Penguin Random House Defends Effort to Buy Simon & Schuster

Penguin Random House, the largest book publisher in the United States, said in a court filing on Monday that its plan to buy a competitor, Simon & Schuster, would be a boon for the industry, benefiting authors, booksellers and readers.

The Justice Department has disagreed. Last month, it sued to stop the $2.18 billion acquisition, as the Biden administration takes a more skeptical view of corporate consolidation across industries.

In its complaint, the department attacked the deal on the grounds that it would harm best-selling authors, since they could potentially receive lower pay with one fewer publisher competing to acquire their books. It documented several bidding wars between Penguin Random House and Simon & Schuster that went into six and seven figures and argued that if the proposed merger goes through, those authors wouldn’t have received such lucrative advances.

By focusing on authors’ pay, the Justice Department signaled that it is taking a more sweeping view of antitrust law. For decades, it has been used to block deals on the grounds that consumers can be harmed when big companies with few competitors can raise their prices. But in its suit to block Penguin Random House, the government does not claim that the prices for books will rise for readers or for booksellers, but instead argues that if Penguin Random House gets even larger, it will have more leverage over authors.

In the joint response filed on Monday in the United States District Court for the District of Columbia, Penguin Random House and Simon & Schuster said the government’s argument misunderstands the way the publishing industry functions.

“The government wants to block the merger under the misguided theory that it will diminish compensation to just the highest-paid authors,” said Daniel Petrocelli, a lawyer representing Penguin Random House and its parent company, Bertelsmann, in an interview on Monday. “That is legally, economically and factually wrong, and it ignores the vast majority of authors who will indisputably benefit from the transaction.”

Penguin Random House is defending its plan in part because it stands to lose millions if it does not go through. Acquisitions like these often come with termination fees that are owed to the prospective seller if the transaction doesn’t close. In this case, Penguin Random House would have to pay Simon & Schuster’s seller, ViacomCBS, about $200 million.

Monday’s filing described the book industry as more than just the “Big Five” that consists of Penguin Random House, Simon & Schuster, HarperCollins, Hachette and Macmillan. There are other major players like Disney, Amazon and Scholastic, along with hundreds of small and midsize publishing houses. On any given deal, Penguin Random House said, “at least one” smaller publisher will often compete, and some of the country’s highest-selling authors, including J.K. Rowling (“Harry Potter”) and Jeff Kinney (“Diary of a Wimpy Kid”), are published by companies outside the big five.

Penguin Random House criticized the government for focusing on the relatively small but influential group of authors who command the highest advances, calling it an “invented market.” Publishers do not “divide the market for book rights into distinct categories based on the author’s compensation,” it said in the response.

“This slender piece of the market does not exist,” Mr. Petrocelli said. “There is no objectively definable market for authors of anticipated top-selling books.”

Many writers outside that group, Penguin Random House said, would stand to make more money as a result of the deal. Authors now published by Simon & Schuster would be brought into the Penguin Random House supply chain, widely considered to be the best in the business, which would make their work more visible and available. The company’s supply chain and distribution network also helps neighborhood bookstores compete with Amazon, the response said.

There is little dispute that the proposed acquisition would reshape publishing, which has been transformed by increasing consolidation over the past decade.

The merger of Penguin and Random House in 2013 helped to accelerate an arms race among other publishers who felt they had to bulk up to compete with the enormous new company. Hachette Book Group has expanded its catalog by buying successful independent publishers, including Perseus Books in 2016 and Workman Publishing this year. HarperCollins has also made acquisitions central to its growth strategy, purchasing the romance publisher Harlequin in 2014, and earlier this year it acquired Houghton Mifflin Harcourt Books and Media, the trade publishing division of Houghton Mifflin Harcourt, for $349 million.

But in its court filing on Monday, Penguin Random House said that since 2013, competition in the industry has grown. More titles are published every year, it said, and more than half of the dollars spent on hardcover and paperback books in the United States now go to publishers outside the big five, a higher percentage than before the 2013 merger.

“After the merger, the market dynamic will be just the same,” the response said, “and post-merger Penguin Random House’s pricing influence will be just as nonexistent as it is today.”

With its attempt to buy Simon & Schuster, Penguin Random House stands to become even more dominant over the remaining three big publishers. The deal has drawn criticism from industry groups that represent authors and booksellers, including the American Booksellers Association and the Authors Guild, which both expressed support for the Justice Department’s challenge.

Eleanor Fox, a professor at New York University School of Law who specializes in antitrust and competition policy, said the government’s argument was unusual in that it focused on top author earnings rather than harm to consumers or the market as a whole.

“It’s somewhat unique in this time to focus on the supply market and argue that the suppliers will be exploited,” she said. “They have a much weaker case about consumer pricing.”

The government has been investigating the deal for more than a year and has interviewed competing publishers as well as authors and agents. The case was assigned to Judge Florence Pan, who was confirmed this year to the U.S. District Court for the District of Columbia, and a scheduling hearing is set to take place on Tuesday. Penguin Random House and Simon & Schuster are requesting an expedited trial schedule, with a proposed start date of Aug. 1 of next year.

Edmund Lee contributed reporting.