Judge says US government had 'compelling case' to block PRH's acquisition of S&S

In a newly published document, judge Florence Pan has said the US government presented a “compelling case” to block Penguin Random House’s acquisition of Simon & Schuster, predicting “substantial harm to competition”.

The judge backed the US government’s move last week to block the $2.2bn deal on antitrust grounds. PRH and its owner Bertelsmann, which must pay a $200m cancellation fee if the deal falls through, says it will appeal against the decision, arguing the merger would be “good for competition”.

Judge Pan’s full memorandum opinion, published yesterday (7th November), found in favour of all the US government’s key arguments. She said: “It has properly defined a relevant market focused on the publishing rights for anticipated top-selling books that encompasses 70% of the advances that publishers pay to authors. The post-merger concentration of the relevant market would be concerningly high: the merged entity would have a 49% market share, more than twice that of its closest competitor”.

She said defendants “failed to show that the relevant market is not well defined; have failed to establish that the market-share data inaccurately reflects market conditions; and have failed to rebut the government’s affirmative evidence of anticompetitive harm”. 

She added: “The court is unpersuaded by the defendants’ arguments that the market-share does not accurately reflect conditions in the relevant market because it does not account for constraints that would be imposed by exiting and new competitors, literary agents, and internal imprint competition.” 

She described PRH c.e.o. Markus Dohle’s pledge that should the merger go ahead, S&S imprints would be treated as an external bidder in auctions, as “an unenforceable promise”. “Mr Dohle’s extraordinary pledge appears to reflect his awareness of how threatened the combined entity would be to authors and agents…. It appears that the promise was made just to get the deal done, and once the merger is executed, there will be no economic incentive to maintain the policy.” 

She added the court was “unconvinced” by certain defence witnesses who said advance levels are not the most important factor in book acquisitions. “While that may be true in a small number of cases, books generally are sold to the highest bidder. While the choice of an editor is undoubtedly significant, the agent typically has submitted the book only to a pre-screened list of suitable editors and thus may choose the highest bid among those editors. The overwhelming weight of the evidence supports the conclusion that advances levels are the primary focus of book acquisitions.” 

She went on to describe claims the merger will have either no effect or positive effects on advances as “incredible” and said the court “credits the much stronger evidence that advances will decrease after the merger, based on the market-share data, economic analyses, and the more credible testimony regarding market dynamics….” 

She noted: “It is not necessary for advances to decline in absolute terms for authors to be harmed. The relevant market has been growing rapidly in recent years in response to strong consumer demand, and advances have been rising, consistent with that growth. If the merger goes through, the rate of growth might be offset by competitive harm, allowing publishers to acquire books for more than they do now but for less than they would have absent the merger.” 

Following the decision last week, Bertelsmann, c.e.o. Thomas Rabe said he believed the court decision had been based on "incorrect assumptions", and will be filing a motion with the Court of Appeals. 

A spokesperson for PRH said after the ruling: "We strongly disagree with today’s decision, which is an unfortunate setback for readers and authors, and we will immediately request an expedited appeal. As we demonstrated throughout the trial, the Department of Justice’s focus on advances to the world’s best-paid authors instead of consumers or the intense competitiveness in the publishing sector runs contrary to its mission to ensure fair competition. 

"We believe this merger will be pro-competitive, and we will continue to work closely with Paramount and Simon & Schuster on the next steps."