Belatedly, as I was away for the weekend, here’s something from the latest SHuSH newsletter on the Random Penguin court case:
At the beginning of the millennium, Random House (pre-Penguin) had revenues of $2.3 billion (all US figures) and a profit margin of 9 per cent. At the end of the aughts, it had revenues of 2.3 billion and a profit margin of 9 per cent. It was the biggest publishing company on the planet but it had ceased to grow.
Growth matters, especially to Random House’s parent company, Bertelsmann SE, a public company. People buy shares in publicly listed companies because they believe the entity will grow and produce larger profits in the future, making the share price rise and the investor happy. That is the whole game for public companies.
When an asset at a public company does not contribute to growth it is dead weight. It needs to be fixed or jettisoned.
Bertelsmann decided to fix Random House. In 2012, it struck the richest deal in book publishing history, acquiring 53 per cent of Penguin Books, which it then merged with Random House to make the biggest publisher even bigger.
It was said at the time that the two publishers, with combined revenues of $3.9 billion, would be able to share costs, attract better talent, take more risks, offer new products, develop new markets, and otherwise innovate. Together they would have the scale to stand up to bookselling chains like Barnes & Noble and the massive digital players, Amazon and Apple.
It was a lot of hype, of course. Random House had its pick of talent, all the size it needed to negotiate with Barnes & Noble, and it would never be in the same league as Amazon. Markus Dohle, CEO of Penguin Random House, is lucky to get a mid-level account manager on the phone at Amazon.
But the deal went ahead and expectations for the new Penguin Random House were sky high. They had to be. Bertelsmann’s purchase price valued Penguin at $3.5 billion, or more than twenty times its annual profits of $171 million. Penguin Random House would have to be far more than the sum of its parts to justify that price.
Over the next several years, Bertelsmann doubled down on its bet, scooping up the remaining 47 per cent of Penguin in two separate transactions to eventually own it outright.
Did any of the anticipated magic happen?
The first full year of a combined Penguin Random House was 2014. Revenues were about $4 billion, and that’s where they’ve been ever since (leaving aside a nice bump in 2019, the year of Michelle Obama). Profits are up, which might be considered a good sign. But they didn’t grow as a result of the combined firm’s increased scale, new competitive muscle, better talent, new markets, new products, or innovations. As far as I can tell, the improved profitability was achieved the old-fashioned way: the payroll shrunk from a high of 12,800 to 10,800. Also, e-books and audiobooks improved the profitability of all publishers. And the Obamas each knocked one out of the park.
The point is that seven years down the road, Penguin Random House remained exactly the sum of its parts, minus 2000 workers. The acquisition was a big-time bust. Most of the $3.5 billion purchase price was wasted.
