Back in 2020, Penguin Random House’s acquisition of Simon & Schuster seemed a given, to all insiders from the book publishing industry. Well, they changed their tune in November 2021, when the US department of justice filed a lawsuit to block the deal. And won. Why did the Penguin Random House’s acquisition of Simon & Schuster fall through? What does it say about current M&A antitrust enforcement policy, in the US, but also globally?
1. Penguin Random House’s acquisition of Simon & Schuster: the facts
Simon & Schuster is an American publishing company founded in New York City on 2 January 1924 by Richard Simon and Max Schuster (‟S&S”). Its initial commercial break came from publishing crossword puzzles, after Richard Simon’s aunt, a crossword puzzle enthusiast, asked whether there was a book of New York World crossword puzzles out there, to buy as a gift. Since there was none, and sensing an opportunity, R. Simon and M. Schuster started a publishing house that published crossword puzzles. At the end of 2005, S&S was part of American multinational media conglomerate CBS Corporation. In 2019, CBS and Viacom reunited to form ViacomCBS. As a result, S&S became part of the newly formed ViacomCBS, which has since rebranded as ‟Paramount Global” in 2022 (as this American multinational mass media and entertainment conglomerate owns the Paramount Pictures film and television studio, among other entities). In March 2020, ViacomCBS CEO, Bob Bakish, announced his intention to sell the S&S division, as it ‟does not have significant connection for our broader business”.
Several contenders came knocking at the door, among them German media group Bertelsmann (which owns Penguin Random House), French mass media holding company Vivendi (which owns French publisher Editis) and American mass media and publishing company News Corp (which owns HarperCollins). ViacomCBS expected the bids to be placed before 26 November 2020.
On 25 November 2020, ViacomCBS announced it would sell S&S to Bertelsmann’s subsidiary, Penguin Random House LLC (‟PRH”) for USD2.175 billion in cash.
The transaction was expected to close in 2021, subject to customary closing conditions, including regulatory approvals.
It is unclear, but likely, whether PRH made some filings with, and required some clearances from, the United States (‟US”) department of justice (‟DOJ”) or the Federal Trade Commission (‟FTC”), under the Hart-Scott-Rodino Act.
However, and since the horizontal acquisition – between competitors – of S&S by PRH (the ‟Acquisition”) would have created a publishing company that controlled roughly one-third of the worldwide publishing business, the DOJ filed a civil antitrust lawsuit on 2 November 2021 to block it under Section 7 of the Clayton Act, and ‟ensure fair competition in the US publishing industry” (sic). The DOJ’s complaint is available here.
The lawsuit went to trial in August 2022, with the DOJ’s star witness, author Stephen King, whose works are published by S&S, testifying in the US district court for the district of Columbia, in Washington DC. Other industry luminaries, among them powerful literary agents and other best-selling authors, also testified. Even executives from other major publishing houses, among them the heads of Hachette and HarperCollins (more on these publishing companies below), also testified against the Acquisition.
After a thirteen-day trial in Washington DC which lasted until 19 August 2022, US district court judge Florence Pan made a final verdict on 31 October 2022, deciding that the Acquisition should be blocked via a permanent injunction.
While the full order is temporarily sealed to allow the parties to review for confidentiality, a brief two-page document was released by the district court for the district of Columbia, stating that ‟upon review of the extensive record and careful consideration of the parties’ arguments, the court finds that the US has shown that the ‟effect of the [proposed merger] may be to substantially lessen competition” in the market for the US publishing rights to anticipated top-selling books”.
While that was a blow for the Acquisition, PRH said that it was planning to appeal the permanent injunction, through the release of the following statement: ‟We strongly disagree with today’s decision, which is an unfortunate setback for readers and authors, and we will immediately request an expedited appeal. As we demonstrated throughout the trial, the [DOJ]’s focus on advances to the world’s best paid authors instead of consumers or the intense competitiveness in the publishing sector runs contrary to its mission to ensure fair competition. We believe this [Acquisition] will be pro-competitive, and we will continue to work closely with Paramount and [S&S] on next steps”.
