A boatload of witnesses testified at last year’s court battle between the US Department of Justice and Penguin Random House. Stephen King got all the attention. Not because he said anything particularly interesting or contentious—defence lawyers didn’t even bother to cross-examine him—but because he was Stephen King, celebrity witness. Also because he was seen to be on the side of the angels.
Most of the journalists and industry people watching the trial wanted the Department of Justice to succeed in blocking Penguin Random House’s attempted purchase of Simon & Schuster. King, as a DOJ witness, gave voice to their view that American trade publishing has already seen enough consolidation; decades of deals have left five major firms at the top of the industry and everyone else far below. He argued that allowing Penguin Random House to swallow S&S would shrink the Big Five to a Big Four, reducing competition to the detriment of writers, readers, and literature.
When Judge Florence Pan found for the plaintiff, King took a victory lap, tweeting: “The proposed merger was never about readers and writers; it was about preserving (and growing) PRH’s market share. In other words: $$$.”
I agreed with much of King’s reasoning. Competition is good, too much consolidation is bad. US publishing is better off with a Big Five instead of a Big Four.
SHuSH reported extensively on Penguin Random House’s motives for acquiring Simon & Schuster. Unable to improve its own operations for the previous twenty years, it had only managed to grow by buying other publishing houses. Prized assets like Simon & Schuster were not often on the market, so Penguin Random House wanted it desperately. Acquiring S&S would have transformed Penguin Random House from the largest of the Big Five to twice as big as anyone else, providing a whole other layer of shelter from competition beyond what you get as one member of a five-party oligopoly. Market dominance is priceless, which is why Penguin Random House offered the ridiculous sum of $2.2 billion for Simon & Schuster—twice its normal valuation of publishing assets.
My problem wasn’t with King’s arguments but his conclusion: that blocking the deal was a victory for readers, writers, American publishing, and literature in general. Consolidation of ownership and reduced competition are bad, but they are not the worst that can befall an industry.
It’s important to remember that the court case was fought on exceedingly narrow grounds. The applicable law was Section 7 of the Clayton Act which prohibits one firm from buying another firm if the effect will be to substantially lessen competition or create a monopoly in a particular market.
The trick to a successful antitrust action under the Clayton Act is to identify the particular market. It needn’t be the whole market for trade books. If a firm, by acquiring another firm, is in a position to enhance its profits by squeezing just one supplier on one product line, the deal is illegal. The DOJ had a huge range of options on the Penguin Random House file. Book publishing is a complicated marketplace, with many suppliers and product lines. Publishers buy distribution services, printing, advertising, editorial services, and so on. The DOJ might have argued that a merged Penguin Random House-Simon & Schuster would have the muscle to make its printers or copyeditors reduce their rates. Instead, it put its chips on the discreet line of business in which top-selling authors supply manuscripts to publishing houses.
Top-selling authors were defined as those receiving advances (i.e., guaranteed money) in excess of $250,000. Far fewer than 1 percent of authors receive advances over that mark; Publishers Marketplace, which tracks these things, recorded 233 such deals in all of 2022. The DOJ argued that the combined firm of PRH-S&S would have the power to improve its profits by trimming advances to elite authors. In the end, Judge Pan agreed these advances would be in jeopardy if Penguin Random House acquired Simon & Schuster and the deal was dead.
King was pleased with the result, naturally. The case was prosecuted on his behalf. Hurray for the 1 percent. Pan blithely wrote that the impact of the decision on the 99 percent of authors who receive advances of less than $250,000, like the interests of the more than 12,000 publishing employees at Penguin Random House and Simon & Schuster, were “not relevant to the Court’s analysis of the government’s claim.”
Something irrelevant to the law can be relevant to the rest of us. Which is why I wrote in the aftermath of the decision (SHuSH 177, “This Settles Nothing”): “It’s far too early to celebrate Judge Pan’s decision as any kind of win for the book world. All she has done is put S&S back on the block, left PRH in a heap of trouble (not her concern), and protected the fortunes of the least vulnerable people in publishing.” It was possible, even likely, that Pan’s decision would result in widespread job loss and retrenchment in the industry, less money and fewer opportunities for the vast majority of authors, fewer choices for the reading public, and a generally impoverished trade publishing sector.
We’re not yet one year removed from Pan’s decision and the damage is mounting.
That Penguin Random House would be in turmoil if it lost at trial was clear at the time. There was a lot wrong with its longstanding strategy of growth by major acquisition: it was almost always financially disappointing and it led to the aforementioned consolidation and reduction in competition. But it was also a stabilizing force in the industry, keeping large publishing assets in the hands of a company that knew something about the business and cared for its reputation as a quality literary establishment.
