot of frantic googling for this episode to make sure I was up to speed, and I'm happy to do that. It's nice to learn something new. It's always nice to talk to my friend Jim Gillies. Jim, thank you so much.

Jim Gillies: Thank you, sir. 

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Dylan Lewis: Last week on the podcast, Robert Brokamp and Alison Southwick talked leadership with analyst Asit Sharma. Today, they pick up that conversation with how investors can evaluate CEOs, including one of the most understated leaders to watch. 

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Alison Southwick: Let's start off today with looking at the management team's quality, and why do you look at that when you're evaluating a CEO?

Asit Sharma: It's funny because the management team is about so much more than one person, but it's often the CEO who is driving the rest of the selection of that executive suite. So this is a reflection of that toolkit that we were talking about last week that I said should be broad, it should be wide, they should be good at so many things, and be able to handle these opposite skill pairs at once.

So we look at most of the companies that are fun to invest in, that are growing. Let's say they each have one or two identifiable strategic imperatives that seem to override everything else: Like, we've got to expand our cloud-based platform, or we have to increase our users' engagement. How capable is that management team in making these critical imperatives happen? Well, the CEO is the person who has chosen the people in the various seats who can work together as a team to do all the thousand things that may drive engagement for Company A or platform growth for Company B. So I think this is simultaneously learning something about a company, but also again, going back to the first driver of leadership, which is that executive chair position.

Robert Brokamp: How do you figure that out? It's often difficult enough to find information about a CEO, especially if you're trying to get beyond the PR and the salespersonship. How do you dig a lower level down to find out who's in charge of a project and do research on that person?

Asit Sharma: One of the first things you can do is simply go to a corporate page and look at the management team. Most people will put their C-suite people all on one page. And then, from there, interestingly enough, two great sources are LinkedIn profiles and something that Tom Gardner taught me, which is you can find interviews with chief marketing officers, and chief financial officers, and chief product officers. Go watch those videos. You're going to learn a lot about those people. So all the skills that we develop trying to judge these CEOs, guess what? They're really translatable when you start to get a bead on the other people that are assisting the CEO. Many times I've come away just wowed by a management team. I'm like, "These guys really seem to have something here," and other times I've been like, "Boy, they're all so boring and they don't even seem excited by their products and services. Do I want to invest in this company?" Come on, team -- wake me up.

Alison Southwick: Do you have an example of a management team that recently made you go "hmmmm" one way or the other, good or bad?

Asit Sharma: Let's skip the bad because there are several of them. They could come after me.

Alison Southwick: Yeah. We'll skip that. We'll go for the good.

Asit Sharma: Name one CEO, so what? Name a management team, now you have five people after you. 

Alison Southwick: Yeah.

Asit Sharma: I think, for me, Okta's management team is great. Now, this is a company that's been around for a while. They hit a speed bump, and they've had some turnover actually on their management team. But going back to the founders, the people they've selected to move into new positions, those who are sticking around, they're really personable people, always very smart and vibrant. I think there are some good videos on the internet as well that you can find from that management team. So both the mix of old and new. I think that's a team that usually impresses me and still does today.

Alison Southwick: Let's move on to incentives. This is a fun one. Who doesn't love talking about corporate pay, golden parachutes, all that kind of stuff? So what do you look at when it comes to how the CEO is incentivized?

Asit Sharma: Very, very much we should try to tie a company's incentives to management's incentives. So if a company is incentivized, let's say to grow revenue, that's what investors are rewarding, then it makes sense if management is incentivized to grow revenue. Sometimes you see incentives that are just shaped toward share price, which is this double-edged sword, and I hate and I love it. There's a poem by this dead Latin poet, I think he's Latin, Catullus, "Odi et Amo," [which means] "I hate and I love," and I feel this way about this kind of incentive when you say, a board says, basically OKs, If this company quadruples or goes up eightfold in the next 10 years, then the CEO is going to get a gazillion-billion dollars. That's not tying the company's performance to anything that's long-lasting except share price. On the other hand, if you hold shares and it goes up eightfold in five years, maybe that makes some sense there. But the red flag that I would love to bring up here is just if you're reading through a proxy statement, or maybe if you're not an investor who likes to go to that level of detail, if you just understand from interviews, etc., or reading a company's filings, how management is incentivized, if you see something that's just way out of whack, where it looks like, through accounting manipulation or through just a few big maneuvers, a management level person can get a big payout, that's something to be careful of. Don't just look past that and say, "Oh, I like everything else about the company." It can often come back to bite you as an investor.

