The Prof G Pod with Scott Galloway - Prof G Markets: Paramount’s Suitors, Nepo Babies on the LVMH Board, and Elon’s Voided Pay Plan

Episode Date: February 5, 2024

Scott shares his thoughts on Byron Allen’s $14.3 billion offer to buy Paramount, and identifies who would be a better acquirer. He also breaks down the latest earnings from luxury powerhouse LVMH, explains why its stock has underperformed, and discusses the problems with family businesses. Finally, he takes a look at the outcome of the shareholder lawsuit against Elon Musk. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, eight. There are eight parrots at a zoo in the UK who have learned to swear. Their favorite words? Fuck off. True story. True story, Ed. I went into a pet store to buy a little bunny rabbit.

And the owner said, what kind of bunny rabbit do you want? A white rabbit or a brown rabbit? And I said, I don't think my python cares. welcome to prop g markets today we're discussing paramount suitors lvmh's record year and elon's shareholder lawsuit here with the news is prop g media analystison. Ed, what are the headlines? We've got a lot of headlines, Scott. I just want to say first, though, I love that you're in your old Warby Parker glasses. I feel like you haven't worn those in years. So I have.

I live all over the world, Ed, because I'm kind of cosmopolitan. And I'm a terrible packer. I don't know if this comes as a huge surprise to you, but I'm a bit absent-minded. And I don't like to travel. I literally just take, you know, a gag ball, saran wrap, starch, some Haribo gummies, and some Cialis. And that's it. That's all I travel with. And I just trust whatever is in the place that I left. And these glasses, I found these glasses in my solo apartment. I have the other rimmed ones. I kind of miss them. In London. Yeah, they're okay. They're very, they're iconic.

Yeah, sort of 2019 Prof G. Do you have contacts, by the way? I feel like you're never wearing glasses on this pod. No, I'm scared to put contacts in my eyes. I think I'm going to get Lasix, actually. Although, without glasses, someone told me I look very patient, kind of post-chemo. And so, you know, the shaved head and everything. So, I like wearing wearing

glasses plus it feels professorial and i think it accents my cheekbones along with the massive amounts of filler i had injected in yesterday by the way i'm crying i don't know if you can tell but i'm crying right now anyways get to the fucking headlines enough about me let's start with our weekly review of market vitals. The S&P 500 climbed, the dollar was volatile, Bitcoin rose, and the yield on 10-year treasuries declined. Shifting to the headlines. The Federal Reserve held interest rates steady for the fourth time in a row. It also signaled that while it's done raising rates, it is not ready to start cutting them. Microsoft reported that its fourth quarter net income increased 33% as the highest quarterly growth in more than two years, but shares fell 3%. Google's revenue rose 13% year over year, marking its fourth straight quarter of accelerating sales growth. However, ad revenue fell short of expectations and the stock fell more than 7%.

Walmart is executing a three-for-one stock split to allow more of its employees to participate in its stock purchase plan. The stock currently sits near a record high. Year over year, it's up 15%. SiriusXM acquired the exclusive rights to the podcast Smartless for more than $100 million. That show is hosted by Will Arnett, Jason Bateman, and Sean Hayes, and its previous home was Amazon,

which paid between $60 and $80 million for its three-year contract. CEOs from TikTok, Snap, X, Discord, and Meta testified at a Senate hearing on the Kids Online Safety Act. It was a rare instance of bipartisan agreement on Capitol Hill as senators pressured tech executives to take accountability for harming children. Scott, reactions? I think Jerome Powell or Chairman Powell takes pleasure in not, you know, not succumbing to any sort of expectations. I don't think he cares. You know, it's like Honey Badger don't give a shit. I think he almost kind of takes rebels in not doing what people are expecting or pressuring to do. It feels like

things are headed in the right direction, but he just wants more time. What he doesn't want to do is say we're cutting rates, signal it, confirm it, and then not do it. So I think he'd rather stick to his guns and say fighting inflation is our number one priority and continues to be our number one priority. And I still believe that he deserves a Nobel Prize or that he's the most consequential person of the last year. Microsoft is unbelievable. Net income up 33 percent and its shares fell 3 percent. Keep in mind that, you know, the stock market is a prediction machine or attempts to be a prediction machine. And it's been pretty clear looking at all their moves that things are going really well,

specifically sort of this AI-inspired boom in their stock price from what is likely to go down as the greatest corporate venture capital investment in history in open AI. And you think, well, open AI is worth $90 billion. They own X percent. So $11 billion, whatever they own of it, they maybe made $20 or $30 billion. So it's not the most successful investment ever. What they miss is that I think part of that 60% run-up in their stock they've had, which has added about, what is that, added about $1.2 trillion in market capitalization, is largely on the heels of their sort of pivot to AI, or it's not even a pivot, it's an enhancement or AI enhancement. So if you look at it that way, an $11 or $12 million investment kind of got them a trillion dollars in value back, even discount

