This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2012/10/30/business/global/random-house-and-penguin-to-be-combined.html

The article has changed 6 times. There is an RSS feed of changes available.

Version 2 Version 3
Random House and Penguin to Be Combined Random House and Penguin to Be Combined
(about 3 hours later)
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. PARIS — The book publishing industry is getting smaller to get stronger.
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. Confirmation on Monday that Random House and Penguin will merge narrows the business to a handful of big players, led by a new international giant, Penguin Random House. And it could set off a long-awaited round of consolidation, analysts said.
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. Bertelsmann, the owner of Random House, and Pearson, which owns Penguin, said Monday that they had reached an agreement to combine the two houses to create the largest consumer book publisher in the world. Analysts said the deal between Bertelsmann, of Germany, and Pearson, of Britain, would give the combined companies greater scale to deal with the challenges arising from the growth of electronic books and the power of Internet retailers.
Together, Penguin Random House would have a global market share of more than 25 percent, and a book list that includes contemporary best sellers like Random House’s “Fifty Shades of Grey” and Penguin’s back list of classics from authors including George Orwell.
With e-book sales growing, publishers are increasingly worried about the leverage wielded by Internet giants like Google, Apple and, especially, Amazon. These companies have huge resources to invest in new technology, including digital sales platforms and algorithms that steer people toward books that match their interests. Their scale gives them the power to negotiate better terms on book prices.
“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.“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.
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. The remaining of the so-called Big Six publishers could face increased pressure to respond to Penguin Random House, which will be based in New York. The other four are also owned by larger media conglomerates: HarperCollins, which is part of News Corp.; Macmillan, which is owned by Georg von Holtzbrinck of Germany; Hachette, whose parent company is Lagardère of France; and Simon & Schuster, a division of CBS.
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. “I wouldn’t be surprised if all the major trade publishers were having conversations like this,” said Ned May, an analyst at Outsell, a research firm. “I would expect to see similar realignment.”
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. “Some of these publishers, which last week no one would have called small, are realizing that they need to gain scale to invest in digital transformation,” he added.
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. Of the Big Six, HarperCollins has already signaled its interest in consolidation. News Corp. reportedly approached Pearson informally during the weekend as it was meeting with Bertelsmann to complete their talks, which had been going on for months.
One person close to the merger talks said Pearson had considered all options for Penguin, including an outright sale rather than the joint venture that was announced. But a sale would have been difficult, this person said, because it would have prompted prohibitively high capital gains taxes in the United States.
The deal requires approval by regulators in the United States and Europe. But if it is completed and further consolidation occurs, midsize players in the crowded field of publishing mass-market books might find it especially difficult to compete, analysts say, with bigger players more able to extract favorable terms from customers or to invest in digital operations. Small publishers with a niche focus and loyal groups of authors and readers might manage to remain independent, Mr. McCabe said.
While the music industry, which was hit earlier and with greater force by the digital revolution, has already shrunk to three major players — Warner Music Group, Sony Music Entertainment and the pending combination of Universal Music Group and EMI — the publishing world has remained relatively fragmented.
John Makinson, the chief executive of Penguin, who will serve as chairman of the new company, said that with consolidation inevitable, “we decided it was better to get in early rather than be a follower.”
Random House and Penguin needed to move fast. As the first major publishing industry merger since Bertelsmann paid more than $1 billion for Random House in 1998, seeking government approval first gives the companies a huge advantage with U.S. regulators, said James L. McQuivey, a media analyst at Forrester Research. “It’s easier to argue that the industry going from six to five publishing houses won’t change the market, than arguing that going from five to four players won’t impact competition.”
Under the agreement, Markus Dohle of Random House will be the chief executive of Penguin Random House, which would have annual revenue of about $3.8 billion. No cash is changing hands; Bertelsmann would control 53 percent of the combined entity, with Pearson owning 47 percent.
The combined company is expected to invest heavily in e-books and what Mr. Dohle called digital product development. He said that did not necessarily mean the publisher would produce its own e-reader device, as some industry watchers had anticipated.
Thomas Rabe, the chief executive of Bertelsmann, said during an interview that the merger would allow the combined company to invest more in digital operations and emerging markets, which show more promise for growth than do developed markets like the United States and Western Europe. He said the merger would allow the publishers to cut costs in their back offices, making it possible to spend more on authors.
“The intention is to continue to invest in the creative potential of the businesses,” he said.“The intention is to continue to invest in the creative potential of the businesses,” he said.
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. Marjorie Scardino, chief executive of Pearson, said synergies were not the primary motivation for the deal. She said the combination would help Penguin Random House “invest in books and in new ways of deploying them.” This could include digital platforms selling books directly to consumers, she said, as well as new digital formats.
“While we will be combining the strengths of both companies, we will be maintaining the distinctive identities of all our imprints,” he said. “There are a lot of things changing with reading,” she said, “and a lot of things that are going to happen that don’t happen now.”
Even in the old-fashioned world of printing ink on paper, Mr. McCabe said there would be benefits to greater scale as 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 best sellers,” he said.
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.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.
Mr. Dohle, in a letter to Random House authors, insisted that the new entity would be “author- publisher- and editor-centered.” Richard E. Snyder, former chief executive of Simon & Schuster, said concerns about the effects of consolidation had been overstated. In a business that is always scrambling to find the next best seller, it is literary agents, not publishers, who hold the real power, he maintained, and the combination of Penguin and Random House will do little to change that.
“Your relationship with your editor and your publishing team will be unaffected by the new company,” he wrote. “It really is just a natural progression,” he said. “Even as this deal happened, 10 other publishing companies probably got started yesterday.”
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. Analysts have raised questions about possible regulatory hurdles, given that the combined companies would have more than a quarter of the consumer publishing business in big, English-language markets like the United States and Britain. Especially in Europe, regulators have been sensitive to the possible effects on “cultural diversity” when media business combine, and they demanded substantial divestitures as a condition for approval of Universal’s purchase of EMI.
“We decided it was better to get in early rather than be a follower,” he said. Mr. McCabe said he thought 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.”
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. Pearson said the agreement was not subject to shareholder approval, and Bertelsmann is privately held, so there is little chance of a competitor stepping in with a more attractive offer.
“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.“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. Amy Chozick contributed reporting from New York.
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.