Barred from major acquisitions, Penguin Random House would need a new strategy. Given that its parent company, Bertelsmann, is publicly traded, which means it has an imperative to grow quarter by quarter, year by year, sitting still was not an option. Nor was Bertelsmann going to let PRH try to spend its way to growth: PRH has been the biggest spender in publishing for quite some time without generating forward momentum. The likely course was cost cutting and reorganization in pursuit of improved profitability—a strategy promising years of hard choices and turmoil for the biggest publisher on the block.
It’s now underway. As noted in SHuSH 184 “Succession: Gütersloh,” Markus Dohle, CEO of Penguin Random House and architect of the S&S deal, resigned last December. He was followed a few weeks later by Madeline McIntosh, the esteemed CEO of Penguin Random House US, and Gina Centrello, president of Penguin Random House US. Bertelsmann replaced Dohle with interim CEO Nihar Malaviya, an MBA with a talent for logistics, i.e., a professional cheese parer.
And as noted more recently in SHuSH 201 “Congratulations, you’ve expired!”, Penguin Random House is now purging itself of older, higher-salaried employees. In recent weeks, a whole generation of proven editorial leadership has departed in moves Malaviya describes as “designed to meet market challenges.” Another reshuffling in the endless game of moving imprints from one division to another has begun.
Probably the worst news out of Penguin Random House is that it has substantially reduced the number of books it acquires. The company’s deal-making, according to Publishers Marketplace, saw “big declines” in 2022 and it remains depressed in 2023. Who is losing out as PRH retreats? Not the elite. Penguin Random House is signing more big-money deals than ever. It’s regular authors who are going hungry.
This, too, was predictable. One of the clearest trends in book publishing over the last half century has been bigger and bigger bets on potential blockbusters. It hasn’t mattered how much consolidation the industry has seen: publishers have been ever-more-willing to shell out for books that look like sure things. There’s a logic to it. As we learned at trial, two out of three books lose money, and 4 per cent of the few books that make money drive 60 per cent of a firm’s profitability (that is PRH data but PRH is so huge and has absorbed so many smaller publishers that its numbers are a reasonable proxy for the entire industry). Not all books signed for big advances go on to become blockbusters, but because their authors are usually proven sellers or celebrities, their odds are better than those of books signed for normal advances. The general reader in today’s crowded book market is faced with a bewildering array of choice and tends to default to known quantities, those same proven bestsellers or celebrities. It’s a blockbuster world.
The rich were going to get richer even if PRH-S&S had gone ahead. Not even consolidation will stop the trend: there’s a clear historic precedent in Random House’s 2013 acquisition of Penguin, after which the number of big advances increased substantially. Was PRH-S&S really going to grind its star writers and risk them jumping to HarperCollins or Hachette? Judge Pan apparently thought so: she was dazzled by Yale professor Edward Snyder’s econometric model; it predicted that the PRH-S&S deal would reduce advances to top-selling authors by 6 percent on average. We’ll never know if that 6 percent would have materialized, although I would guess the success rate of econometric models is about the same as the success rate for the average book. We do know that rank-and-file writers are now being harmed.
Not all the damage at Penguin Random House is a direct consequence of the failed S&S acquisition. The last year or so has been tough in publishing—HarperCollins, unaffected by the PRH-S&S deal, has announced that it’s laying off 5 percent of its staff. But the leadership changes and the new fiscal discipline within Penguin Random House are direct and predictable results of the failed deal and Malaviya has made it clear there is more to come. A massive publishing company that King hyperbolically claimed was all about the $isnow,wellandtruly,allaboutthe$.
Last week we learned that Simon & Schuster, the other half of the blocked deal, will be sold by its parent company, Paramount, to the private equity firm Kohlberg Kravis Roberts & Company (KKR).
It was obvious and discussed at trial that Paramount was going to unload Simon & Schuster one way or another. If the buyer wasn’t Penguin Random House, it would be another publishing company or a private equity firm. The latter option was worrisome. Private equity tends to have one game plan: buy a company, load it with debt, wring out costs to improve its financials, sell at a profit. Dealing Simon & Schuster to private equity, The New Republic warned at the time with some slight hyperbole of its own, would mean “absolute devastation and wholesale job loss.”
