March 20, 2023

Penguin and Random House Merge, Saying Change Will Come Slowly

E-mails were sent to nervous employees assuring them that their health plans would not change.

And a new temporary logo — with a penguin in profile next to a tidy house — was released until a permanent one could be designed.

On Monday, the newly formed company of Penguin Random House began to take shape, only hours after a middle-of-the-night announcement that the long-planned merger had been completed.

Together, Penguin and Random House will make up the biggest and most dominant publisher in the business, one that has unmatched leverage against and the potential to inspire other mergers in the industry.

Markus Dohle, the chairman and chief executive of Random House, who will take on the role of chief executive of the new company, announced the completion of the merger in an e-mail to employees on Monday.

“Today, we are Penguin Random House,” he wrote. “You should be proud of what you’ve accomplished and what we are all now a part of: the first truly global trade book publishing company. Together, we are even better positioned to fulfill our core purpose: to bridge authors and readers by publishing the very best books.”

Bertelsmann, the owner of Random House, and Pearson, the owner of Penguin, disclosed the merger in October, saying that Bertelsmann would control 53 percent of the company and Pearson 47 percent. Since then, the merger has sailed through regulatory approvals in the United States and Europe, as well as China, Canada and other countries.

The combined companies will control more than 25 percent of the book business, with more than 10,000 employees, 250 independent publishing imprints and about $3.9 billion in annual revenues.

Mr. Dohle, in a telephone interview from London, where he was about to embark on a three-week tour around the globe to meet with employees, said that part of his message is simple: there will not be much change at first.

There are no immediate plans for laying off employees or closing imprints. Both Penguin and Random House have long leases on their buildings in Manhattan, so they will not work from the same building anytime soon — maybe not for at least a decade, Mr. Dohle said.

“The continuity will far outweigh the change,” said Mr. Dohle, who has a reputation for deliberate moves. “We have the luxury to take the time before we make any strategic decisions. There is no need to rush.”

One goal of the merger, he said, is to “crack the code of discoverability” — of how to put books in front of potential buyers — “in a world with fewer bookstores.”

Several important leadership changes for the new company were announced Monday. David Shanks, the chief executive of the Penguin Group USA, has stepped down and will be a senior adviser to Mr. Dohle and the executive team. John Makinson, the head of Penguin Group since 2002, will be the chairman of Penguin Random House.

Executives sought to reassure anxious employees, authors and agents that there was nothing to worry about. In a letter to authors, Mr. Dohle said that the new company would invest in distribution and marketing, maximizing potential readers. The authors’ relationship with their editors and publishing teams, he said, “will remain untouched.”

Executives at Penguin and Random House said the initial focus would be on unifying the infrastructure of the companies, including establishing pay scales, health benefits and new e-mail addresses.

But there will also be an effort to sort out redundancies, a process that typically involves a reduction in employee count. As physical book sales decrease, so does the need for gigantic warehouses to store and ship books; the newly combined company is likely to find ways to trim printing, distribution and storage costs.

“There’s positives and negatives,” said Elyse Cheney, a literary agent. “The positive is that I hope they will be able to have greater leverage with companies like Amazon. But more importantly, that they figure out new and innovative ways to reach consumers, now that the marketplace is changing so rapidly.”

Analysts said it was too early to predict the consumer impact of the merger. Mike Shatzkin, the founder and chief executive of Idea Logical, a consultant to publishers, speculated that Penguin Random House would eventually use its large list of books to create a digital subscription offer, much like a book-of-the-month club for e-books, or build minibookstores within retailers like clothing stores.

For authors, the suddenly larger presence of Penguin Random House will make it a more attractive prospect, Mr. Shatzkin said.

“If you’re a Penguin author or a Random House author, you should be pretty happy today,” he said. “If you’re another publisher or an author with another publisher, you should be watching this with a wary eye.”

But authors and agents also quietly voiced concern that there would be fewer major publishing houses competing for their work.

Harlan Coben, the best-selling novelist who is published by Dutton, an imprint of Penguin, said that “the one thing that worries every writer is that there is going to be fewer houses and less competition.”

But, he added, “this business so constantly changes that whatever we’re talking about now will be nonsense a few years from now.”

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Random House and Penguin to Be Combined

Under the agreement, Bertelsmann, which owns Random House, would control 53 percent of the merged publishers. Bertelsmann and Pearson would share executive oversight, with Markus Dohle of Random House serving as chief executive and John Makinson of Penguin becoming the chairman.

