more-arw search

Random House/Penguin Books Merger Could Create Financial Consolidation

The recent announcement that major publishers Random House and Penguin Books will merge could be a signal of a new trend of consolidation among players in this market, and expectations that the industry will have a wave of transactions could impact the budgeting process of existing firms.

Industry Consolidation 

A recent opinion piece in the New York Times states that publishing houses have been struggling to adapt to a market that has been changed forever by the rise of Amazon. The two companies announced at the end of October that they planned to merge, and the fact that such a combination would put the market in the hands of a few small players made market experts wonder if the remaining publishers would continue this trend out of necessity.

The fact that the newly-created corporate entity will have only one-twelfth of the annual sales of Amazon helps support the speculation that more publishers will follow suit, according to the news source. This progression could result in the Big Six publishers becoming the Big Three, and this could eventually result in the creation of the Big One.

John Makinson, who currently serves as the chief executive of Penguin and will be the chairman of the newly-formed entity, told The New York Times that since industry firms will inevitably consolidate, "we decided it was better to get in early rather than be a follower."

Greater Scale 

The post-merger entity will be world's largest publisher, and will benefit from a substantial list of books as well as a 25 percent share of the industry's market. Market experts speculated at the time that combining the two entities would provide the resulting publisher with a substantial size that could help it cope with the challenges presented by the existing market, according to the news source.

Since the new entity would be the result of two major publishers combining their operations, the company could likely reduce costs when engaged in its budgeting process by eliminating redundant positions - for example operational and support staff. The new publisher should benefit from the same revenue stream it had before. The higher top-line results and reduced costs could result in the company generating stronger earnings.

Future Of The Industry 

The media outlet reports that there are two main schools of thought on what will happen to publishers as a result of the existing technological transformation - while some believe that a wide range of small businesses will crop up, fighting major corporations with nothing but their websites and 3-d printers, others predict that the market will be dominated by large companies - that can leverage their vast resources to manufacture on the cheap, gather customer data easily and design their products domestically.

Either one of these scenarios would clearly have implications for the budgeting process of market participants. The first scenario would provide these smaller firms with a low-cost structure, whereas in the second case the companies could benefit from economies of scale and use their size to engage in price wars with their competitors.

Of course, one must wonder if deals such as the one between Penguin and Random House are good for the economy as a whole, and if they will benefit the stockholders of the pre-merger publishing companies. Transactions such as this frequently yield benefits, but realizing them can take time.

What do you think of the transaction that will create Penguin Random House, the world's largest publisher? Is this deal hot or not? 

Products and Companies: