Bertelsmann to Buy Random House
John F. Baker and Jim Milliot -- 3/30/98
Germany's giant Bertelsmann media group announced March 23 that it planned to buy Random House, a move that astounded the industry and changed the shape of American trade publishing overnight. "It is an awesome array of assets," the head of one major publishing house commented.
The deal, which had been a closely held secret, was worked out on a personal level over the past couple of months between Thomas Middelhoff, soon to become CEO of Bertelsmann, and Si Newhouse, who heads Advance Publications, Random's owner. Bertelsmann used its own in-house team of M&A experts to negotiate the deal. "There was a good working relationship between Si and myself, and one of our priorities was to keep the negotiations as confidential as possible," Middelhoff told PW -- and he certainly succeeded, as the news hit publishers last week as a bombshell. Since both companies are privately held, no financial details were given, but using normally accepted financial formulas for such a deal, PW estimates that a buying price of $1.3 billion to $1.5 billion seems likely.
When the transaction is completed, likely by the middle of the year, Random will be joined with Bertelsmann's other U.S. operation, Bantam Doubleday Dell. The whole vast combination, under the name of the senior partner, Random House Inc., will have annual sales estimated at $1.8 billion-almost double that of Penguin Putnam, its nearest rival. Peter Olson, chairman and CEO of Bertelsmann's North American operations, will head the combined companies, and Alberto Vitale, Random's current chief, will become chairman of a newly created supervisory board, with members drawn from all three entities. This board will serve as an advisory group, focusing on strategic issues, but no member will have any operating responsibilities for Random.
Si Newhouse, whose family bought a house that has been called "the Cadillac of publishing" for about $80 million in 1980, said owning it had been "gratifying," but that in looking forward, he and his brothers had decided to focus their interests on Advance's "core business" of newspapers and magazines. Calling Random "the most prominent and prestigious trade publisher in the world," he said he was confident it would continue to flourish under the German giant.
Random, like most trade houses, had a difficult 1996, but Vitale told PW that sales improved in the second half of last year and the company finished 1997 with a reduction in returns and an increase in sales and profits. He commented: "Bertelsmann's strategy is simple: they want to be the premier English-language publishing house. Random has the name that represents talent, tradition, authors, editors, a strong publishing philosophy and a keen customer-oriented posture."
It was just such a hallowed conception of Random's role in the American publishing picture that made the thought of the deal so harrowing to some. After an initial reaction of shocked disbelief, a flurry of concerns were raised, particularly by authors and agents, who feared a diminution of the competitive marketplace, a watering down of the Random group's role as one of the more literary, tradition-minded publishers, and an even tougher time ahead for quality midlist titles, as opposed to high-budget glamour books with targeted readerships. There were also fears expressed, particularly among staff members of the two huge houses that will now be merged, over likely duplication of functions and resulting job losses.
Olson told PW that it was too early yet to discuss how the two companies, which have very distinct corporate cultures, will be combined, or what the organizational structure will be. He did emphasize, however, that the editorial autonomy and independence of the various imprints, on which the Random group in particular has always prided itself, will be maintained.Olson also noted that as other large media companies abandon trade publishing or books altogether, Bertelsmann is increasing its commitment. "The book business has been and always will be a core business for Bertelsmann, be it through direct marketing, online retailing or trade book publishing," he said, adding that "all three businesses will be run at arm's length from each other." The group plans to continue investing in the book business; "We would like to play a role in shaping the future of the book publishing industry," he declared. Middelhoff said there are no plans in place to increase acquisitions of worldwide rights-a matter of particular concern to agents-and he noted that a major challenge in the future will be how books will be sold over the Internet.
It was this sense of the future of publishing that was a source of both excitement and concern to observers, according to their vantage points. For Pat Schr der, executive director of the Association of American Publishers, it was an indication of optimism in a business that has lately seemed beleaguered. "What are these young guys seeing about the future of publishing that some of us are missing?" she enthused. (She was referring to the fact that Middelhoff, Olson and BDD's CEO Erik Engstrom are all in their 30s and 40s.) "If they can see some way the business can grow, that's exciting. These young Turks are not just buying a crown jewel, they're seeing ahead into the 21st century." She acknowledged that the consolidation would hurt the AAP in terms of dues collection, but "we'll just have to hustle more."
What the consolidation could mean in financial terms to writers and agents was also at the heart of concerns expressed by the Authors Guild and the Association of Authors Representatives, respectively. Although Olson stressed to PW that there are no plans to cut back on titles at the new Random ("We plan to offer more, not less," Olson promised), agents and authors fear a shrinking market for their offerings, particularly of less obviously commercial titles, with a whole new crop of imprints joining those that are already, through corporate ownership, enjoined from participating in auctions or bidding wars against each other for titles. "This is dismaying news for authors," said Virginia Barber, president of the AAR. "It means a serious reduction in the competitive field. Big corporations require big profits from big books, and the ones that tend to suffer are the offbeat, quirky, controversial or intellectually challenging ones." Barber added that she hoped the consolidation would inspire "serious discussion" of antitrust questions in Washington. Another agent who wished to be anonymous said he was exploring the possibility of a letter-writing campaign to persuade congressional representatives to raise the issue with the Justice Department.
Paul Aiken of the Authors Guild said authors are always concerned when a major player is acquired by a rival. Their greatest fear, he said, is of the kind of contract cancellations that occurred last year at HarperCollins; he also hoped the merger would not mean that Random's new initiative under trade chief Ann Godoff, to increase the exposure of midlist authors, would be curtailed.
Central to a lot of the talk going on in publishing circles last week was the issue of how Random fits financially into a new Bertelsmann context. There has been an impression that the house has been more relaxed about spending than BDD (in fact, Random author William Styron was even quoted in the Washington Post as saying the house had become "monstrous and bloated"). Vitale insisted, however, that the publisher was no more of a big spender than any other large trade house, and it certainly seems to have been pulling in its horns after the free-spending years at "little Random" under trade chief Harold Evans. Middelhoff said he was confident that the new Random House will be able to meet Bertelsmann's requirement to deliver a 15% return on assets-a very high level for a trade publisher to attain, but something, he claimed, that BDD has consistently done for the last four years.
A Deal of Global Significance
The combining of Random House and BDD has more than national implications, for both houses have major outposts in London, as well as in most English-speaking countries.
In London, Mark Barty-King of Transworld, BDD's London operation, said he believed the new association would create "the U.K.'s most exciting and wide-ranging publishing concern, with an unbeatable range of quality books." Gail Rebuck of Random U.K. (named recently as Publisher of the Year by the "Nibbies" awards, as Transworld has been in the past), said she did not expect any lessening of editorial autonomy, or any diminution of the house's numerous imprints (it has 25). "Authors will still be dealing with the same editors, and may have more opportunities under the Bertelsmann connection," she said.
Peter Mayer, who as chief executive for 20 years of the Penguin group has more experience of global publishing than any other executive, told PW from London, where he was attending the book fair, "It may be that part of the Bertelsmann strategy, beyond the increase in market share in the U.S., could be its interest in building its own German publishing operation, because this deal will give it new and significant access to an increasing number of Random authors. As a function of a large corporate investment in the U.S., it could also have larger implications in Europe; and in other English-speaking countries, it could lead to bigger and more efficient combined entities."
Of the motive behind the merger, Mayer, who now runs small Overlook Press, said, "It has to do with a sense of what large companies have to do to combat the almost systematic depredation of their margins caused by retailer and author demands." And he added that it could also offer "possibilities for some medium-sized publishers."
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