The deal would consolidate Random House’s position as the largest consumer book publisher in the English-language world, giving the combined companies greater scale to deal with the challenges arising from the growth of e-books and the rise of Internet retailers like Amazon.

“Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers,” said Marjorie Scardino, chief executive of Pearson, which is based in London.

By taking control of the company, Bertelsmann, which is 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 riven by management turmoil and differences over strategy, prompting Bertelsmann to sell its share to Sony eventually.

“With this planned combination, Bertelsmann and Pearson create the best course for new growth for our world-renowned trade-book publishers, to enable them to publish even more effectively across traditional and emerging formats and distribution channels,” said Thomas Rabe, chief executive of Bertelsmann, in a prepared statement.

Analysts have raised questions about possible regulatory hurdles to the deal, given that the combined companies would have around one-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.

Pearson and Bertelsmann said Monday that “the combined organization’s level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses.”

Some literary agents, however, were unimpressed by the prospect of a combined Random House and Penguin, responding to reports of a possible deal last week by saying it could reduce the number of outlets for authors.

The companies said the agreement would exclude certain assets, including Random House’s trade publishing business in Germany. Pearson will retain the right to use the Penguin brand in its education business, which has become the focus of the company’s plans for the future.

Analysts have said the deal could spur further consolidation in the book publishing business, which has remained more fragmented than, say, the music business. Another publisher, the HarperCollins division of News Corp., was said to be interested in Penguin.

But Bertelsmann and Pearson accelerated their talks over the weekend after reports last week, and they said Monday that they hoped to close the deal in the second half of 2013. Pearson said the deal is not subject to shareholder approval.

News Corp.’s interest in Penguin was first reported in The Sunday Times, a London paper that is also owned by News Corporation. According to The Times, News Corp. was exploring a cash offer of $1.6 billion.

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Media Decoder Blog: In EMI Bid, Universal Considers a Sale

To get European regulators to approve its $1.9 billion takeover of EMI, the Universal Music Group may do something once considered unthinkable: sell Parlophone Records, which releases the music of Coldplay and Radiohead and is the heart of EMI’s holdings in Europe.

According to a report in The Financial Times late Thursday that was corroborated by one person briefed on the talks, executives from BMG Rights Management, a music company backed by Bertelsmann and Kohlberg Kravis Roberts, have met with Universal over a possible sale of Parlophone. Representatives for Universal, EMI and BMG all declined to comment.

The fact that Parlophone is on the table is a sign of how troubled Universal’s talks with the European Commission have become. Universal, whose global market would swell to more than 40 percent if it absorbed EMI, entered the talks two weeks ago hoping it could gain the commission’s approval by offering to sell European rights to a relatively small number of songs. After its early offers were found inadequate, Universal looked to sell off independent labels that EMI had acquired over the years, like Virgin, Chrysalis and Mute. In its latest strategy, Universal is considering keeping those smaller labels and selling Parlophone.

In an interview this week with Dow Jones, Joaquín Almunia, the European competition commissioner, described the talks with Universal as being “very tough.” Last month, the commission sent Universal a nearly 200-page “statement of objections” that reportedly rejects many of Universal’s central arguments in favor of the merger.

While any Parlophone deal would most likely include the bulk of its extensive catalog, it would exclude EMI’s ultimate jewel, the Beatles, according to The Financial Times’s report and the person briefed on the talks, who was not authorized to speak publicly about it. Parlophone’s artists include stars like Kylie Minogue, Blur, Gorillaz and the Verve. The label also handles the European releases for other acts signed to EMI’s American branches, like the Beastie Boys, but it is unlikely that a sale would include rights to those artists’ music.

Peeling off Parlophone could have an adverse effect on the value of Universal’s overall deal for EMI. Universal assumed all regulatory risk in the transaction, agreeing to pay about 90 percent of the full sale price by September, whether the deal is approved by regulators or not. If Universal is forced to sell big pieces of EMI for less than it paid, and also loses some of the $157 million it expected in annual savings, the deal could end up far more expensive for Universal.

Universal has until Wednesday to make its formal submission of remedies to the European Commission, although it may do so earlier. Its proposal will then go through “market testing” with competitors, and the commission will have until Sept. 27 to make a final ruling.

In the United States, the Federal Trade Commission is investigating the deal.

Ben Sisario writes about the music industry. Follow @sisario on Twitter.

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