some of that out because it's performing well. This is an investment that increased the market capitalization 50 to 80x. So this is just, it's just incredible. But getting back to the stock price, the stock's up 60%. So a lot of the expectations were already built into this earnings call. So what do you think the market was looking for then? More, bitch, more. I mean, it's just, what's happened in the last 12 months is that a lot, on a regular basis, a pretty big company absolutely blows their earnings out of the water. I think two-thirds have exceeded their earnings estimates. It's just been sort of people expect or analysts of the street are no longer impressed by you beating your earnings. They want you to kind of blow it out of the water. Walmart is, I would argue, kind of

over the last 20 years, maybe one of the best managed companies in America, Doug McMillan. I know Doug. And when I was down there speaking to the management team, they had this kind of associates day. And I guess they do this every month. And there must've been a couple hundred sales associates or what they call associates, people in the stores, average kind of age 50 to 120. And he must have taken an hour just to go down the line and talk to them and not just shake their hand like, hi, pose with the camera, move on. He really did talk to me, get the sense he is definitely really generally interested in people. So I like the company. I like him and Walmart. I remember my dad used to talk about stocks when I was in college. So that was about, what was that, about 25 years ago?

35. Anyways, he loved Walmart and he kept investing in it. And I think that, I think, I'm not sure. I think he still has Walmart in his portfolio. I don't know as I, I should know because last week I had him under, you know, he has serious dementia. So I have him signing over his will to me and my seventh wife. But I don't remember seeing it in the will.

That's not funny, Ed. Do you have any thoughts on the stock split itself? I mean, they're just taking the price down by splitting the stock so that employees can participate in earning stock in the company, which is kind of like a startup-like move of them. Yeah, why not? It doesn't really cost them anything. The stock's at 167, so they'll issue three for one or go to 56 bucks a share. Maybe that makes it more manageable.

But what's interesting is if you look at the chart, Walmart is not a growth stock. Walmart is a mature company, but it's so well managed. Over the last year, it's up 16%, which is great. Over the last five years, it's up 78% or probably, what is that, about 12% a year. But if you look at the chart, the chart doesn't make you seasick or nauseous or give you motion sickness like some of the other volatile stocks. It's just a company that continues to deliver. And I think a lot of people who don't want to go on the wild ride that is tech like investing in a company that will kind of continue to deliver and slowly creep up. And that's the stock. Stock splits, I mean, I'll give you an example. One of my board members, again, Paul Sagan, who's really smart, said, when we were incorporating, I said, okay, we're incorporating, we have a million shares. He's like, no, no, no, no, do 100 million. And I said, well, why is that? And he said, well, if you give someone 1% of the company, that's options on 10,000 shares. She's like, no, no, no, no. Do a hundred million. And I said, well, why is that? And you said, well, if you give someone 1% of the company, that's options on 10,000 shares. When you have a hundred million shares, it's options on a million shares. It just sounds better. It sounds more impressive. So some of it, some of it is psychic, but why not?

Damn. They actually care? Like, I feel like if you're negotiating with an employee, they just look at the percentage. Yeah. But that's because you host a markets podcast, Ed. I think a lot of people like the idea of getting options on a million shares. And I was just blown away by, it's like a lot of people who graduate from college can do calculus, understand organic chemistry, and don't understand basic financial literacy. And I think I was just shocked as someone who was running a startup that when we got sold, I was just super excited. And I brought in, and this is the funnest day, you bring everybody in and go, we've been sold, and this is what it means for you. And you take them through. And there were people I brought into my office.

Some knew kind of exactly what it meant for them. They had done the math and were like, oh, I'm going to get X. And I'm like, yeah, actually, that's exactly what you're going to get. I had other people who, no joke, were getting $300,000, $500,000, $800,000 and broke down and started sobbing because they just had no idea. That's one of the reasons I really like when private companies do fundraisers. I would say, take some off the table. You want to diversify. You never know what's going to happen. And two, give employees the opportunity to sell shares because there's something very visceral and confirming when your employees go, oh, wait, this shit you keep talking

about, options and that paperwork I signed, it can actually convert to money? Because if you have a young workforce, it's never happened to them before, and they sort of don't believe it. Let's talk about Sirius acquiring the exclusive rights to the podcast Smart List for more than $100 million. Okay. Now, here's some critical thinking. Ed, this means the likelihood you actually get a girlfriend has skyrocketed. Why? Because we're going to make a lot of money, I hope. That's exactly right. First off, market dynamics will always trump individual performance. You'd rather be a good company in a frothy market than a great company in a mediocre market. So when Joe Rogan did his $200 million deal and then Spotify went big game hunting and paid Megan and Harry

tens of millions of dollars to do nothing, it just didn't work. And the head of the division that was spending all this money, or I should say immolating it, got fired. And the market has dipped, if you will, in terms of valuation placed on podcasts. However, this signals that the market is getting hot again. And there's good reason why. Podcast ad revenue is only in the kind of the low $2 billion range. It's still a small business, but it's growing like 25% or 28% a year. It's growing faster right now than search off a small base, but it's growing. In addition, the CPMs are really high and that's cost per thousand. That's what an advertiser is willing to pay for every thousand impressions or listens or downloads you get.

