In a ruling that was not totally unexpected, Judge Florence Pan chose to exclude the testimony from Manuel Sansigre, senior v-p and global head of mergers and acquisitions for Penguin Random House, ruling that his numbers were not independently verified as required by precedent. She was especially critical of the revenue projections, which she said could not be based on models from prior mergers or past experience. In addition, she said the model, which was developed in November 2020, but updated more than 100 times, was itself unreliable because of the numerous updates.
The dispute involves PRH’s claims that its acquisition of Simon & Schuster would create “cognizable merger-specific efficiencies.” But according to previous court filings, PRH’s expert witness, Edward Snyder, conceded in his testimony that he did not seek to independently verify the numbers he used in forming his opinion on such efficiencies, which were drawn from a report by Sansigre, and PRH U.S. president and COO Nihar Malaviya. (While Sansigre's testimony has been excluded, Snyder has been allowed to continue to testify about the deals survey he conducted, whose results are below).
At a July 25 hearing, Judge Pan said she should not have to verify the numbers underlying PRH’s expert testimony, but said that since it was a "consequential" issue she "was willing to hear the testimony from Snyder and Sansigre to figure out if this is verifiable." While the ruling is a blow to PRH, it is not seen as fatal since the case was always was going to come down to Pan's view of the government's argument that a merger would give a combined PRH-S&S too large a share of the anticipated top sellers market.
In her statement tossing out PRH’s model, Judge Pan (mistakenly) noted that the company anticipated $81 million in cost savings by 2025. This would largely come from redundancies, including $25 million in savings from distribution and warehousing, $25 million from IT and duplicate administrative and managerial functions, and the remaining $31 million from the elimination of third-party contracts. A rep from PRH said that under no circumstances would anyone on the creative side, who worked with books, be at risk of losing their job. In addition, they added that despite comments made yesterday by Sangrise, which noted that PRH’s sales force for was five times larger than S&S’s, no field sales reps were being considered as being part of potential cost savings.
Indeed, Sansigre's testimony had created its own stir, especially among S&S employees, as he laid out plans for how S&S would be merged with PRH. Sangrise offered several examples of how synergies would be achieved, noting that he and his team went “line-by-line” over each of S&S’s 1,400 employees, “aligning the departments and sub-departments." He considered job titles and expenses, created a formula that averaged salaries, and came up with a number of potential “headcount synergies”—a euphemism that was later dropped and replaced with “headcount reductions,” and which Pan would eventually describe as cost-saving. She pointed to a second Sansigre report that outlined “millions of dollars” in savings and asked how many people this would impact. Sansigre initially answered “a few,” then when prompted to be more specific, Sansigre said he had identified “about 70” people who had overlapping roles at the two companies, particularly in “high end” editorial and art production. It is believed that these jobs were primarily management positions—not editorial or creative—and the number of potential layoffs was fewer than five.
One area that would very likely undergo extensive integration was distribution and fulfillment, where Sansigre said PRH would only require the use of one of S&S’s three warehouses: the primary one in Riverside, N.J. He noted that PRH had invested heavily in logistics over the past several years and had more than enough capacity to absorb S&S and any additional distributed clients it picks up each year. (S&S has a large distribution business). Another area that would likely see a comprehensive integration effort is sales, as PRH has a salesforce five times larger than S&S and “don’t need more,” he said. Sansigre also saw potential for increased efficiencies as S&S currently outsources processing its returns, something PRH could do in-house. PRH also has stronger relationships with non-traditional channels and independent bookstores, as well as internationally, where it has local sales forces in some 200 countries, as opposed to S&S, which only sells in 100. (A rep from S&S contacted PW to say that this was factually untrue, as S&S books are also available in more than 200 countries).
When it comes to content creation, Sansigre identified opportunities to enhance S&S’s audiobooks division, in part by bringing production in-house. “S&S doesn’t have studios and outsources production,” he noted. (Again, this is factually untrue, as S&S does have in-house production studios, editors and support staff -- and that the audiobook business is thriving and successful). On the production side, he felt that, based in part on data derived from the prior merger with Penguin, PRH could help lower S&S’s return rate and spending on paper, printing, binding, and shipping, a gain that comes from economies of scale and better analytics.
