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Random House and Penguin to Be Combined Random House and Penguin to Be Combined
(about 4 hours later)
PARIS — Two European media companies, Bertelsmann and Pearson, confirmed Monday that they planned to combine their book publishing divisions, Random House and Penguin. PARIS — Two European media companies, Bertelsmann and Pearson, confirmed Monday that they had agreed to combine their book publishing divisions, Random House and Penguin, creating the largest consumer book publisher in the world.
Under the agreement, Bertelsmann, which owns Random House, would control 53 percent of the merged publishers. Bertelsmann and Pearson would share executive oversight, with Markus Dohle of Random House serving as chief executive and John Makinson of Penguin becoming the chairman. The deal would give the combined companies, already two of the biggest English-language publishers, an even greater scale to deal with the challenges arising from the growth of e-books and the power of Internet retailers like Amazon.com.
The deal would consolidate Random House’s position as the largest consumer book publisher in the English-language world, giving the combined companies greater scale to deal with the challenges arising from the growth of e-books and the rise of Internet retailers like Amazon. Together, the combined publishers would have a global market share of slightly more than 25 percent, and a book list that includes contemporary best-sellers like Random House’s “Fifty Shades of Grey” trilogy and Penguin’s back list of classics from authors like George Orwell.
“Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers,” said Marjorie Scardino, chief executive of Pearson, which is based in London. “That is very attractive in a business that is going to become more and more digital,” said Douglas McCabe, an analyst at Enders Analysis in London.
By taking control of the company, Bertelsmann, which is based in Gütersloh, Germany, hopes to avoid the problems that plagued a 50-50 partnership with Sony of Japan, in which the two companies combined their music recording divisions. The venture, Sony BMG, was riven by management turmoil and differences over strategy, prompting Bertelsmann to sell its share to Sony eventually. Under the agreement, no cash is changing hands; Bertelsmann, which owns Random House, would control 53 percent of the combined entity, to be called Penguin Random House, with Pearson owning 47 percent.
“With this planned combination, Bertelsmann and Pearson create the best course for new growth for our world-renowned trade-book publishers, to enable them to publish even more effectively across traditional and emerging formats and distribution channels,” said Thomas Rabe, chief executive of Bertelsmann, in a prepared statement. Bertelsmann and Pearson said they would share executive oversight, with Markus Dohle of Random House serving as chief executive and John Makinson of Penguin becoming chairman. The combined company, to be based in New York, would have annual revenue of about $3.8 billion.
Analysts have raised questions about possible regulatory hurdles to the deal, given that the combined companies would have around one-quarter of the consumer publishing business in markets like the United States. Teams of lawyers from both companies are said to have been huddling in New York for weeks to examine these and other issues related to the deal. Thomas Rabe, chief executive of Bertelsmann, said in an interview that the merger would allow the combined company to invest more in digital operations and emerging markets, where book sales are growing faster than in developed markets like the United States and Western Europe.
Pearson and Bertelsmann said Monday that “the combined organization’s level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses.” Mr. Rabe said the merger would allow the publishers to cut costs in their back offices, making it possible to spend more on authors, too.
Some literary agents, however, were unimpressed by the prospect of a combined Random House and Penguin, responding to reports of a possible deal last week by saying it could reduce the number of outlets for authors. “The intention is to continue to invest in the creative potential of the businesses,” he said.
The companies said the agreement would exclude certain assets, including Random House’s trade publishing business in Germany. Pearson will retain the right to use the Penguin brand in its education business, which has become the focus of the company’s plans for the future. Mr. Rabe added in a conference call that while there were opportunities for “economies of scale,” these cuts would not affect the publishers’ individual imprints, which work directly with the authors.
Analysts have said the deal could spur further consolidation in the book publishing business, which has remained more fragmented than, say, the music business. Another publisher, the HarperCollins division of News Corp., was said to be interested in Penguin. “While we will be combining the strengths of both companies, we will be maintaining the distinctive identities of all our imprints,” he said.
But Bertelsmann and Pearson accelerated their talks over the weekend after reports last week, and they said Monday that they hoped to close the deal in the second half of 2013. Pearson said the deal is not subject to shareholder approval. Enthusiasm about the agreement has been more muted among literary agents, however, with some responding to reports of a possible deal last week by saying it could reduce the number of outlets for authors.
News Corp.’s interest in Penguin was first reported in The Sunday Times, a London paper that is also owned by News Corporation. According to The Times, News Corp. was exploring a cash offer of $1.6 billion. Mr. Dohle, in a letter to Random House authors, insisted that the new entity would be “author- publisher- and editor-centered.”
“Your relationship with your editor and your publishing team will be unaffected by the new company,” he wrote.
Mr. Makinson, currently the chief executive of Penguin, said in an interview that consolidation was inevitable as the industry adapts to the imperatives of the digital revolution.
“We decided it was better to get in early rather than be a follower,” he said.
Even in the old-fashioned world of printing in ink on paper, Mr. McCabe said there would be advantages to greater scale in a world where the retail side of the business was also consolidating around fewer, more powerful chains that are often focused on marketing a handful of top titles.
“There’s a real advantage to being a superpower when the market is focused on bestsellers,” he said. While small publishers with a niche focus and loyal groups of authors and readers might survive, he said, midsize publishers publishing mass-market books might come under further pressure to combine with competitors.
Another publisher, the HarperCollins division of News Corp., has already signaled its interest in consolidation. It was reportedly considering a bid for Penguin when Pearson and Bertelsmann accelerated talks, which had been going on for weeks, and reached an agreement.
Pearson said the agreement was not subject to shareholder approval, and Bertelsmann is privately held, so analysts said there was little that competitors could do to stop it, assuming that regulators clear the deal.
“The companies are committed to this transaction; there is no way they can walk away,” Mr. Makinson said.
Analysts have raised questions about possible regulatory hurdles to the deal, given that the combined companies would have more than a quarter of the consumer publishing business in markets like the United States. Teams of lawyers from both companies are said to have been huddling in New York for weeks to examine these and other issues related to the deal.
Mr. McCabe said he though the deal would be approved, possibly with some concessions.
“Authors will be very interested in this, so the process could be more drawn out than they hope,” he said. “This is not a merger of two widget makers that nobody will notice.”
European regulators, in particular, tend to scrutinize mergers in media businesses closely if there is concern about any possible loss of what the European Commission describes as “cultural diversity.”
By taking control of the company, Bertelsmann, based in Gütersloh, Germany, hopes to avoid the problems that plagued a 50-50 partnership with Sony of Japan, in which the two companies combined their music recording divisions. The venture, Sony BMG, was divided by management turmoil and differences over strategy, prompting Bertelsmann eventually to sell its share to Sony.