They're around, for our show, they're around 45 bucks, which is pretty good for any medium. And the reason why they're strong for us is, one, podcasts are very intimate. You really have an impact on the listeners. They're listening. You're usually with them when they're doing something, walking their dog with their family, something sort of intimate.

Whereas when you're watching CNBC, it's kind of like background noise, maybe you're on a trading floor, and you kind of just turn off when James Garner comes on and tells you're on a trading floor, and you kind of just turn off when James Garner comes on and tells you to buy a reverse mortgage or some old man tells you to trade like Chuck that you can spend more time with your grandkids if you're stupid enough to do his options trading strategy or buy this CPAP and it'll change your life. Anyways, the reason we get high CPMs is we kind of have what I'll call

one of the silverback gorillas from Rwanda. What's rare? Why do advertisers like our listeners, Ed, let me ask you more critical thinking. I'm going to say wealthy, or at least financially conscious. Right. But more than that, our listenership is young men who are doing well professionally, who are really difficult to reach. You can reach them in sports, but for the most part, they have gravitated their media consumption to subscription based media platforms, Netflix, and they're hard to reach. Now, even higher CPMs at Pivot, because while we get the silverback gorillas, which are rare, pivot listeners are kind of the great white rhino. They are really rare.

Who are they, Ed? Who are they? Executives, maybe? Senior-level tech executives that make big purchase decisions, that decide if they're going to do SAP or Oracle or if they're going to use ZipRecruiter to buy their benefits, right? So podcasts are growing. They reach an interesting cohort of intelligent, successful people, and it's a very intimate medium. The reason they want us to do host readovers, as strange as it is, supposedly 80 or 85% of listeners don't hit the skip button

because they don't mind listening to an ad when Kara Swisher or Ed Elson is reading it. They just feel like it's a kind of part of the relationship. I think they would skip me, but yeah. You see what I'm saying? So SmartList getting a hundred million bucks. The thing I've noticed about the term was that it's only three years. So that's real cabbage, $33 million a year. They deserve it. It is a lovely podcast. Those guys do a great job. They have a great dynamic. It's a big deal, and it's probably increased what I'll call the value or the price of locking up top 100 podcasts. It's probably increased every deal by 30% or 50% because now it feels like the champagne and cocaine are back.

So the ultimate question is how much are we worth? I try to add that up every day, but I think it'll be enough for you to, you know, get some girl to come to Club Med with you or whatever it is you do. It was a nice way of avoiding the question. Club Med. It'll be a lot. I hope so. I hope so. I'm running out of time. I mean, I need the jet before the ask answer shows up, Ed. So yeah, I think this is a... You sold the jet, but yeah. I sold that, but I want one back. I'm much more interesting with a jet. Suggest we move on unless you want to talk about the Senate hearing.

What did you think? Did you see it? I just, I'm so sick of these Senate hearings, honestly. I mean, I've, maybe I'm too young, but I've never seen a Senate hearing that actually resulted in anything policy-wise. And every single one of them, it's just a clippable moment where a politician will get on the stage, bang their fist, act tough. I mean, the interaction that everyone's talking about is that interaction between Zuckerberg and Josh Hawley, where Josh Hawley basically just forces him to stand, and we should play the clip actually, but he just forces him to stand up and apologize to the parents of the victims

behind him. They're here. You're on national television. Would you like now to apologize to the victims who have been harmed by your product? Show them the pictures. Would you like to apologize for what you've done to these good people? He does it, obviously, because he doesn't really have a choice. And then we're sitting here.

It's like, great. He does it, obviously, because he doesn't really have a choice. And then we're sitting here, it's like, great, he apologized. It's like, it's, what I would compare it to is going to the principal's office. It's like, it's not even a conversation. They just ask these stupid, one-sided questions. They barely allow for a response.

I mean, they're constantly interrupting them. And then the worst part is that it's always televised. Yeah, I think that's a, that's a pretty cogent analysis of it. At least a principal can suspend or expel the person in front of them. I imagined or I fantasized that one of the parents would yell out, Mr. Zuckerberg, now turn around and ask the people in front of you why the fuck they haven't done anything.

Because I believe Mark Zuckerberg and Sheryl Sandberg are absolutely culpable. But the culprits are the senators pretending to give a good goddamn. And I do believe some of them care. I think Senator Klobuchar, Senators Blumenthal, Senators Durbin really do care. And I would also say Senator Blackburn. I think she's sincere. But when Senator Cruz wants a TikTok moment, I mean, this is how outrageous it is. They're all looking for a moment that'll go viral on the platforms whose CEOs they're berating. Exactly. And they get in the way of any legislation because they've been paid off.