During cross-examination, the DOJ’s attorneys and Judge Pan (in a preview of Pan's eventual ruling to exclude Sansigre's testimony) probed the validity of Sansigre’s sources, noting that his report had originally been produced in late 2020 and didn’t reflect the two strong years of sales growth both PRH and S&S had undergone since the start of the pandemic. (S&S sales rose 10% in 2021 and are up again in the first half of 2022). Sansigre dismissed data from the past two years as an outlier, prompted by the pandemic, and noted other recent phenomenon, such as inflation, supply chain challenges, and increases shipping expenses, were likely relatively short-term and should also be viewed as unreliable for predicting future trends.
The DOJ’s attorneys pointed out that Sansigre's approach was “top-down” rather than “bottom-up,” and Sansigre acknowledged that a bottom-up approach would only be feasible once PRH owned S&S and had full access to and control of its operations. One area of focus for the DOJ was the millions of dollars Sansigre's model said would be saved through merging the two firms IT divisions though there was there was “no discernible plan” for how this would happen. Sansigre, who joined PRH following the company’s acquisition of Spanish publisher Santillana in 2014, acknowledged that there was no plan, but said his expertise and ability to extrapolate derives from having analyzed six different PRH mergers—including that of Penguin in 2013. He noted that the company tracked metrics for Penguin for three years, until 2016, after which the two companies were so integrated there was no separate Penguin data.
Authors will win
Finally, when it came to the impact on authors—major point of the Department of Justice’s objection to the proposed merger—Sansigre only identified an upside. For a start, he said pre-sales were higher at PRH than at S&S, thus by implication giving authors a better chance at hitting the bestseller list, which would in turn “improve dollars returned to authors.” Better database management and metadata would help improve discoverability, which would also improve sales, especially online. Sansigre predicted, based on his data analysis, a 0.7% rise in overall sales per year in the U.S. and 3% in aggregate—which presumably meant overall for the full company. By way of example, he pointed to PRH’s acquisition of U.K.-based children’s publisher Little Tiger in 2019. “We doubled their sales,” said Sansigre. PRH parent company, Bertelsmann, has $6 billion a year for investments and some of that money was likely to go to bolstering S&S once it was acquired. Whatever the sum, which Sansigre said was yet to be determined, would also likely serve to “increase sales,” as well.
Competition remains unchanged
The judge’s probing extended to the day’s second witness, Edward Snyder, professor at the Yale School of Management, who the defense called to challenge the theory that the proposed merger would lead to lower advances for authors. Snyder used a Powerpoint presentation to analyze data from a survey of 18 literary agents who offered him information about 975 different book deals. He then parsed this information a variety of ways. Of the 975 deals, 360 were valued at $250,000 or more, and of those 150 were won by single bidders, and 150 went to auction (60 were undefined this way). PRH and S&S won 96 of those 360 contracts, or 26.5%.
Of the total number of nearly 1,000 deals tracked, Snyder said PRH or S&S were winner or underbidder only 21% of the time overall. Furthermore, he said his analysis of the 975 deals showed that between 2019 and 2021, there were more than 25 publishers who bid on books that sold for more than $250,000, and non-Big Five publishers won or were runner-up 23% of the time and they bid against, but lost to Big Five publishers more than half the time. He cited Chronicle Books and Norton as examples of publishers who were bidding on the big books. Of the all the deals Snyder analyzed, 20 were for $1 million or more and of those, PRH and S&S accounted for five (though it was not indicated if these were single or multi-book deals).
Agents are clever
Throughout his testimony, Snyder ascribed a great deal of power to agents, who he contended routinely entice a bidding war between two imprints from the same publisher. This can be achieved by keeping a third bidder in the process, which legally allows them to forgo informing the parent corporation they have two imprints competing for the same title. He said that one agent reported having reduced the number of bidders to two different imprints from the same company, and thus the necessity to report it to the company, just one time in 36 years. In this way, competition among imprints will remain, even if PRH and S&S merge. In fighting over a book, “high market shares are not [a] significant [advantage]” when sellers have numerous “attractive outlets” for their titles, Snyder asserted.
By extension, Snyder said even if there were fewer deep-pocketed bidders for books, advances would not go down—an assertion the judge immediately challenged. “Lowering advances is not a conscious decision,” Judge Pan said. She added, “You just offer lower advances and still win, because there is less competition” to drive up the price. Professor Snyder said he didn’t follow the Judge’s logic.
“Publishers bid a lot and they lose a lot,” said Snyder, who again noted mid-sized and smaller publishers were a “viable option.” As proof, he then evoked the name of perhaps the biggest author everyone recognizes as a phenomenal success that was not published by a Big Five house: J.K. Rowling.
This story has been updated and corrected for factual errors regarding Simon & Schuster's business.