THE BLOG
11/21/2012 09:53 am ET Updated Jan 21, 2013

Will it work? My thoughts on the Penguin-Random House merger

As a former executive at both organizations, I believe the Penguin-Random House merger will be harder to pull off than it sounds (and it sounds hard to pull off in the first place). I also believe -- quite strongly -- that the resources of both houses could be devoted to other initiatives that would better serve them and the industry at large.

Here is a summary of my current thinking on the merits of the merger along with some of the challenges it will entail:

Cost-cutting, yes. Leverage, not so much
I can't recall the specific market shares of the two companies but I'd estimate they will combine to account for 30 - 40% of all units sold, depending on the year and what hits they have. That's massive but I don't think it will make much difference to Amazon who is simply too big, wealthy, customer-focused, and pre-occupied with its actual competitors: Apple, Google, Facebook, Microsoft, and other massive, publicly traded technology companies.

By way of hypothetical example, Amazon could offset giving up a point of discount on ebooks to a new heavyweight publisher by simply increasing prices on other products by 0.5%. That's a guess but it feels reasonable. Anyway, you see the point...

Focus will be diverted to cost-control and job justification
Once the merger is approved, the companies' best and brightest minds are likely to be pre-occupied -- if not completely consumed -- with merging. They will also be pre-occupied with protecting and justifying their jobs -- often to people who don't know what they do. Their focus will turn internally (where, arguably it already is too much of the time) and away from adding value for authors or consumers, their two essential constituencies, and growing revenues.

The cultures/capabilities could complement each other. They could also mix like oil and water
In the US (which is what I know I best) Random House and Penguin are very, very different companies.

Random is (and sees itself as) decentralized, relatively autonomous from its parent company, operationally and technically best-of-breed, and analytically-inclined. In my opinion, it is also a bit bloated staff- and cost-wise (thus lower margins than Penguin), though this has improved greatly under Dohle.

Penguin is (and sees itself as) lean, scrappy, and intuitive with a strong Sales and Marketing culture (its US CEO, David Shanks, comes from a Sales background while its President, Susan Petersen Kennedy comes from the Marketing/Editorial side). Speaking broadly, it has weaker IT and business intelligence tools, operates on an aging operational infrastructure, and is constantly dealing with a meddling Pearson and its much bigger sister, Pearson Education. Historically, it has produced higher margins than Random, at least in the US. How the two mix will depend on many very strong personalities. It could go terrifically. It could also get ugly.

They actually have to merge many more companies than two
Random House is really six companies in the US alone: its five divisions and its corporate area. These disparate parts are somewhat more integrated than in the past but in many respects they might as well be separate companies. Both Random and Penguin also have the pervasive divide between the "corporate" and the "division/imprint."

It is interesting how all involved have taken great pains to emphasize that the editorial/imprint sides of the businesses will remain autonomous. It seems no one is quite bold enough to monkey with the black magic that occurs over there at this time.The extent to which Penguin and Putnam or BDD and Random every fully merged (especially culturally) is also debatable but that's for another post.Then there are the international units, also fodder for another post.

Bertelsmann is historically hands off; Pearson hands on. Bertelsmann is German, Pearson is British
Being merged will feel strange to both Random and Penguin for different reasons. How they react is a total unknown and also critical to whether the merger succeeds. Being Irish-American myself, with only some experience dealing with the parent companies on their home turf, I have very little to offer on how the cultural differences will effect the merger efforts, but I can say that it is difficult for me to imagine they'll have no effect at all.

Tom Peters' opinion of M&A plus a boatload of studies:
70-90% of mergers fail, often for the reasons I've cited above.

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