And it's super easy. Ted Cruz raises money from lobbies that are backed by big tech, and he has concerns about free speech or the chill this would put on small business. So he wants to keep working on it. And there is absolutely no legislation or no laws. It is outrageous because any father or mother knows, we talk about GDP, we talk about innovation, we talk about stupid headsets. It is all meaningless, meaningless. And you'll discover this once you have kids. If something is wrong with your kids, much less the unimaginable horror these people have gone through, your whole world shrinks to that kid.

Nothing else, nothing else matters. And the fact that we could fix or reduce dramatically this problem, they will throw up their arms and claim complexity. We age-gate pornography, the military. We age-gate alcohol. We age-gate driving. And we do really good jobs at all these things. But we can't age-gate social media. There is no reason anyone under the age of 16, in my view, should be on social media.

The benefits do not outweigh the immense costs here. We'll be right back after the break with a look at Paramount's potential acquirers. We're back with ProfitG Markets. The slow-moving auction for Paramount took another turn last week when Allen Media Group put in a bid for $14.3 billion. That's the second offer the group has made to the company. Back in April, its bid for $18.5 billion was rejected. Since then, as Alan pointed out, Paramount's stock is down about 37%. Some detail on Paramount. Paramount is publicly traded but controlled by the Redstone family.

Its assets include the Paramount Film Studio, CBS, BET, Comedy Central, and Paramount+. And as we discussed recently, it has attracted several buyers. Warner Brothers Discovery has had conversations about making a deal. So has Apollo Global Management, a large private equity firm, and so has Skydance Media. That's David Ellison's production company. He is the son of the founder of Oracle, Larry Ellison. So Scott, that's quite a list of buyers there. What is making Paramount such an attractive acquisition target right now? Well, one, it's in play. Sherry Redstone has basically said for the first time,

the controlling shareholder, and it's a dual-class shareholder company, she controls it. She's basically said, I'm willing to sell. And every year for the last five or six years, it's made sense for her to sell. But I think she keeps hoping that the stock price will go up and she'll be able to get more money, and every year the stock goes down. And in addition, there's nothing on the horizon that would say this thing's going to recover. In addition, you have a market that's consolidating, and they're a consolidatee, not a consolidator, and it makes sense. It will add value. It has some real assets.

You know, National Amusements, a controlling shareholder at Paramount, depended on substantial dividend payments for the company to finance its debt load. With Paramount struggling, it needs capital to finance its $25 million annual interest payments. So things are getting scary there. Its direct-to-consumer revenues increased 39% in the first nine months of last year, which is good news. And revenue from the TV media segment, which includes CBS, decreased 6%, and filmed entertainment declined 17%. And the company suffers from lower margins than pure play streamers. Paramount's trailing 12 months gross margins is 25%, while Netflix is 42%. And the stock is underperformed,

declining 15% last year in the face of an incredible market surge, while Netflix was up 63%. And it's attractive right now because its valuation, it trades at 0.3 times sales versus Netflix, which trades at eight times. So think about this. I mean, Netflix is trading at about 26 times the multiple on revenues as paramount. So this thing needs to be rolled up. What's interesting about this deal, my favorite part was that the acquisition company controlled by Byron Allen put in a, my understanding, via text message and said, this offer should be taken seriously. Now, if you ever want your offer to not be taken seriously, point out that the offer should be taken seriously. So for example, if Apollo submitted a term sheet, you can be clear it's serious. They have the

capital. They could stroke a check for Paramount very easily, but I still don't think they're the best buyer. The best buyer here is likely a company that when they announce the acquisition, it just makes a lot of sense. And Sherry needs a certain level of certainty of close because what she doesn't want is to announce a deal, her stock will go up, and then for the deal to fall out of bed because I think her stock would probably go below pre-announcement level. She's got to know that this deal is going to close. And what was telling is the market, when it heard about this text message or this quote-unquote offer they're

supposed to take seriously from Byron Allen, the stock didn't budge up. It budged up a little. I mean, it went up, it ended the day up around 7%. But that's, yeah, that's nowhere near the premium that he was offering. He was offering a 50% premium. So I feel like the market was kind of like, eh, maybe, but probably not. Unfortunately, Mr. Allen is kind of developing a reputation for someone who shouldn't be taken seriously. So here are some of his media bids that have not closed. A $10 billion bid for ABC, an $8.5 billion bid for, I think it's called Tegna Station Group, a $3.5 billion bid for BET, $5.6 billion bid for the Washington Commanders, and an undisclosed bid for the Denver Broncos. People just don't take him seriously. Now, to be fair, he owns the Weather