Alison Southwick: You have an accounting background. When you're talking about looking at the funny jiu-jitsu that they might be doing, it's maybe going to be more obvious to you than it is to someone who doesn't have an accounting background. For someone like me, what am I looking for?

Asit Sharma: Yeah. The most common one is -- and I see Bro nodding his head because we're watching each other as we record -- is earnings per share. When you see these big incentives that are tied too much to earnings-per-share growth and a company let's say has obscenely great cash flow but they're not investing in the future, but they're buying back shares so that there are fewer shares outstanding. So earnings on a per-share basis look better and better and better, and then the management team's getting a lot of money for that climbing number, where we know that the company isn't building up its resources for the future -- that's a great yellow, red flag I'm talking about. You don't need an accounting degree to look through that.

Alison Southwick: Now we talked a bit about management teams, but here's another group influencing the CEO, and that is the board. How do you evaluate a board of directors?

Asit Sharma: There are two types of boards. There are boards that are filled with professional board members who make a living, just, they've had a former eminence, and now they sit on four or five different boards, and tend to rubber-stamp what a company does. Then there are boards that are constructed really with the idea to help the company reach a certain goal. And a great CEO isn't going to give themselves the easy way out and pull in a board that's going to rubber-stamp actions. But they will find board members that help them learn, challenge them, help the company grow, bring relevant expertise in every area, and are tough in some circumstances to work with. You actually want people who are going to challenge you. It's a very simple dividing line for me. I just ask that question: Is this more rubber-stamp or is this more "let's go conquer this market"? If the board is the kind that's going to help a company do that in a way that's also looking at the fiduciary interests of the company and making sure that shareholders are well-served, that's the kind of board that I personally gravitate toward.

Alison Southwick: How how do you evaluate a rubber-stamp board? Is it just as easy as looking at it being like, "Oh, this board is full of 90-year-old ex-senators, that's a rubber-stampy board"? How do you tell?

Asit Sharma: Yeah. I mean, it's funny you should say that, because age can be really great in a board. I mean, sometimes it's the oldest members who have the most experience. But again, if it looks like that's all that they're doing with their time is serving on multiple boards, then maybe they're not contributing as much. This is one thing that I look at is to try to understand how involved the board member is with that. I mean, if they're on four or six or eight boards, how much time can they spend with company X? That's one.

And the second is, too, I think you've touched on something important, which is diversity. All kinds of diversity help a board. Diversity of perspectives, diversity of experiences. Yes, some of the things that get more controversial in the real world -- does it have gender diversity? Is there racial diversity? I look for these things because I think these are all types of diversity that bring different experiences to a board and really inform a robust debate around whatever the subcommittees are working on. Boards are broken into subcommittees. I think it's always helpful for a board. When I find a board that's very homogeneous, it doesn't have to be like 90-year-old people. It could be a group of 20-somethings that a tech bro, now founder, has built up. I think I'm going to dig a little more here. I don't think this could be that great for this company.

Alison Southwick: Yeah. Now, I don't want to get accused of ageism here, but I guess I was just more going for the homogeneity of it.

Robert Brokamp: You were also thinking of Theranos' board.

Alison Southwick: I was! That's exactly what I was thinking of. 

Robert Brokamp: My rule of thumb is if I look at the board and I know everyone, they're in trouble, because they're on the board because they're famous, not because they're particularly technically knowledgeable about some aspect of that business.

