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Judge blocks Penguin Random House-Simon & Schuster $2.75B merger

U.S. District Judge Florence Pan issued the 80-page opinion following a 12-day bench trial in August.

WASHINGTON (CN) — A federal judge blocked the nation’s largest book publisher, Penguin Random House, from acquiring the fourth largest, Simon & Schuster, ruling that the proposed $2.75 billion dollar deal would unfairly stifle competition in the U.S. publishing industry.

U.S. District Judge Florence Pan, an Obama appointee, sided with the government in an 80-page ruling unsealed Monday, finding that the proposed deal would likely substantially lessen competition to acquire publishing rights for anticipated top-selling books in the country.

Pan’s opinion comes after a 12-day trial in August, during which attorneys with the Department of Justice argued that the merger would turn Penguin Random House into a “monopsony” — a situation in which there is only one buyer in a given market — in violation of federal antitrust laws. 

She agreed with the government’s argument that the merger would cause an upstream disadvantage in the U.S. market where only five major publishers, the “Big Five,” control the lion’s share of the publishing industry.

“Book publishers have the enormous power and responsibility to decide which books — and therefore which ideas and stories — will be made broadly available to the public,” the judge wrote. “A publishers’ marketplace of ideas is also a marketplace of book sales, production costs, and market share.”

Defense attorneys insisted throughout the trial that there are still three other major publishers within the Big Five — HarperCollins, Hachette Book Group and Macmillan — that would compete “fiercely,” as well as already-existing smaller publishers that could fill any gap post-merger.

But Pan ruled that the loss of competition in situations where Penguin Random House and Simon & Schuster would have been the top two — or only two — bidders for an anticipated top selling books is “inarguable.”

And the post-merger promise by Penguin Random House Global CEO Markus Dohle that Simon & Schuster would continue internal bidding against Penguin Random House even when there are no other bidders “does little to rebut” the government’s prima facie case or the possible anticompetitive consequences.

“Indeed, the promise calls to mind the criminal-law concept of ‘consciousness of guilt’: Mr. Dohle’s extraordinary pledge appears to reflect his awareness of how threatening the combined entity would be to authors and agents,” she wrote.

Internal imprint competition is not a substitute for competition among independent publishers, the ruling says.

Pan was also “unconvinced” by testimony of certain defense witnesses who said author advance levels are “not the most important fact in book acquisitions, and that the author’s ‘fit’ and comfort level with the editor are more significant.”

During the trial, the judge went back-and-forth with Simon & Schuster CEO Jonathan Karp over his testimony that a lot of a book’s success depends on events out of an author’s control and the idea that “any publisher can make a book a bestseller is false.”

She pointed out at trial that the company is telling clients they can “better their chances” of having a bestseller if they sign a book deal with Simon & Schuster because it can “create buzz” through its distribution networks. 

Karp, however, testified that “a lot of the time — it’s like taking credit for the weather.” He said, “you can’t really make those assurances,” adding that he believes it comes down to a “personal connection or a spark or a shared sensibility” between the editor and the publisher. 

Pan meanwhile wrote in her opinion that evidence, including data and testimony, overwhelmingly shows the highest bidder typically wins, and that advance levels are the “primary focus” of book acquisitions.

Jonathan Kanter, assistant attorney general of the DOJ's Antitrust Division, called the decision a victory for readers, authors and “the free exchange of ideas.”

“The proposed merger would have reduced competition, decreased author compensation, diminished the breadth, depth, and diversity of our stories and ideas, and ultimately impoverished our democracy,” Kanter said in a statement.

The Justice Department sued the parent companies of Penguin Random House and Simon & Schuster in August 2020, arguing the proposed merger violates Section 7 of the Clayton Act.

The nearly two-week bench trial over the summer came amid calls for stricter antitrust law enforcement, and three years after the Justice Department’s 2019 failed attempt to prove — in the same federal court — that a $40.4 billion deal between major media conglomerates AT&T and WarnerMedia would stifle competition.

Bestselling author Stephen King took the witness stand in August, telling the judge he traveled to the Washington federal courthouse to testify voluntarily for the government because he thinks “consolidation is bad for competition.” Macmillan Publishing CEO Don Weisberg and longtime literary agent Christy Fletcher also voiced similar worries about the proposed merger while on the witness stand.

Meanwhile, Penguin Random House Global CEO Markus Dohle, Global Senior Vice President Miguel Sansigre and U.S. CEO Madeline McIntosh defended the merger when called to testify.

Attorneys for Penguin Random House and Simon & Schuster did not respond to requests for comment by press time Monday.

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Categories / Business, Government, National, Trials

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