However, PRH could only appeal the decision if Paramount Global, S&S’s parent company, agreed to extend the Acquisition, which purchase agreement was due to expire on 22 November 2022. Paramount Global decided to let the purchase agreement for the Acquisition expire, which triggered a USD200 million termination fee for PRH to pay to Paramount Global.
Paramount Global decided not to proceed with the Penguin Random House’s acquisition of Simon & Schuster, concluding that it was not worth challenging the DOJ in court.
2. Overconsolidation would further narrow down the oligopoly that already exists in the book publishing market
The book publishing industry is structured in such a way that five publishers, called ‟The Big Five”, dominate US and United Kingdom publishing. For example, they make up 90 percent of the market for anticipated top-selling books. They hold the lion’s share in the book manufacturing and selling industry and, with so many resources at their disposal, they have the ability to make or break a book release. Despite churning out an innumerable number of releases each year, many writers find it difficult to make connections with the ‟Big Five”, resulting in more and more authors deciding to self-publish instead.
Among those ‟Big Five” are:
- PRH (the world’s largest book publisher, PRH was formed from the 2013 merger of Penguin and Random House, which were founded in 1935 and 1927 respectively. It now has more than 300 brands and independent imprints across the world under its umbrella. It has locations in North America, Europe, Australia, New Zealand, South America, Asia and Africa. PRH has more than 90 US imprints, across seven publishing groups. It publishes over 2,000 new titles every year in the US. In addition to publishing, PRH sells distribution services to third-party publishers. In 2020, PRH earned over USD2.4 billion in US publishing revenues);
- Hachette (founded in 1826, Hachette is a French publishing house that has acquired a number of well-known imprints, such as Little, Brown and Company, Mulholland Books and Grand Central Publishing. Though Hachette has locations all over the globe, they mainly operate in French, English and Spanish language books and audiobooks);
- HarperCollins (first established in 1817, HarperCollins cemented itself as a major publishing player after a number of mergers in the late 1980s and early 1990s. It is now one of the most prolific English language publishers, perhaps most well-known for its romance genre imprints, Harlequin and Avon Books, as well as its divisions for children and teenagers);
- S&S (the fourth-largest US book publisher, it has 30 US imprints across three publishing groups and publishes over 1,000 new titles annually in the US. In 2020, S&S earned over USD760 million in US publishing revenues), and
- Macmillan (last on the list of the ‟Big Five”, Macmillan was founded in 1843 and strengthened in 2015 after a number of mergers. With imprints such as Farrar, Straus, Giroux, St. Martin’s Press and Tor, Macmillan releases books in every genre).
Since both S&S and PRH are part of the ‟Big Five”, the DOJ contended, in the lawsuit, that number 1 PRH, and number 4 S&S, by total sales, compete fiercely to acquire the rights to publish the anticipated hottest-selling books. Indeed, the two New-York based publishers have impressive stables of blockbuster authors, who have sold multiple millions of copies and have scored multimillion-dollar deals: within PRH’s constellation are Barack and Michelle Obama, whose package deal for their memoirs totaled an estimated USD65 million; Bill Clinton, who received USD15 million for his memoir; Toni Morrison; John Grisham and Dan Brown. S&S counts Hillary Clinton, who received USD8 million for her memoir, Stephen King, Bob Woodward and Walter Isaacson.
If competitors PRH and S&S had been allowed to merge, the combined company would control nearly 50 percent of the market for the acquisition of publishing rights to anticipated top-selling books, hurting competition by reducing advances paid to authors and diminishing output, quantity and variety of books published. Post-merger, the two largest publishers would collectively control more than two-thirds of this market, leaving hundreds of authors with fewer alternatives and less leverage.
