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Random House and Penguin to Be Combined Random House and Penguin to Be Combined
(about 4 hours later)
PARIS — The book publishing industry is getting smaller to get stronger. PARIS — The book publishing industry is starting to get smaller in order to get stronger.
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. The announcement on Monday that Random House and Penguin would merge narrows the business to a handful of big publishers, and could set off a long-expected round of consolidation as the industry adapts to the digital marketplace.
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. 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.”
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. In announcing the agreement, the European owners of Random House and Penguin — Bertelsmann and Pearson, respectively — said Bertelsmann would control 53 percent of the combined entity and Pearson 47 percent. In a statement, Bertelsmann said the deal would most likely conclude in the second half of 2013, after approval from regulators.
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. The merger will create the largest consumer book publisher in the world, with 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 backlist of classics from authors like George Orwell.
“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. The deal, analysts said, would give the new company, to be called Penguin Random House, greater scale to deal with the challenges arising from the growth of electronic books and the power of Internet retailers. Publishers are increasingly worried about the leverage wielded by Internet giants like Google, Apple and, especially, Amazon. These companies have vast resources to invest in new technology, like digital sales platforms, and the size to let them negotiate better terms on prices.
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. Facing those challenges, the major publishers have been expected to join together, getting smaller in number and bigger in size. The other four houses among the so-called Big Six are also owned by larger media conglomerates: HarperCollins, which is part of News Corporation; Macmillan, owned by Georg von Holtzbrinck of Germany; Hachette, whose parent company is Lagardère of France; and Simon & Schuster, a division of CBS. They could all now face increased pressure to consolidate in response to a combined Penguin Random House.
“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.”“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.”
“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. HarperCollins has already signaled its interest in consolidation. News Corporation approached Pearson informally over the weekend to explore its own bid for Penguin, and that interest sped up what was already an expedited process with Random House, said one executive briefed on the negotiations. Now that Penguin is out of the picture, News Corporation will most likely be looking for a new partner for HarperCollins.
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. Analysts also said there could be matchups between large publishing houses and smaller, independent ones.
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 must still be approved by regulators in the United States and Europe. But if it is completed and further consolidation occurs, midsize companies in the crowded field of mass-market book publishing might find it especially difficult to compete, because the bigger publishers will be 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, said Douglas McCabe, an analyst at Enders Analysis in London.
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. The combination announced Monday is the first major publishing industry merger since Bertelsmann paid more than $1 billion for Random House in 1998. James L. McQuivey, a media analyst at Forrester Research, said that as far as gaining regulatory approval, Random House and Penguin should benefit from being the first of the major publishers to merge. “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,” he 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. “Regulators generally understand that these companies aren’t just competing with each other, they’re competing with a very changed marketplace,” he added.
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.” Mr. McCabe said he thought the deal would be approved, possibly with some concessions.
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.” “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.”
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. One person briefed on the talks said Pearson had considered all options for Penguin, including an outright sale. 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 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. Under the agreement, Markus Dohle of Random House will be chief executive of the new entity, which would have annual revenue of about $3.8 billion. In a phone interview Mr. Dohle said he expected Penguin Random House to be able to cut costs in areas like supply chain distribution. “The goal of the new company is not about cost efficiency, but about efficiency in better services,” he said. “But together we have a bigger physical footprint so of course that helps get the physical cost-per-copy down.”
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. Marjorie Scardino, chief executive of Pearson, also said that cost-saving 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 for selling books directly to consumers, she said, as well as new digital formats.
“The intention is to continue to invest in the creative potential of the businesses,” he said. “There are a lot of things changing with reading, and a lot of things that are going to happen that don’t happen now,” she said.
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. 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 it would produce its own e-reader device, as some in the industry expected.
“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.” Thomas Rabe, chief executive of Bertelsmann, said in an interview that the merger would also allow the combined company to invest more in emerging markets, which show more promise for growth than developed markets like the United States and Western Europe.
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. Authors and literary agents, one step removed from the merger, have expressed concern about consolidation, fearing that they will lose leverage if there are fewer publishers. Blake Bailey, the author of literary biographies of Richard Yates and John Cheever, reflected this unease, saying: “Having just gone through an auction with my Philip Roth biography, I think it’s usually true that an author benefits when there are as many big players as possible bidding against each other.”
“There’s a real advantage to being a superpower when the market is focused on best sellers,” he said. In an apparent effort to ease those concerns, Mr. Dohle on Monday sent letters to the author, agent and bookselling communities, seeking to reassure them how much a combined Penguin Random House would value them. “For us, separately and in partnership, it is and always will be about the books. Your books,” Mr. Dohle wrote in the message.
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. He said in the phone interview that the merger would not result in closing redundant imprints and less editorial independence. “The idea of this company is to combine the small company culture and the small company feeling on the creative and content side with the richest and most enhanced access to services on the corporate side,” Mr. Dohle said.
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.

Eric Pfanner reported from Paris and Amy Chozick from New York. Leslie Kaufman contributed reporting.

“It really is just a natural progression,” he said. “Even as this deal happened, 10 other publishing companies probably got started yesterday.”
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.
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.”
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.
“The companies are committed to this transaction; there is no way they can walk away,” Mr. Makinson said.
Amy Chozick contributed reporting from New York.