Penguin and Random House Merge, Saying Change Will Come Slowly

Receptionists cheerfully answered the phones with a new greeting: “Good morning, Penguin Random House.”

E-mails were sent to nervous employees assuring them that their health plans would not change.

And a new temporary logo — with a penguin in profile next to a tidy house — was released until a permanent one could be designed.

On Monday, the newly formed company of Penguin Random House began to take shape, only hours after a middle-of-the-night announcement that the long-planned merger had been completed.

Together, Penguin and Random House will make up the biggest and most dominant publisher in the business, one that has unmatched leverage against Amazon.com and the potential to inspire other mergers in the industry.

Markus Dohle, the chairman and chief executive of Random House, who will take on the role of chief executive of the new company, announced the completion of the merger in an e-mail to employees on Monday.

“Today, we are Penguin Random House,” he wrote. “You should be proud of what you’ve accomplished and what we are all now a part of: the first truly global trade book publishing company. Together, we are even better positioned to fulfill our core purpose: to bridge authors and readers by publishing the very best books.”

Bertelsmann, the owner of Random House, and Pearson, the owner of Penguin, disclosed the merger in October, saying that Bertelsmann would control 53 percent of the company and Pearson 47 percent. Since then, the merger has sailed through regulatory approvals in the United States and Europe, as well as China, Canada and other countries.

The combined companies will control more than 25 percent of the book business, with more than 10,000 employees, 250 independent publishing imprints and about $3.9 billion in annual revenues.

Mr. Dohle, in a telephone interview from London, where he was about to embark on a three-week tour around the globe to meet with employees, said that part of his message is simple: there will not be much change at first.

There are no immediate plans for laying off employees or closing imprints. Both Penguin and Random House have long leases on their buildings in Manhattan, so they will not work from the same building anytime soon — maybe not for at least a decade, Mr. Dohle said.

“The continuity will far outweigh the change,” said Mr. Dohle, who has a reputation for deliberate moves. “We have the luxury to take the time before we make any strategic decisions. There is no need to rush.”

One goal of the merger, he said, is to “crack the code of discoverability” — of how to put books in front of potential buyers — “in a world with fewer bookstores.”

Several important leadership changes for the new company were announced Monday. David Shanks, the chief executive of the Penguin Group USA, has stepped down and will be a senior adviser to Mr. Dohle and the executive team. John Makinson, the head of Penguin Group since 2002, will be the chairman of Penguin Random House.

Executives sought to reassure anxious employees, authors and agents that there was nothing to worry about. In a letter to authors, Mr. Dohle said that the new company would invest in distribution and marketing, maximizing potential readers. The authors’ relationship with their editors and publishing teams, he said, “will remain untouched.”

Executives at Penguin and Random House said the initial focus would be on unifying the infrastructure of the companies, including establishing pay scales, health benefits and new e-mail addresses.

But there will also be an effort to sort out redundancies, a process that typically involves a reduction in employee count. As physical book sales decrease, so does the need for gigantic warehouses to store and ship books; the newly combined company is likely to find ways to trim printing, distribution and storage costs.

“There’s positives and negatives,” said Elyse Cheney, a literary agent. “The positive is that I hope they will be able to have greater leverage with companies like Amazon. But more importantly, that they figure out new and innovative ways to reach consumers, now that the marketplace is changing so rapidly.”

Analysts said it was too early to predict the consumer impact of the merger. Mike Shatzkin, the founder and chief executive of Idea Logical, a consultant to publishers, speculated that Penguin Random House would eventually use its large list of books to create a digital subscription offer, much like a book-of-the-month club for e-books, or build minibookstores within retailers like clothing stores.

For authors, the suddenly larger presence of Penguin Random House will make it a more attractive prospect, Mr. Shatzkin said.

“If you’re a Penguin author or a Random House author, you should be pretty happy today,” he said. “If you’re another publisher or an author with another publisher, you should be watching this with a wary eye.”

But authors and agents also quietly voiced concern that there would be fewer major publishing houses competing for their work.

Harlan Coben, the best-selling novelist who is published by Dutton, an imprint of Penguin, said that “the one thing that worries every writer is that there is going to be fewer houses and less competition.”

But, he added, “this business so constantly changes that whatever we’re talking about now will be nonsense a few years from now.”

Media Decoder Blog: Awaiting Merger With Random House, Penguin Settles E-Book Case

Penguin, trying to ensure a clean slate before its planned merger with Random House, announced late Tuesday that it was settling a lawsuit brought by the Department of Justice over the pricing of e-books.

In a terse statement the company said, “Penguin has always maintained, and continues to maintain, that it has done nothing wrong and has no case to answer.”

Nevertheless, the company said, it was agreeing to settle because of the impending merger between Random House, a division of the German media company Bertelsmann, and Penguin, a division of the English conglomerate Pearson. That deal, in which Bertelsmann will assume 53 percent control of the new company, was announced this past October as the publishing industry begins to consolidate to try to better meet the online challenge from Amazon.