Channel and his media firm, people believe it's worth $4.5 billion. His offer includes, assuming paramounts, $15 billion in debt. So the total value of the offer is just under 30 billion. I personally think that this ends up with Zaslav. Specifically, I think this ends up with Warner Brothers Discovery. Why? Because despite the massive debt they already have, they could raise the money here and do the deal. And in addition, there's so much synergy here i mean when i say synergy i mean they're going to get to lay off a lot of people the two-thirds of the layoffs will come from the one that's on bottom specifically paramount but they'll also lay off some people at time warner because they're just not going to need

they're not going to need two cfos of the tv division they'll need one they're not going to need as many people in the newsroom i would not be want to be in CBS newsroom. I would not want to be in ad sales for CBS after if Warner Brothers Discovery buys the company. They will get a lot of synergies and efficiencies. In addition, Sherry will know the deal will close with them and the deal just sort of makes sense. And even if she, even if he says to her, look, Sherry, I can't pay you all in cash. You got to take some stock. It's a liquid stock. And she'll probably see that at these levels, there's a decent upside that the market will like the deal, see the synergies, see the cost savings, and will take the stock up. So he might be able to, he being Zaslav, might be able to offer cash and stock. Whereas

Sherry's not going to take stock in Allen's company. It's not going to take stock in Skydance or whatever the hell it is, because this thing makes sense to go to Warner Brothers Discovery. That's who I would think is the logical buyer here. But Paramount, and I think we predicted this last year in our predictions deck, we said Paramount is not going to be an independent company by the end of 2024. The stuff that is pretty crazy you mentioned there is like his company's worth four and a half billion and he's offering $15 billion plus he's got to come up with the financing for the $15 billion in debt. So it's really a $30 billion deal. And it's just like, where is that money coming from? If his one holding is worth $4.5

billion. But you also mentioned that Warner Brothers Discovery is the best buyer here. They have $40 billion in debt. And then Paramount has $15 billion in debt. Is the debt not enough to warrant no buy here? I mean, combine them, you're looking at $60 billion in debt. I'm pretty sure the bond rating is at like triple B. They could fall into junk territory. Do you think that that's enough to be a no-go? I don't. I think they could pull this deal off because one, while Warner Brothers Discovery has a lot of debt, Zaslav has been paying it down consistently. Two, it is really friendly debt. When you talk about debt, you got to talk about the size, but you also talk about the terms. And they were able to secure this debt when interest rates were

really low. So this debt doesn't come due for several years and they're paying a very low interest rate on it. So it's kind of friendly debt, if you will. In addition, he's buying a company that while it's shrinking, it's still profitable. And so the synergies here, I think, would be more than the additional interest they'd have to pay on bonds that they'd have to issue at a higher interest rate, and it would be accretive. So what is an accretive acquisition? If you buy a company for $10 billion and it's doing a billion in earnings and your stock trades at 14 times earnings, then technically you should be adding $14 billion in market value to a $10 billion acquisition, and technically it's accretive. And shareholders are like this because there needs to be consolidation, and they would get to hold on to the majority of the revenues, I think, and cut costs. They could cut costs faster than the revenue declines. And Zasloff has earned a reputation as a disciplined operator, I got to give him that, who is able to cut costs. And so he is the best buyer here. And he has a

public currency. He has, I think, credibility in the markets. He has a very tight relationship. My guess is if they put in an offer, they'll already have a letter signed by Jamie Dimon and a bunch of creditors saying, here's our commitment letter. So just to use an example, if you're serious about buying a house and you want a good deal, you show up with a pre-approved mortgage or you say, this is an all cash offer with no contingencies. I'm not suggesting you do that. But if you want to jump ahead of the line and you want to get better terms than anybody else, you show up with financing or you just say, I have the money, I don't need financing, or the financing is lined up and I'm ready to close.

It sort of reminds me of that text between, I don't know if you remember when Elon was buying Twitter and he got a text, I think from his lawyer saying, hey, this guy, Sam Bankman-Fried wants to get in on the deal. He wants to invest. Um, he responded, who is he? And he explains, Oh, he's just like this crypto guy. He's, he's pretty cool. Really like really nice guy. And Elon just responds, does he have huge amounts of money? That's exactly what's going on here with Byron Allen and Alan media group. It's like, okay, nice, we like the deal, but do you have huge amounts of money that you can actually get this deal done? And it seems like the answer is just a resounding no. I remember that, too.

My favorite line from Elon was, he's like, I'm not going to have to listen to an hour of him talking about crypto, am I? LVMH, the world's largest luxury goods company, beat annual earnings expectations, reporting sales up 13% over 2022. The company's stock rose 12% on the news, which restored chairman Bernard Arnault as the world's richest person and also triggered a rally in other luxury stocks. The French stock market, which features a number of luxury goods companies, reached an all-time high. Scott, LVMH has had an interesting few years. It nearly doubled in value between 2020 and 2022. But then last year, while the S&P climbed 20%, LVMH fell around 5%.

