As the Department of Justice’s case against the proposed acquisition of Simon & Schuster by Penguin Random House entered its third week, the defense called PRH US CEO Madeline McIntosh, plus merger and acquisition executives from ViacomCBS and PRH, to the stand to discuss why approval of the deal would benefit all parties.
The day started with the testimony of Alex Berkett, chief corporate development and strategy officer of ViacomCBS, who talked about the process of finding a buyer for its publishing subsidiary once the conglomerate put S&S up for sale in early 2020. Berkett emphasized that he and his colleagues wanted S&S to go to a “home” where things would be “good” for “employees and executives.” Why, the defense asked, would this matter to a media company whose business model is based on streaming content, a company that believes books don’t provide “enough rights” to allow streaming opportunities?
The answer, said Berkett, is that the endgame is always “reputational,” and he was certain that Bertelsmann/PRH, which paid nearly $2.2 billion for S&S, could provide “an excellent home” for S&S. The government’s cross relied on the argument that ViacomCBS had considered other types of buyers, including an offer from a financial buyer as well as a strategic partner with a strong financial side. “You believed that a financial buyer could potentially be a good home for S&S?” the government asked. Berkett replied that the word “potentially” was an important one.
After 40 minutes of closed testimony from Berkett, PRH lead attorney Dan Petrocelli called on McIntosh to walk the court through “the lifespan of a book.” The examination went quickly to the analysis of one title, Book H on the decoder sheet, in order to talk about how editors work up a P&L statement for their acquisitions. Asked how editors determine an advance based on a P&L, McIntosh explained that the process is "highly subjective" and so advances can't always be predicted. In fact, sometimes you get three different advance figures for the same book, McIntosh said; in those cases, she added, she usually greenlights them all, because she wants to encourage her editors’ enthusiasm for the manuscript.
Under Petrocelli's questioning, McIntosh continued to run through all aspects of how a book gets published, making the point that the size of the advance plays no role in marketing plans. “It’s very much an iterative process,” she said, referring to the shifts marketing strategy can undergo depending on buzz, sales, and something she referred to many times as “opportunity,” meaning when a book gets unexpected attention (e.g., is selected for a celebrity book club, or has an important news hook). “We’re adapting in real time,” McIntosh said, adding that by the time you begin to discuss marketing plans, the book’s advance “is a sunk cost.”
McIntosh admitted that “we’ve made some painfully expensive mistakes” when it comes to buying titles by celebrity authors, noting that sales predictions can be, well, unpredictable. “If you told me that a book was definitely going to sell 300,000 copies in a year, I would definitely spend millions of dollars to get that book,” McIntosh said. Yet often, she said, a book that sells that many copies is what PRH calls “a breakout book,” and can often be a debut title that had a relatively modest advance; those bestsellers, she explained, can be extremely profitable. As examples, she cited Where the Crawdads Sing by Delia Owens, Fifty Shades of Gray by E. L. James, and Gone Girl by Gillian Flynn. “Even if we had hopes for them at the time of acquisition, the sales so outstrip our expectations [that] they are the books that account for the lion's share of profitability," McIntosh said.
All the discussion of advances seemed to point to PRH’s willingness to spend whatever is necessary to acquire the books they believe in—although once a book with a big advance is in-house, McIntosh said, it gets no special treatment. McIntosh and several other witnesses, including publishers and agents, repeatedly stated that advances are not tied to marketing plans. McIntosh also acknowledged that sometimes other factors got involved in acquiring a book, regardless of what a P&L statement says. "Book H,” for example, had a $4 million-advance, and did not earn out. “Why would you give such a book such a high advance, since the computer P&L program allows you to see the profitability available at lower levels?” the defense asked. “Because this was a second-time PRH author, and their agent was very persuasive,” McIntosh said. “Who was the agent?” the defense asked. McIntosh: “Andrew Wylie.”
In the government’s cross examination, the focus was to show how big PRH already is. While McIntosh didn’t have statistics “at any level” about how often PRH loses high bids (of $1 million or more) to other Big Five houses, she said that one of the reasons these statistics are not easily found is because “books are not a commodity.” Asked by Judge Florence Pan if publishers look to maximize profits, McIntosh said that while is true, there are variables when it comes to each book, pointing to expected sales and type of book.
Judge Pan, picking up on an idea brought up by HarperCollns CEO Brian Murray in his testimony last week, asked McIntosh that is it true that if you excluded HarperCollins Christian Publishing from HC , PRH's trade business would be three times that of HC. McIntosh said she did not have the data to confirm that.
Following McIntosh, Manuel Sansigre, PRH senior v-p of global mergers and acquisitions, outlined the process the company followed to acquire S&S, which included the creation of a template so detailed its spreadsheet included 100 separate tabs. His models showed that, by 2025, the integration of S&S would create synergies between $135-$175 million. One of the cost-cutting measures PRH would take would be to move S&S's 1,400 employees from its current location at Rockefeller Center to the PRH headquarters at 1745 Broadway. “After the transaction,” Sansigre said, “S&S would not need its building.”
This story has been updated.
