US trustbusters: slaying of monster Penguin reflects mission creep

It was an image of horror that even chilled the blood of spine-chilling writer Stephen King. After devouring rival publisher Simon & Schuster, Penguin Random House would plunge its bloody beak into top authors’ earnings. Happily for the best-selling novelist — but not for M&A bankers — a federal judge agreed, blocking the £2bn takeover.

The name of the beast would have been “monopsony”. That describes a buyer whose huge scale unfairly disadvantages suppliers. For decades, US trustbusters have focused on fighting monopolies. Their reaction to the prospect of Penguinzilla shows they are broadening their scope under president Joe Biden.

The legal ruling backs up a Department of Justice decision, drawing the praise of King and others worried about creeping corporate consolidation.

US competition authorities are aggressively trying to stop deals they believe are bad for the economy. In the case of book publishers, the DoJ concluded that a clique of top authors accustomed to six-figure advances was a group worth protecting.

The issue was whether writers who command advances of $250,000 and above would earn less if a Big Five of publishers shrunk to a Big Four.

The acquisition partners argued that the complexity of book market dynamics permitted a reduction. They estimated that in an annual market of $1bn of advances, that figure would perhaps be reduced by $30mn. The pair claimed an enlarged PRH would be better placed to negotiate with retailers such as Amazon, benefiting book buyers.

The publishers have said they will appeal against the judge’s decision. However, if the appeal fails, S&S owner Paramount faces a tough choice. Book publishing is not core to its video streaming ambitions. A spun-off, listed S&S is not likely to thrive in public markets.

A private equity buyer would solve the problem by overcoming monopsony -based objections. But it would look to slash costs more brutally than by eliminating duplicate overheads as PRH would have done. The nameless horror now menacing the US publishing industry is that it will drift towards a Big Four without consolidation taking place.