So what do you make of these earnings here? I think it was Barry Ritholtz from Ritholtz Wealth Management, who's also at Bloomberg and just a very, a really smart guy, like a great student of the markets, sent me these two graphs. One was, or one graph, it was Netflix's stock price over the last year and LVMH's. And he said that the market thinks a recession is coming and that people are going to buy fewer luxury goods and spend more time at home because Netflix stock had gone up 60% and LVMH was down 5%. So the market is a predictions machine and sometimes it gets it wrong, but it's in the business of predicting. And I think what this says is investors are worried about China, which has been the gift that keeps on giving and luxury and the overall state of

the economy. And that also LVMH's run-up, which has been, again, historic going back to Microsoft, it's all about where your stock is now relative to expectations. And despite what was a really strong earnings report, it's really been an underperformer. And whether that's because the market is worried about luxury or because it senses or just it thinks the stock is fully valued. Our analyst, Emil Saverio, highlighted something that was super interesting in that as she thinks they're paying a conglomerate tax, if you looked at the pure plays of Hermes and assign that multiple to Louis Vuitton or Dior, which are both amazing brands, you would get a company, just the value on those two companies would be greater than all of LVMH combined.

And the point she was trying to make, and we've made this point a lot, is that consumers don't like or investors don't like conglomerates. Bernard Arnault loves a conglomerate because if Ramoa is up or down, say it's down, that's okay because Bulgari or the Dior group is up. CEOs love to diversify because it's easier for them to sleep at night. But here's the thing, investors don't need a CEO to diversify for them. They can diversify themselves by buying different stocks. What they want is the CEO focused and accountable. They want you to lose sleep at night because you're worried about Dior full stop. And it appears that LVMH relative to some other pure plays is in fact paying that conglomerate tax. Now, what would potentially happen if LVMH were to continue increasing its earnings and its stock were to remain flat? Bernard Arnault, who I believe his

background is actually in banking, would probably consider spinning one or more of the brands or letting them trade while he would maintain control, but letting them trade as a pure play. So for example, Ferrari, who I think is the majority owner is Fiat Chrysler, they spun that and the stock has been just an outstanding performer yeah i mean the the conglomerate that you mentioned here it's like it's in fashion it's in watches it's in jewelry but then it's also it's in wines and spirits so it's it owns dom perignon it owns tennessee it's in cosmetics it owns sephora and it even owns a luxury hotel, a luxury cafe, and my favorite, a luxury river cruise company. So if we're serious about this spin idea, what do you think that would look like? an LV of Vitan and make it an independent company with its own financials, its own shares,

and then they would spend 20% of it to the public so Arnaud would still control it. The problem is separating it out operationally a little bit and how they account for shared expenses and things like that. But back to the notion of conglomerates and the China overhang right now, Estee Lauder is both a conglomerate and heavily dependent on China. I mean, a conglomerate in the sense they own a bunch of brands. Its stock, get this, is off 50% in the last year. Incredibly well-run company, amazing brands. It's been cut in half and the collapse is out to weaken demand in their key market, China. Sort of live by the sword, die by the sword. Hermes, the pure play, is up 15%. You're seeing both the China chill

and the conglomerate tax across all the luxury. The other interesting news is that Bernardo, I know specifically, has added two more sons to his board. So now that's four out of his five children who are on the board of the company. Two of those kids are 29 and 31 years old. Is that a red flag? On the whole, you like to see professional management. And I mean, this is a tough one

because you're talking about families. And what people miss is that just because you're a family member, generally I found the kids, they're not idiots. The idiots are off doing something else. They don't let them near the golden goose. They ascertain pretty early. All the cousins are like, you know, Bob is a shithead and we don't want him responsible for trying to grow our wealth. You know, what about that cousin? So for example, A.G. Sulzberger at the New York Times Company, he's a Sulzberger, but he came up through the ranks. He's a really impressive young man. And he's, I would argue, a very competent publisher. Would he be in that role if he didn't have the last name Sulzberger? No, but that doesn't necessarily mean he's not a good

person for the job. I have actually been really impressed with the kids. I don't think I would ever want one of my kids in that business because I just think it's, I'd rather just, if I were the kid, I'd rather just have money and go do my own thing because I think it's a lot of pressure. I think you walk into a room thinking everybody thinks understandably that you didn't deserve your seat. I remember I was at, I won't even name it, a retailer, an iconic retailer that I actually built the first website for back in the 90s. And the CEO and chairman of this company was just one of these larger than life guys. And his son worked in the company. And we were literally walking down the hall on the way to the cafeteria, me and the CEO. And this kid was walking by him and said, you know, just looks so nervous and

looked up at him and said, hi dad. And I thought, Jesus Christ, this kid looks like he's about to faint out of fear. And I thought that's his nine to five every day? And this guy did not suffer fools. I can't imagine how hard he... The person I'm talking about is a really decent man, but there's some real downside. I'm thinking a lot about this. I worry about my kids and I think, okay, should I be trying to figure out a way to build a business and force them on Ed Ellison and make them the co-host of this podcast. But anyway, but it's kids and family empires are really, you know, it's a tough one, but I don't, yeah, it's a red flag, no doubt about it. But that's why it typically only happens in companies where there's a controlling shareholder. The Sulzbergers own only 2% of the outstanding stock, but they control the company. And I was on the board there with several of their cousins. Did you know I was on the board of the New York Times, Ed? Where's my shot glass? Yeah. When 08 hit, which was really bad, I said, we got to stop the dividend. We need to hoard our cash here. We could blow our covenants on our debt. We need to cancel the dividend. And Arthur Sulzberger's face just went kind of pale.

