American Book Publishing's Synergy Trap

It's a given that Americans don't read books.

A recently released Education Department study showed that roughly one in seven adults in this country, or more than 31 million Americans, can't read basic prose, let alone Philip Roth or John Updike. That percentage is unchanged from the previous study done in 1992, so we haven't exactly been nurturing readers as we go along.

But as pathetic as these statistics may be, it now appears that in the near future Americans won't be publishing books either. And that's just downright sad.

Earlier this week Time Warner announced it was selling its book division - Warner Books and Little, Brown and Company - to the French media conglomerate Lagardere, owners of the magazine publishing group Hachette Filipacchi and major book publishing houses in France, Spain and England. (Full disclosure: Little, Brown published my recent book, WHAT GOES UP: The Uncensored History of Modern Wall Street. C'est la vie.)

Since nothing in the business world happens in a vacuum, the deal actually is part of a broader trend where American media outfits are getting rid of their book publishing subsidiaries. Over the last decade European companies have emerged as dominant players in the book business, taking over increasing numbers of major U.S. commercial houses and imprints.

Random House now is a division of Germany's Bertlesmann AG. HarperCollins is owned by News Corp. and Viking is owned by Pearson Plc, both British companies. The German media giant Verlagsgruppe Georg von Holtzbrinck controls several prestigious American imprints, like Henry Holt and Farrar, Straus & Giroux. And now France's Lagardere will have Warner Books and Little, Brown.

After the Warner deal closes only two major commercial book groups will be owned by American companies: Viacom's Simon & Schuster and Disney's Hyperion. Viacom Chairman Sumner Redstone has said he's ready to sell Simon & Schuster. And it's only a matter of time before Disney comes to the same conclusion with Hyperion (though it likely will keep its children's publishing division, which handles the tie-ins for Disney's blockbuster movies.) Nobody should be surprised if the eventual buyer of at least one, if not both, of these publishing groups is a foreign media conglomerate.

Now for all the carping about America's lack of interest in reading (which does make for a nifty opening to a column) the reason the commercial book publishing industry is moving overseas actually has very little to do with our tastes in culture and entertainment. Rather, American book publishers are experiencing the predictable fallout from the fallacy of "synergy" that Wall Street sold during the '90s merger boom. And the hope here is that the rest of corporate America is paying attention because financial history is highly cyclical. So it's likely that we'll be faced with these same mistakes again before too long.

Let me explain. Like politics, fashion, popular music, and fine dining, corporate finance is susceptible to the fickle winds of trend thinking. There are merger booms, where gigantic companies are cobbled together based on a single shred of logic, followed by busts, where these companies are torn apart. And all the activity usually is triggered by Wall Street bankers, who react like piranhas at a feeding frenzy once there's blood in the water, frantically collecting advisory fees on the way up and the way down.

In the '60s, America went through a merger boom fueled by conglomerateurs like Charlie Bludhorn of Gulf + Western and Harold Geneen of ITT, who believed that companies in completely different businesses - movie studios, oil refineries, car rental agencies, and so on - could be managed efficiently under the umbrella of a single parent organization. The logic turned out to be a fallacy, and most of these conglomerates were busted up in the '70s and '80s by raiders like Carl Icahn and T. Boone Pickens and leveraged buyout specialists like Henry Kravis and Ted Forstmann.

Then in the '90s it was time to merge again. And this time the reason was "synergy."

Now, as an economic concept synergy is a valid and vital part of a company's growth strategy. The basic idea is that two entities with similar processes and products can be run more efficiently by combining facets of the business like record keeping, inventory storage, distribution - you get the picture. Synergy always has been a logical reason for companies to merge.

The problem is that in the '90s companies started seeing synergies beyond the physical benefits of eliminating overlapping positions. In the media industry, the Internet revolution brought an increased fascination with "content," and many companies concluded that with this new technology there were synergies in combining different producers of "content" under a single corporate umbrella. The idea was: a publishing subsidiary puts out a book, which is then plugged in the company's magazines, on its radio stations, by its television news division, and on its websites, and eventually winds up as a movie or television series developed by the company's film production division.

Sounds brilliant. But there was only one problem. "Content" isn't created that way.

Very few books are tailor-made for film or television. And broadcast, print and electronic news divisions view themselves as journalists, not corporate pitchmen. So although some books, movies and television programs may wind up being covered by a company's news shows (see the curious relationship between Simon & Schuster and "60 Minutes") there's no guarantee that it will happen. In short, for content-based synergy to work news divisions would have to be pure corporate marketing arms and publishing divisions would have to be farm teams for film and television producers.

As it turns out, the best example of the failure of this logic is the creation of Time Warner, an ugly amalgam of numerous disparate parts, including America Online, Warner Brothers, CNN, Time Inc., and Time Warner Cable, a major cable television and high-speed online service provider. (Again, full disclosure: my publisher, Little, Brown, is a division of Time Warner until the Lagardere deal is finalized.) Right now the company is under siege by Icahn, the '80s-style raider back to his old tricks of trying to tear down bloated businesses. Say what you will about Icahn and his tactics, there's a very real logic to his arguments in this case. Time Warner is a dysfunctional company, with many different moving parts that probably would be better off on their own or in more appropriate environments with real synergies.

The sale of its book group is a perfect example. Synergy of "content" may have turned out to be illusory, but there are synergies in the book industry. As European publishers are figuring out, since the book market is becoming increasingly global, a company can be run efficiently by combining houses from different countries, and that print in different languages, as long as there are overlaps in various back office functions.

Following that logic, the Warner book group is an ideal fit for Lagardere. The company has thriving publishing operations in France, Spain and England, but none in America, a key book market for an operation with global aspirations. And for Time Warner, its book group is a just small piece of the business - one that's really separate from what the rest of the company is doing. It's easy to jettison. Of course, busting up the rest of Time Warner, which is what Icahn's truly after, would be a much more painful process.

So for now it looks as if the U.S. commercial publishing industry is going the way of the Dodo bird. Sure we'll still have those familiar imprint names on the spines of our books. But the purse strings of the major houses will be held overseas, meaning that's also where the ultimate arbiters of what gets published for a mass audience will be.

Now if this scenario deeply troubles you, there is reason to take heart. Considering the cyclical fashions in corporate finance, some American companies likely will get a chance to buy back these publishing houses in a few years anyway. And by then they'll probably have a whole new set of logical reasons for doing it, too. Maybe this time they'll even be right.