The company said in its statement, “It is also in everyone’s interests that the proposed Penguin Random House company should begin life with a clean sheet of paper.”

In April, the Justice Department filed a lawsuit accusing five major publishing houses and Apple of conspiring to fix the price of e-books. These five had moved from a wholesale pricing model that allowed retailers to charge what they wanted to a system that allowed publishers to begin setting their own e-book prices, what was known as “agency pricing.”

The publishers had been looking for a way to prevent Amazon from pricing books below their actual cost, a practice that they said would hurt the entire industry over time. But the government said that the publishers “conspired” in e-mails, in telephone conversations and at lavish dinners to keep e-book prices artificially high.

Three big publishing houses — HarperCollins, Simon & Schuster and Hachette — settled with the Justice Department, but Penguin, Macmillan and Apple decided to fight the charges, until Penguin reversed course on Tuesday.

In the terms of a settlement that a judge approved in September, the three publishers that settled agreed to end contracts with Apple and with e-book retailers that contained restrictions on their ability to set prices, and agreed not to make such restrictive contracts for the next two years.

In May, when Penguin filed its response in United States District Court in New York, it argued that it was Amazon that treated books as “widgets.” It further argued that Amazon was “predatory” and a “monopolist” and that the government’s case was based on “innuendo.”

Penguin said in its statement on Tuesday that it still believed that agency pricing was just. “Penguin continues to believe that the agency pricing model has encouraged competition among distributors of both e-books and e-book readers and, in the company’s view, continues to operate in the interest of consumers and author.” it said.

The terms of the settlement with the Justice Department were not available, but people with knowledge of the details said that they were the same as those received by the other three publishers.

This post has been revised to reflect the following correction:

Correction: December 18, 2012

Because of an editing error, an earlier version of this post carried an erroneous byline.

Random House and Penguin to Be Combined

Confirmation on Monday that Random House and Penguin will merge narrows the business to a handful of big players, led by a new international giant, Penguin Random House. And it could set off a long-awaited round of consolidation, analysts said.

Bertelsmann, the owner of Random House, and Pearson, which owns Penguin, said Monday that they had reached an agreement to combine the two houses to create the largest consumer book publisher in the world. Analysts said the deal between Bertelsmann, of Germany, and Pearson, of Britain, would give the combined companies greater scale to deal with the challenges arising from the growth of electronic books and the power of Internet retailers.

Together, Penguin Random House would have a global market share of more than 25 percent, and a book list that includes contemporary best sellers like Random House’s “Fifty Shades of Grey” and Penguin’s back list of classics from authors including George Orwell.

With e-book sales growing, publishers are increasingly worried about the leverage wielded by Internet giants like Google, Apple and, especially, Amazon. These companies have huge resources to invest in new technology, including digital sales platforms and algorithms that steer people toward books that match their interests. Their scale gives them the power to negotiate better terms on book prices.

“That is very attractive in a business that is going to become more and more digital,” said Douglas McCabe, an analyst at Enders Analysis in London.

The remaining of the so-called Big Six publishers could face increased pressure to respond to Penguin Random House, which will be based in New York. The other four are also owned by larger media conglomerates: HarperCollins, which is part of News Corp.; Macmillan, which is owned by Georg von Holtzbrinck of Germany; Hachette, whose parent company is Lagardère of France; and Simon & Schuster, a division of CBS.

“I wouldn’t be surprised if all the major trade publishers were having conversations like this,” said Ned May, an analyst at Outsell, a research firm. “I would expect to see similar realignment.”

“Some of these publishers, which last week no one would have called small, are realizing that they need to gain scale to invest in digital transformation,” he added.

Of the Big Six, HarperCollins has already signaled its interest in consolidation. News Corp. reportedly approached Pearson informally during the weekend as it was meeting with Bertelsmann to complete their talks, which had been going on for months.

One person close to the merger talks said Pearson had considered all options for Penguin, including an outright sale rather than the joint venture that was announced. But a sale would have been difficult, this person said, because it would have prompted prohibitively high capital gains taxes in the United States.

The deal requires approval by regulators in the United States and Europe. But if it is completed and further consolidation occurs, midsize players in the crowded field of publishing mass-market books might find it especially difficult to compete, analysts say, with bigger players more able to extract favorable terms from customers or to invest in digital operations. Small publishers with a niche focus and loyal groups of authors and readers might manage to remain independent, Mr. McCabe said.

While the music industry, which was hit earlier and with greater force by the digital revolution, has already shrunk to three major players — Warner Music Group, Sony Music Entertainment and the pending combination of Universal Music Group and EMI — the publishing world has remained relatively fragmented.

John Makinson, the chief executive of Penguin, who will serve as chairman of the new company, said that with consolidation inevitable, “we decided it was better to get in early rather than be a follower.”