The book industry spent the better part of 2011 watching the slow, painful collapse of Borders. Then there was the Department of Justice inquiry. The DoJ lawsuit against Apple, Penguin, Hachette, Simon & Schuster, HarperCollins, and Macmillan—as well as the reaction to the lawsuit and ensuing settlements—took up much of the industry’s mindshare in 2012.

In 2013, the event sure to be front and center is the pending merger of the country’s two largest trade publishers: Penguin and Random House. Speculation is certain to mount about how the companies will be combined as approval of the deal, expected in the second half of 2013, draws closer. The merger will create an entity called Penguin Random House—the two companies combined had sales totalling close to $4 billion in 2011.

While more than half of PRH’s sales come from the U.S., the merger will involve operations across the globe. In addition to America, the houses both do original publishing in eight of the same countries. They both also have separate business interests and/or sales offices in more than 20 other countries. As chairman of Penguin Group, John Makinson, who will become chairman of PRH, currently has responsibility for the worldwide Penguin business, with the heads of the major groups reporting directly to him, as are Kevin Weiss, Author Solutions Inc. CEO, and John Duhigg, CEO of DK. David Shanks, Penguin Group USA CEO, in addition to overseeing the American operations, has oversight of Penguin Group International sales for South and Central America. Nicole Winstanley, president and publisher of Penguin Canada, reports to Shanks.

Random House’s worldwide operations are presently run by chairman Markus Dohle, who is slated to become CEO of PRH. In addition to having responsibility for the U.S., Dohle now has direct oversight of RH Canada, RH U.K. Group, Verlagsgruppe RH (which is not becoming part of PRH), and RH Mondadori. While Dohle has overall responsibility for the U.S, he has turned over some management responsibilities to Madeline McIntosh, who, as COO, handles sales, distribution, fulfillment (including IT), and all corporate digital areas, including the Smashing Ideas subsidiary.

Dohle oversees the legal, finance, human resources, business development, and communications departments, and, perhaps most importantly, Random’s four publishing groups: Crown Publishing Group (with Maya Mavjee, president and publisher); Knopf Doubleday Publishing Group (with Sonny Mehta, chairman and editor-in-chief, and Tony Chirico, president); Random House Publishing Group (with Gina Centrello, president and publisher); and Random House Children’s Books (with Barbara Marcus, president and publisher).

There is something of a similar division of labor at Penguin USA. Shanks oversees the Penguin Young Readers Group (headed by former RH executive Don Weisberg) and Berkley/NAL, which is run by Leslie Gelbman and houses all of Penguin’s mass market paperback operations. Shanks also oversees the sales, finance, operations, legal, and human resources departments. Susan Petersen Kennedy, Penguin president (who headed RH’s Ballantine imprint years ago), oversees the majority of the company’s adult imprints.

The companies’ sales organizations, at the broadest level, are organized slightly differently. Random House has two main sales groups: adult, headed by Jaci Updike, and children’s, led by Joan De Mayo. Penguin has three sales forces: Dick Heffernan is president of hardcover/YA; Norman Lidofsky directs paperback sales; and Felicia Frazier (another RH alum) is director of sales for the Penguin Young Readers Group (reporting to Heffernan). How PRH will choose to deploy its new sales force is at the top of mind for booksellers throughout the country.

By any measure, Penguin Random House will be a trade publishing juggernaut in the U.S. Estimates put the combined market share of the company between 25% and 30% of trade sales, and around 25% of the audiobook market. Its share of bestsellers is even more impressive. In 2012, Penguin Random House would have combined to account for 181 books on the Publishers Weekly hardcover bestseller lists, and 134 paperback bestsellers. Those totals represent 42.5% of hardcover bestsellers in the year, and 52.8% of paperbacks.

While Random House is bigger than Penguin in most areas, there are some places where the two are close in size, or where Penguin is slightly larger. With its Penguin Classics line and strong presence in major genres, Penguin is estimated to be at least as big as Random House in the mass market paperback field. In any case, the combined company will have a market share in mass market paperback that is estimated to top 35%. Penguin’s ownership of DK also makes it a formidable presence in the children’s nonfiction category, although Random House is much larger in overall children’s fiction. Both publishers are well represented in the broad categories of commercial and literary fiction and nonfiction, but there are some areas where Random House historically has had a larger presence, such as cookbooks, religion, and graphic novels. Categories where the combination will yield particularly impressive market share include travel, science fiction/fantasy, and mystery/thriller.

How Will It Unfold?

When the merger was first announced in late October, both Random House and Penguin promised that the combination would, among other things, result in a more efficient, more profitable publisher; PRH would be an entity with resources to invest in both its print and digital businesses. One industry merger and acquisition specialist—all sources spoke to PW on the condition of anonymity—estimated that over $200 million in costs could be wrung out of a combined Penguin Random House. Various industry members said that most costs will come out of back-office operations, including such corporate functions as legal, finance, and human resources.