In evaluating a potential acquisition of S&S, a Bertelsmann board presentation characterised the US publishing industry as an ‟oligopoly” of PRH and ‟only four further large publishers”. The Acquisition would have made this oligopoly even smaller.
Because Bertelsmann knew that the Acquisition posed a greater ‟antitrust risk”, than any other potential buyer of S&S, it understood that it would have to pay a significant premium over other bidders to acquire S&S.
PRH’s defense was focused on stating that the Acquisition would provide a ‟counterweight” to Amazon’s buying power. The DOJ dismissed this argument, highlighting, in its complaint, that several PRH executives had made statements that the Acquisition was consistent with their ‟goal” to be an ‟exceptional partner for Amazon”. US district court Judge Pan agreed with the DOJ on this one, too.
When S&S announced it was up for sale in March 2020, its current CEO wrote to one of its best-selling authors: ‟I’m pretty sure that the DOJ wouldn’t allow PRH to buy us, but that’s assuming we still have a DOJ”.
Well, it seems that Americans still do have a DOJ after all.
3. More sustained interventionism in mergers & acquisition in the Biden era, consistent with the approach taken in the rest of the world
President Joe Biden made competition a pillar of his economic policy, denouncing what he calls the outsized market power of an array of industries, and stressing the importance of robust competition to the economy, workers, consumers and small businesses. He has called on federal regulators, notably the DOJ and FTC, to give greater scrutiny to big business mergers and acquisitions.
This is a continuation of the antitrust M&A enforcement policy applied by his predecessor, Donald Trump, which saw many big deals blocked, sued to block, or threatened to block, in a number of industry sectors, sometimes on antitrust grounds, other times on national security grounds. For example, in media, notable examples under Trump include DOJ seeking to block AT&T from buying Time Warner, Sinclair being blocked from buying Tribune Media, and the major divestiture requirements on T-Mobile’s deal for Sprint. In tech, Broadcom was blocked from buying Qualcomm, Canyon Bridge from buying Lattice Semiconductor, and DraftKings from merging with FanDuel.
These antitrust challenges have taken place against the backdrop of an increase in global M&A activity (further accelerated by the repercussions of the economic crisis provoked by the management of the COVID 19 pandemic and ‟stunted growth” due to the Russian/Ukraine war).
‟Subject to regulatory approval” was, in the pro-merger US, for decades, an M&A risk factor that merging companies disclosed as boilerplate. Today, however, it is rarely a foregone conclusion – and post-announcement analysis is as much about if a deal will be allowed to close, as it is about price, product, financing, layoffs or strategic coherence.
This is consistent with the rise in power of various competition authorities around the world, and, in particular, in Europe.
Indeed, the European Commission (‟EC”), i.e. the European Union body in charge of controlling mergers & acquisitions on antitrust grounds, has been particularly busy since 2020, with 405 concentrations notified to it in 2021, representing not only a 10.9 percent increase compared to 2020 (361 notifications) but also the second highest annual number of notifications since the introduction of the European merger control regime back in 1990. In 2021, the EC cleared 13 percent more deals at Phase 1 than in 2020, while opening seven Phase 2 investigations, one less than in 2020. Additionally, as in 2020, there was no prohibition decision in 2021. The EC, however, blocked a deal in the shipbuilding industry in January 2022. Also, in 2021, the EC cleared 11 transactions subject to remedies (seven at Phase 1 and four at Phase 2) compared to 16 in 2020, while 12 deals were withdrawn prior to a decision (nine at Phase 1 and three at Phase 2).
To conclude, while the blocking of the Penguin Random House’s acquisition of Simon & Schuster was based mainly on the negative effects such merger would have caused to authors, as opposed to end consumers (i.e. readers), it will be interesting to see whether the FTC also applies a similar rationale during its current probe of the Microsoft’s acquisition of Activision-Blizzard (i.e. whether the acquisition of Activision-Blizzard by Microsoft should be blocked because it would lower remunerations levels among, and advances for, game developers). Watch the space!