Alison Southwick: That's a good one, too. I like that. Asit, we're in the home stretch and the last one we're going to talk about today is "actions speak louder." What are you talking about here?

Asit Sharma: Narrative is very, very important for anyone who's investing. You want to understand what a company's narrative is. I was mentioning looking through earnings call transcripts. That's a great place to understand where a company is going, what its goals are, how it's trying to compete with its rivals in its marketplace, where it's innovating. But it's important to understand the assessments that a management team may give and their plans. We were just talking about this: Are the plans the correct ones? Are the estimates and projections that they're laying out reasonable?

There's a really fun way to do this, to see -- is a company executing or is it moving the goalpost? That's to go back a couple of years and look at old earnings transcripts to see what the narrative was two years ago. Management said they were going to do X. Well, just look at the latest transcript. Does it look like they were executing on this? Did they change the narrative because whatever they put forward was the wrong solution? I think older earnings call transcripts are often more informative than the one that's hot off the press from last week's earnings.

Robert Brokamp: I think looking at the past earnings calls and transcripts are interesting because so much of business is, frankly, predictions. You're making a prediction where you think a market is going or technology is going, and you want your business to be skating where the puck will be, as they say. You want to know -- do these business leaders have a pretty good idea of where things will be one to five years from now?

Asit Sharma: Yeah, absolutely, Bro. What you're looking for really isn't that "aha, got you" moment maybe that I was juicing up just now. But if you're looking for that confluence of what you thought about the team and it really happening, that's where I get the warm fuzzy -- like, "Hey, two years ago, they thought the puck was going here and look, it went there." They're pretty good at this. They have some vision, and I want to keep following this company and investing in them.

Alison Southwick: Asit, before we let you go, do you have an all-time favorite ride-or-die CEO? It doesn't matter what company they're at the helm of, you would follow them through the gates of hell? Or whatever CEO comes closest to that for you?

Asit Sharma: Alison, I'm the type who will follow a leader toward the gates of hell, but then I'm like, "Hey, take that exit off the interstate before we get there because I just want to hit the bathroom," and then I'm out of there. But there are some CEOs that I really like. I mean, I would definitely ride in that direction with them. One is Jensen Huang. I think Jensen Huang, who is the CEO and founder of Nvidia, is one of the most, I want to say, understated CEOs out there. I mentioned him earlier in last week's episode here. I also think that he's going to turn out to be one of the most consequential CEOs of this century just because of how pervasive Nvidia's tech is in everything now, and the role it's going to play in generative artificial intelligence. But what I like about Jensen Huang is he inspires amazing employees to stay for the long term. Like Ian Buck, who was one of the pioneers of the parallel processing technology that informs all of Nvidia's products now, came years ago and has just enjoyed staying there and has created more and more value for shareholders.

One example of one of the intangibles that I talked about earlier, Jensen Huang sent a letter to his employees last summer when the company hit the skids on its revenue. They missed their revenue estimates by $1 billion, one quarter. He basically told employees, look, I'm not going to do any layoffs. By the way, here's a raise for your families. I know inflation is spiking, times are tough. We'll cut in other places. We're going to get through this together.

We see so many companies this year, big tech companies laying off thousands and tens of thousands of employees. Well, guess what? Nvidia is back in a big way this year, and part of that is the way that Jensen Huang manages the company, the culture there, his passion for his people, his care for his people. Lastly, about him -- curiosity and passion, they're off the charts. This is a person who looks at these weird fundamental physics problems -- and he's done this for decades and he is an engineer by training -- and asks, how can we realize this if we made a chip architecture to try to solve this one problem? And then they spend years trying to develop an answer. I really love that about Jensen Huang. I would stay with him probably till the very last exit on that highway to hell. 

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Dylan Lewis: As always, people on the program may own stocks mentioned and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. We'll catch you next time. I'm Dylan Lewis.