And the cousins around the table, you could just immediately see, like, that was going to make for a really ugly holiday when the family members on the board and running the company had to show up and say, hey, you're not getting a check from the company. Which is terrible for corporate governance. I mean, it's terrible that that is an actual obstacle in the way of strategy. 100%. I think it's fine to work with maybe one of your kids, but if four out of five feels suspicious and the other one, the remaining one is 25, so I think he's waiting to put all five of them in there.

And to me, that's the danger right there. I mean, how much of a meritocracy is it if the acceptance rate is 100%? Yeah, the only thing I can tell you when you have five kids is one is going to be incredible and one's going to be an idiot. We'll be right back after the break with a look at a shareholder lawsuit involving Elon Musk. We're back with ProfitGMarkets. Elon Musk is back in the news. In fact, he's back in court. This time he was the defendant in a Tesla shareholder lawsuit.

The suit alleges that his 2018 compensation package breached the company's fiduciary obligations to shareholders. For context, Elon's package is worth a potential $56 billion, and according to the court, is, quote, the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude. That alone wasn't the problem, however. The court also found that the board failed to engage in a meaningful negotiation over the package's terms. The evidence? Well, for starters, five of the six directors who voted on the package were, quote, beholden to Musk or had compromising

conflicts. There is so much to discuss here, Scott. Where do you want to start? This is fascinating, and I've never seen anything like this. I've served on the Compensation Committee of Boards. And the idea that the package you put together for the CEO would be rejected several years hence by the Delaware Chancery Court. And it wasn't even the size of the compensation. It was sloppy. They weren't able to provide any evidence that they had done any benchmarking. Generally, this is how it works. You go out and you do a study. And when you say you, you hire Towers Perrin because boards don't

like to actually do the work. And they come back and say, right, you're a media company doing $5 billion a year. This is the range of compensation for CEOs in this industry in a company of this size. And you have sort of a range. And the problem is, and one of the reasons that CEO compensation has gone from 30 times the average worker's compensation at 350, is that you never pick the 50%, the median. You always go, well, Bob's a good guy. Let's give him 60 or 70%. And that may sound harmless. But when you're constantly giving CEOs every few years compensation that is above the mean, it creates an exponential upward spiral of compensation because that 50% number is still extraordinary compensation. When I say 50%, zero to 100. And so if you're a CEO of a SaaS software company that's doing a billion in revenue,

being at 50% is really good. And very few boards say, oh, we're gonna give them 30%, because here's what CEOs are. CEOs are really charming guys. And they're almost always guys. They're usually the former, they were usually like, they were the rush chairman in the fraternity. They're really likable. And the moment you go on the former, they were usually like, they were the rush chairman in the fraternity.

They're really likable. And the moment you go on the board, they invite you over for dinner or they take you golfing or you meet their kids and you just like them. You like them. And when compensation comes around, you tend to be on the generous side. And unfortunately, the rest of the employees in the organization don't get to know you. So you aren't quite as generous with them. And this is a real problem with corporate governance. Now, this is that dynamic gone apeshit. These guys are so conflicted. They've either made money or have

invested in his other companies. This is not a board. This is not a board. These are sycophants. And for the Delaware Chancery Court to reject this is just extraordinary because I think you could make an argument, to be fair, he's added hundreds of billions of dollars in shareholder value. So you could argue, you could argue that he's entitled to $56 billion. But they said, these directors are so conflicted, they clearly did so little work, they clearly have absolutely did no homework in terms of reasoning for this. And by the way, this does not help his case when he's held a gun to the head of the board and said, I want another 75 billion or I'm going to take the IP of the company. I mean, this isn't setting up well for his additional compensation ass. He also threatened to reincorporate the company in Texas. I don't

even know. I don't think he can do that. So where this all heads is the following. He's going to have to pretend to be an adult and pick board members that are actual fiduciaries and stick someone credible on the compensation committee who, when he or she stands in front of the Delaware Chancery Court, the chancellor, the head chancellor, I think is what she's called, Chancellor McCormick, who's a total gangster, by the way, and does not seem to be very impressed with Elon Musk, who can say, this is the analysis we did. This was the range. This is why we chose this package. This is how we structured it to align it with the incentives of shareholders in the community. And I'll just go through exactly what the issues were that she mentioned. One, Musk controlled the timeline of the process.

She says that it was rushed and she thought it was recklessly rushed. Two, there was no real negotiation over the size of the package. Third, as you mentioned, no benchmarking. They didn't look at any comparable companies and compensation of other ceos at tech companies and then fourth as you mentioned was the members of the committee themselves so the chair of the committee was this guy ira erin price who's a close friend of elon worked with him for 15 years another member was antonio gracias who's another friend of elon and, his personal relationship involved

vacationing with Musk's family on a regular basis. And then the final guy was this guy, Todd Marin, who is Elon's former divorce attorney. And as you mentioned, he's the general counsel. They said, quote, his admiration for Musk moved him to tears during his deposition. So all of that put together, the judge believes that the process did not adhere to fair and responsible fiduciary duty. She says it was, quote, a cooperative venture with Elon Musk. So that's the process side of it. The second side of it is the price. So the argument by Tessa's board is that the package was supposed to incentivize him to work hard and to stay at the company. And it achieved that.