Whether that will be the case or not, most sources agreed that the first steps in the merger will be to combine the back ends of the businesses. Decisions will need to be made quickly on such things as which IT system to use, and how to best capitalize on shipping and fulfillment capabilities. Random House has a state-of-the-art distribution center in Westminster, Md., and a smaller warehouse in Crawfordsville, Ind., while Penguin has two main warehouses, in Kirkwood, N.Y., and Pittston Township, Pa. One way to save money in any merger is to close duplicate facilities, but it is not clear how PRH executives will manage that process. The RH Westminster distribution center is not closing, but it is reasonable to assume that some consolidation among the other facilities will take place over time.

The merger is not expected to yield much cost savings, at least initially, by the joining of offices in Manhattan. Random House recently completed consolidation of its office space at its Broadway headquarters, and its lease is believed to be relatively long. The same is the case with Penguin’s Hudson Street lease. This makes it prohibitively expensive for either house to walk away from its current location. So, unless a viable sublet opportunity comes along, both New York City staffs will likely stay in place for the short term. That reality gives credence to what has emerged as the prevailing wisdom of the moment about the editorial operations: they will be left relatively intact.

After initial concerns that a merged PRH would lead to deep cuts in publishing output that would result in lower advances and the signing of fewer authors, a different view has become more prevalent. A number of industry insiders noted that, if PRH is to operate as efficiently as it hopes, it will need to feed a steady stream of print titles into its supply chain. And this will continue, even as e-book sales eat into print sales. To keep up a sufficient level of print, PRH would need to keep its title output fairly high.

So, while there may be some editorial overlap that PRH addresses, with executives likely looking hard at underperforming imprints, major cuts aren’t expected in editorial. But that doesn’t mean the merger won’t have implications for big-name authors. In the current house makeup, bestselling authors unhappy at either Penguin or Random House could play the companies against each other. Given that each house is considered to be among the best at the publishing process, authors often jump from Random to Penguin, or vice versa. Now, as some agents indicated, jumping to another publisher might mean taking a bigger advance at the cost of being, for lack of a better term, less well published. One of the smartest things the merger accomplishes, mused some insiders, is to lock in big-name authors.

Both those inside and outside of PRH agree that the merger process will be a slow, deliberate one. Although it could be as long as a year between the signing of the agreement and the completion of the deal, no one expects sweeping changes on the first day PRH becomes a reality. One issue that will slow the integration process is the fact that both parties are limited in how much they can communicate right now. The deal was struck against the backdrop of the DoJ and European Union e-book pricing lawsuits. This means that both companies are wary of doing anything that would upset government regulators in the various countries that need to sign off on the merger.

Penguin’s recent agreement to settle price-fixing charges with the DoJ was seen as one step in getting its priorities for the merger in order; this move also settled the question about what terms PRH will adhere to in selling its e-books. The Penguin settlement will eventually pull Random House into DoJ compliance, even though RH was the only big-six publisher not included in the lawsuit.

According to court documents, once the merger is complete, Penguin Random House will have 30 days to meet the obligations agreed to by Penguin. Those obligations include submitting to the settlement’s cumbersome internal compliance terms, including regularly reporting any communications—oral or written—with other publishers. However, in terms of when the settlement agreement will expire, the clock starts ticking for the merged company when the final judgment kicks in for Penguin, which could come as early as May, possibly months before the merger is consummated. This kink potentially shortens the amount of time PRH will need to comply with the settlement terms.

While Penguin’s deal with the DoJ answered the question of how PRH will sell e-books to retailers, another e-book area where the companies operate differently is library sales. Currently, Random House makes its entire e-book catalogue available to libraries for perpetual access through the vendor OverDrive (with the caveat that it charges higher prices to libraries than it does to consumers). Penguin, meanwhile, is involved in pilot programs with e-book vendors 3M and Baker & Taylor. Through these programs, it offers windowed access to a portion of its list. Notably, Penguin has not yet made its peace with industry-leading vendor OverDrive, which it dumped in 2011. Will the merged company use OverDrive and offer Penguin books on Random’s terms? Or will the results of Penguin’s pilot program convince Random to change course and follow Penguin’s lead? Or will there be some combination of policies? Librarians—and the library vendors—await the final verdict.

While the official construction of PRH is still months away, history can provide some hints as to what may happen. When Markus Dohle reorganized Random House five years ago, he prized teamwork and collaboration among all other attributes—qualities he continues to stress today. The merger of Penguin and Random House will bring together some strong personalities, and, ultimately, those willing to navigate a new environment will probably fare best at PRH.

The Vital Statistics

Random House Penguin Group
Worldwide Sales, 2011 $2.26 billion $1.66 million
% of Sales from U.S., 2011 54.0% 58.0%
U.S. Sales, 2011 $1.22 billion $963 million
Total Number of titles published annually 10,000 4,000
% of Hardcover Bestsellers, 2012 27.0% 15.5%
% of Paperback Bestsellers, 2012 35.1% 17.7%