Random House and Penguin Are Negotiating a Merger
In an effort to stave off the challenge from online retailers in a rapidly changing market, two of the world's largest book publishers, Random House and Penguin, are engaged in talks to combine their businesses.
Pearson, the British media conglomerate that owns Penguin, said Thursday that it was discussing a potential deal with Random House's owner, Bertelsmann of Germany. The merger, if completed, would create a combined entity that would control nearly 25 percent of the United States book market and feature an elite roster of authors like Dan Brown, Toni Morrison and John Grisham of Random House and Junot Diaz and Patricia Cornwell of Penguin.
The potential consolidation comes as traditional publishers try to compete with dominant technology companies like Amazon, Apple and Google that have gained power in the e-book market. Lower prices offered by retailers like Amazon have put pressure on publishers to adjust their digital book strategy at a time when brick-and-mortar stores have been disappearing.
A deal could signal a move toward further consolidation among the major publishers, much the way the music industry realigned itself as it made the painful transition to the digital marketplace. Facing intense competition from Apple's iTunes, the industry shrunk from six major record companies to three.
A merger of Random House and Penguin could help the publishing houses cut costs by combining resources, and it would give them more heft in negotiations with Amazon and Apple as readers increasingly abandon print for cheaper e-books.
Penguin Group USA is among the five major publishers named in a lawsuit filed last spring by the Justice Department, which accused those publishers and Apple of colluding in the pricing of e-books. Three publishers — Hachette Book Group, Simon & Schuster and HarperCollins — settled. Penguin and Macmillan have not. Random House, the largest book publisher in the United States, was not named in the lawsuit.
"A combined Random House and Penguin would be a supplier so large it would be very difficult for any anyone to dictate terms to," said Mike Shatzkin, the founder and chief executive of the Idea Logical Company, a consultant to publishers. He added: "You're allowed to collude if you're combined."
But for authors and their representatives, news of the merger discussions, first reported by Germany's Manager Magazin, came as another potential blow in an already challenging profession.
Several literary agents said a merger would lead to a consolidation of publishing imprints, thus reducing the number of bidders vying for titles. They also said that combining editing and marketing resources would likely lead to layoffs and potentially put added pressure on authors, especially those who do not churn out mass-market hits.
David Kuhn, a literary agent in New York, said that a shrinking book industry could be compared to the situation in Hollywood, where studios under financial pressure now focus on churning out a handful of blockbusters a year, rather than taking risks on smaller films. "If there are 20 fewer imprints, then that means there are 20 fewer publishers with checkbooks willing to make bets on less known entities," Mr. Kuhn said.
Another New York agent, who insisted on anonymity to candidly discuss the deal, was more pessimistic. "This group would be HUGE. NOT good for authors," the agent wrote in an e-mail
James L. McQuivey, a media analyst at Forrester Research, said the early panic was justified. "Agents should be terrified because it would give them even fewer people to play against each other," he said.
But, he added, the consolidation of some of the remaining "big six" publishing houses is inevitable. "The need to get some kind of grip on the future of book publishing is driving every single one of these top six publishers in often unconventional ways," Mr. McQuivey said.
A deal between Random House and Penguin would be subject to government approval. Regulators in Europe have demanded significant divestitures as a condition for approval of another recent cultural acquisition, the purchase of EMI by the French media company Vivendi. In the United States, Mr. McQuivey said, regulators could take other factors into account.
"They're facing a much bigger threat in Amazon than considering it might restrain competition," Mr. McQuivey said of the potential merger.
Although financial details remain preliminary, Bertelsmann is expected to have an ownership stake of more than 50 percent in Penguin, according to a person briefed on the talks, who was not authorized to discuss the conversations publicly.
In 1998 Bertelsmann paid more than $1 billion to acquire Random House, which now includes 200 editorially independent imprints that publish around 10,000 books a year. In 2011 the publishing house reported revenue of $2.26 billion, a 4.6 percent decline from a year earlier. In the first half of 2012 Random House reported a 64 percent increase in operating profit, largely because of the success of the "Fifty Shades of Grey" trilogy.
Penguin, which publishes about 4,000 books annually, had $1.61 billion in revenue in 2011, a 4 percent decrease from the previous year. Revenue from e-books accounted for 12 percent of Penguin's global revenues in 2011, up from 6 percent in 2010, according to Pearson.
For Pearson, based in London, unloading part of its struggling publishing business at a premium could help it focus on its faster growing education business. Earlier this month, Pearson's longtime chief executive, Marjorie Scardino, said she planned to step down at the end of the year, prompting speculation that the company would eventually sell its publishing units, Penguin and The Financial Times.
A Bertelsmann spokeswoman, Susanne Erdl, declined to comment. In a statement Pearson confirmed the talks, adding that "the two companies have not reached agreement and there is no certainty the discussions will lead to a transaction."
Analysts said Thomas Rabe, the chief executive of Bertelsmann, based in Güttersloh, Germany, is under pressure to make a deal because some of the company's existing businesses are slowing, with no clear plans for growth in the digital era. Mr. Rabe took over about a year ago from Hartmut Ostrowski, who was seen as more of a caretaker, and immediately announced plans to transform Bertelsmann.
Among other things, he changed the company's legal structure to permit a possible initial public offering of stock, which could raise funds for an acquisition. Buying Penguin would be a big move, though not necessarily the most forward-looking one, given that book publishing, over all, is stagnant or in decline.
"If you're Bertelsmann, would you want to invest in such a slow-growth business?" asked Ian Whittaker, an analyst at Liberum Capital.