I mean, he went from $60 billion in market cap to $600 billion. I mean, he hit a trillion at one point, but now he's at $600 billion. He achieved all of the benchmarks that he needed to receive the full package. The judge's argument is that that package was unnecessary as a means of incentivizing him because he already owned 22% of the company at the time the deal was made. And she gives these examples comparing it to Zuckerberg,

to Bezos, to Gates, mentioning that they actually didn't take any compensation at all in many of their compensation plans. And she says, quote, in each instance, the board recognized that the executive's pre-existing ownership stake provided sufficient incentive to grow the companies they had built. So why not here? Why did Tesla have to give anything in these circumstances? So given all of that, her issues with the process, her issues with the price, do you agree? peak CEO leverage. I've never seen anything like this. He basically, I think he probably told the board, I bet he decided what the comp was going to be. I've been on boards where the CEOs threatened to walk and are pissed off about their compensation. And generally speaking, the board is like, okay, should we fire this guy? I'm not going to take this shit. And sometimes I've actually seen that. I've been on two boards in the last two years where the CEO was so angry and obnoxious about their compensation.

Twice, we basically sat down the CEO and I was the messenger and one of them said, you're about to be fired in 24 hours unless you change your tone here, unless you start acting like an adult, unless you start acting like a fiduciary, unless you do some benchmarking and realize that your compensation is ad market or generous, you are gonna be fired tomorrow at 5 p.m. I've been on two boards where they've done that in the last three years because CEOs are working really hard. They're really important.

They read in the news every day about how one of their buddies or colleagues or someone up here at another firm is making hundreds of millions. And they believe, look, while you guys show up for a free lunch every three months, I'm the one doing the goddamn work here. You can put yourself in their shoes and see why they feel this way. But it has gotten really out of control. And this is just stupid. I don't understand how it's a breach of fiduciary

duty if you built a comp package that said, we're not going to give you any money unless you hit these extraordinary benchmarks, one of them being 10x your market cap within, what, seven, eight years. And he did it in three. And so what's the complaint here? It's like, have they really been bad fiduciaries

if they've given him a plan and he's executed on the plan and it's resulted in becoming one of the most valuable companies in the world? Like, haven't they kind of done their job right? Kathleen McCormick has said, I'm going to do your job for you. That's what she said to the board. You're not doing your job, so I'm going to do it for you. And the question that I would pose to you is, is it really the job

of the public sector, of the Delaware Chancery Court, to be doing the job of boards? It's not her job to be a board member, but it's her job to rule on cases brought before her by shareholders of companies incorporated in Delaware. So she had to issue a judgment here. And part of Delaware law is that if you are on the board, whether you're on the audit committee, the innovation committee, the compensation committee, the nominating and governance committee, you are supposed to be a fiduciary for all stakeholders. Fiduciary is a wonderful word. You're supposed to represent all stakeholders. The compensation committee is supposed to represent Elon Musk, who owns, what does he own? 13%, 17%?

He's down to 13 after this. Yeah, but he never really had... Anyways, he owns 13% of the time. That means the compensation committee is supposed to be representing the other 87% as well. And her point is, there's nothing here that indicates that 10 billion wouldn't have been enough, and that the other 87% would have gotten to split another 40 or $50 billion. And that by virtue of the fact they rubber stamped what looks like a compensation package he demanded with no underlying benchmarks or support that they were not living up to their duty as fiduciaries to represent the other 87%. So I think she was doing her job here. Let's take a look at the week ahead. We'll see earnings from

Spotify, Snap, Alibaba, Disney, and Uber. Do you have any predictions for us? Well, my prediction is just what we said, Ed, and that is all this posturing and peacocking and threatening that Elon's going to reincorporate in Texas, all places, and this is a boring prediction, he's going to have to put new people on the board. He's going to eventually get very angry at the board and realize, wow, I probably could have got this. We're probably going have railroaded this through if I had anyone that didn't have their head up their ass who had any credibility in front of the, in front of the chancery court. Anyways, my prediction is that there's a big victory for governance and that you're going to see actual one or two actual fiduciaries be appointed to the board of Tesla. And does he get paid? He's going to make a very good living. I don't know if he's going to. He'll be fine. Yeah, he's going to be fine. But I would imagine he's going to make a lot less than he thought he was going to make a couple of weeks

ago. I think he thought he had this, he was going to cash a check for 55 billion and get another 75 billion. And I mean, at some point he's going to put the ketamine down, and they're going to appoint a real director here. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavros and Catherine Dillon. Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prop G Markets on the Vox Media Podcast Network. Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday. In kind reunion As the world turns And the dove flies In love, love, love, love