Frontlist | Penguin Random House to Buy Simon & Schuster

on Nov 26, 2020

ViacomCBS agreed to sell the 96-year-old company in a deal that potentially creates a megapublisher.

The biggest book publisher in the United States is about to get bigger. ViacomCBS has agreed to sell Simon & Schuster to Penguin Random House for more than $2 billion in a deal that will create the first megapublisher.

Penguin Random House, the largest book publisher in the United States, is owned by the German media conglomerate Bertelsmann. Adding Simon & Schuster, the third largest publisher, would create a book behemoth, a combination that could trigger antitrust concerns.

The deal announced on Wednesday includes provisions that would protect ViacomCBS in the event that a sale is squashed by authorities. Bertelsmann would pay what is known as a termination fee if the deal does not go through.

The sale of the company will profoundly reshape the publishing industry, increasingly a winner-take-all business in which the largest companies compete for brand-name authors and guaranteed best-sellers.

The book business has seen wave after wave of consolidation in the past decade, with the merger of Penguin and Random House in 2013, News Corp’s purchase of the romance publisher Harlequin, and Hachette Book Group’s acquisition of Perseus Books. This fall, Houghton Mifflin Harcourt announced it was exploring a sale of its trade publishing division, and could be an attractive target for a large publishing company like Macmillan or Hachette.

Simon & Schuster, which publishes prominent authors like Stephen King, Don DeLillo, Bob Woodward, Doris Kearns Goodwin and Walter Isaacson, had long been rumored to be the next big company to be put up for sale, and it made an attractive prize for larger publishing houses seeking to grow through acquisitions. It has a vast backlist of more than 30,000 titles.

Founded in 1924 by Richard L. Simon and M. Lincoln Schuster, the company began as a publisher of crossword puzzles. It eventually grew into a sprawling company with more than 30 publishing units, and a backlist of literary treasures like the works of Ernest Hemingway and F. Scott Fitzgerald, Henry James and Edith Wharton.

The past year has been tumultuous for Simon & Schuster. In March, it was put up for sale, just as the first wave of the coronavirus pandemic hit, destabilizing the economy and forcing bookstores to close, hobbling a major sales channel. In May, Carolyn Reidy, the company’s beloved chief executive, died suddenly, and was later replaced by Jonathan Karp, who was formerly the publisher of Simon & Schuster, the company’s flagship house among dozens of imprints. The company also faced lawsuits from the Trump family and administration, as the president tried and failed to prevent the publication of books that were critical of him, by John Bolton and Mary L. Trump.

The company had a profitable year, in spite of such hurdles. Revenue grew to $649 million through September, an 8 percent increase, and profit before tax rose by 6 percent to $115 million.

For Simon & Schuster’s owner ViacomCBS, the all-cash deal will help the company pay down its $21 billion debt load and keep up dividend payments to shareholders. The sale of Simon & Schuster is part of a great unwinding taking place across the media industry as conglomerates cleave off or close down ancillary businesses. ViacomCBS, which also owns Paramount studios and Nickelodeon, has bet its future on streaming, and books won’t play a big role in that strategy.

Mr. Karp and Dennis Eulau, Simon & Schuster’s chief operating officer and chief financial officer, would remain the heads of the publishing house under new ownership.

In an interview on Wednesday, Mr. Karp said that Simon & Schuster would maintain its editorial independence and would continue to publish the same volume of books under its new ownership.

“This is a company that respects the creative autonomy of publishers,” he said. “We’ll all still be competing against each other. Publishing is a business driven by individual passions for books and for writers.”

Mr. Karp said it was too early in the process to discuss whether there would be staff reductions or streamlining of editorial and marketing departments, or if Simon & Schuster’s print distribution networks and warehouses would be absorbed into its parent company.

Markus Dohle, the company’s chief executive and a member of the Bertelsmann executive board, said in an interview that Simon & Schuster would retain its editorial identity. He noted that Penguin Random House’s imprints compete with one another for book projects and that that practice would apply to Simon & Schuster as well.

“We’ve done this before, so we have proof of concept,” he said, citing the merger of Random House and Penguin. “We keep the creative side of the business basically untouched.”

Mr. Dohle said that concerns that his company’s acquisition of Simon & Schuster would create a competition-stifling monopoly are based on “politics and perception” rather than data.

“The book publishing industry is very unconcentrated and fragmented compared to other industries,” he said. “We are very confident we’ll get clearance for the deal, and we are also confident that we can increase the service level for authors, agents and retailers.”

Still, some authors and literary organizations expressed alarm at the news that the largest publishing company could gain even greater market share.

“I worry that it’s going to force authors out of the industry, and I worry that it’s going to force really great people who work in the industry out,” said Jason Pinter, an author and the founder and publisher of Polis Books, an independent publishing company.

The Authors Guild, in a statement, said it opposed the sale, and it called on the Justice Department to challenge the deal.

“The number of large mainstream publishing houses will go from five to just four, further reducing competition in an already sparse competitive environment,” it said. “For authors, it means there will be fewer competing bidders for their manuscripts, which will inevitably drive down advances offered.”

ViacomCBS received more than half a dozen inquiries from interested buyers, including financial firms and the French media giant Vivendi, which holds a minority stake in Hachette through the publisher Lagardère. The top three contenders were Bertelsmann, Rupert Murdoch’s News Corp, which owns HarperCollins, and Vivendi. News that Bertelsmann was close to a deal was reported earlier by The Financial Times.

The merger will be reviewed by President-elect Biden’s team, according to Erik Gordon, professor at the Ross School of Business at the University of Michigan. The incoming administration, he said, “will be tougher than the prior administration’s team and more sympathetic to the plight of authors who will have less ability to negotiate deals or even get published.”

He added that regulators could seek what are known as “structural remedies” where Penguin Random House would have to sell off other divisions or imprints as a condition of the merger. The company would have to spin off or sell a large enough chunk to create “viable competitors,” he said.

A spokesman for Bertelsmann said Penguin Random House had lost market share in recent years and cited Amazon as a competitive threat to the overall book market. The combination of Penguin Random House and Simon & Schuster would be “below 20 percent,” the company said, citing data from the Association of American Publishers, an industry trade group.

The sale could also have a ripple effect throughout the literary ecosystem. The biggest houses are better equipped to negotiate favorable terms with major retailers like Amazon, Barnes & Noble and the big box stores, and are also able to develop direct-to-consumer marketing and sales networks so that they are not as dependent on retailers.

For literary agents and authors, the wave of consolidations has meant fewer potential buyers for books from authors without a proven track record.

“There are projects that would have sold for $150,000 years ago that might not sell at all now to the big five, whereas the book that would have sold for $500,000 might go for a million,” said the literary agent David Kuhn. “They would rather go in bigger for the thing that they have the most consensus on.”

Some industry analysts say the sale will accelerate a long-running trend that has taken hold over the last decade, as publishers have grown more dependent on blockbuster titles and backlist sales, resulting in fewer opportunities for new writers and midlist authors.

“For certain books, there will be only four possible customers, down from five,” said Mike Shatzkin, founder and chief executive of the Idea Logical Company. “It’s another sign of how the trade publishing ecosystem has weakened.”

With its pending acquisition of Simon & Schuster, Penguin Random House will dwarf other major publishers, giving it an estimated market share of some 30 percent of the U.S. book market. The company has developed sophisticated online marketing networks and is the only major publisher in the United States whose warehouses ship books seven days a week.

“It certainly extends their dominance,” Mr. Shatzkin said. “It’s going to be a strengthening elixir.”