Judge Pan’s decision was disingenuous on this point. On the one hand, she wrote that the future prospects of Simon & Schuster were irrelevant to her court; on the other hand, she tried to insulate herself from those consequences by declaring concerns that S&S might get raped by private equity “highly speculative.” She was wrong about “highly speculative.” There had been private equity bidders when S&S was first put up for sale in 2020. Private equity was always a distinct possibility.
KKR is paying $1.6 billion for Simon & Schuster, $600 million less than what Penguin Random House put up. It is now doing what private equity does.
The purchase was made within American Fund XIII, one of KKR’s many private equity vehicles. The fund was launched in 2021 with a $19-billion war chest. It has been buying companies since inception; it will hope to have most, if not all, lipsticked and sold for a substantial profit by 2030.
Like all private equity firms, KKR likes to limit the use of its own money in acquiring companies. It prefers leveraged buyouts, meaning that it borrows to cover most of the purchase price. In Simon & Schuster’s case, KKR has already arranged $1 billion worth of debt financing from a group of banks led by Jefferies Financial Group. KKR will contribute the remaining $600 million from its North American Fund XIII. It won’t pay the hellish interest costs on the borrowed $1 billion. S&S will, wiping out a big chunk of its profitability, which KKR likes because the company will pay less tax.
KKR will want to sell Simon & Schuster in five to seven years, its usual time frame, for a return of about 2.5-times its invested capital, which is the average return across all the deals in an earlier iteration of the North American Fund. So with $600 million invested in Simon & Schuster, it will seek, through the sale price and whatever management fees it can extract from S&S in the meantime, roughly $2.5 billion. If it succeeds, it will pay back the borrowed billion and pocket $1.5 billion, or 2.5 times its $600 million.
As a company flipper with no literary reputation to safeguard, KKR is as much about the $$$ as any organization on the planet.
How do you buy a company for $1.6 billion, load it with expensive debt, make it pay management fees, and sell it five to seven years later for something approaching $2.5 billion? You make it more profitable in the interim. How do you do that? You either goose sales revenues or cut costs or hope that the overall book business grows and you can ride that wave.
KKR is smart enough to know that the overall book market is unlikely to grow substantially. It would also have realistic expectations about how much Simon & Schuster’s sales revenues can be improved. There are probably opportunities to expand the business internationally: unlike most of its peers, S&S has been largely confined to North America. But the company has been on a tear the last few years, thanks to hits by Colleen Hoover, and the reasonable expectation is that its sales eventually revert to the mean. CEO Jonathan Carp has admitted this in Publisher’s Weekly.
The heavy lifting will have to come on the cost side. In the months ahead, hordes of KKR’s recently minted MBAs and Ivy grads will descend on Simon & Schuster to identify how to cut expenses at a company already reputed as the leanest of the Big Five (Paramount spent several years reducing costs to make S&S more attractive before putting it on the market in 2020). The kids won’t do the dirty work. S&S management will have to do it.
How do you convince managers of a proud publishing company to take an ax to their own operations? It’s not easy. They’re like any other managers: they think they’re running as lean as possible. They’ll want to tell KKR that they can’t eliminate a huge whack of costs without affecting quality and working conditions and the growth potential of the company. KKR has heard these lines a thousand times. It has devised a nifty workaround. It promises to share some of the proceeds of the eventual sale of S&S with its managers and employees. The idea is to make every single person who works at Simon & Schuster all about the $$$. They may reduce S&S to a shadow of its former self, but at least they’ll be well compensated.
Simon & Schuster, incidentally, is Stephen King’s publishing house.
In five to seven years, the company will be in new hands—the hands of the highest bidder. S&S may get lucky and land with someone who likes books or simply wants to own and support a legendary publishing brand. Or it may not. KKR doesn’t care. It will already have raised funds for North American Fund XIV; its attention will be on those opportunities.
None of this is guaranteed to happen. It’s what is likely to happen to S&S if the standard private equity playbook is followed. Maybe KKR will surprise us and find some ingenious way to grow S&S without reducing costs. I sincerely hope it does. I wouldn’t bet on it, though. I’ve had some exposure to KKR. It is incredibly adept at buying and selling businesses, but its subject matter expertise is thin and there aren’t a lot of easy fixes in centuries-old industries.
Of course, we don’t know what would have happened if Penguin Random House would have been permitted to acquire Simon & Schuster—some job loss was inevitable in that scenario, too. But these outcomes don’t look to me like a victory for writers, readers, and the whole of the publishing world. Stephen King and an elite few are fine. They were going to be fine anyway. A far greater number of writers and publishing employees won’t be.
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