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Penguin, Simon & Schuster Argue Merger Benefits Blunt DOJ Fears

Aug. 11, 2022, 5:20 PM

Penguin Random House LLC and Simon & Schuster Inc. are battling the Justice Department’s lawsuit against their merger by contending the combination will generate efficiencies that outweigh any anticompetitive effects.

The department—zeroing in on the deal’s potential impact on highly paid writers—is arguing in the US District Court for the District of Columbia that the merger should be blocked because it would reduce competition for authors’ manuscripts worth more than $250,000. The publishers began presenting their side Wednesday.

The publishers maintain that US District Judge Florence Pan shouldn’t accept the department’s definition of the affected market and the alleged suppression of it. In case she does, the publishers are arguing that the merged companies’ ability to reduce redundancy and boost supply chain strength will offset the harm to competition, according to their pretrial brief.

But a defense focused on the efficiencies derived from the merger is likely to fail, antitrust professors and trial watchers said.

The efficiencies defense in antitrust law is “legally problematic,” and courts tend to be unreceptive to it, said Chris Sagers, a professor of law at Cleveland State University’s Cleveland-Marshall College of Law.

While smaller mergers more clearly generate efficiencies by allowing companies to cut redundant systems and share human resources departments, for example, courts are typically unwilling to let a challenged merger through on an efficiencies argument alone, Sagers said.

Time and Money

Antitrust law typically allows companies to attempt to justify deals with the merger-specific efficiencies argument: that the newly formed company will save more money, time, or resources in the relevant market than the unmerged companies.

“Every single merger involves an efficiencies defense, but what are you going to prove in this case?” said Herbert Hovenkamp, an antitrust professor at Penn Law. “There are very few cases in the history of antitrust where the defendant was successfully able to argue the efficiency of a merger that would otherwise be condemned.”

In the publishers’ case, any efficiencies must be sufficient to fully make up for any decrease in author advances that results from the merger, Hovenkamp said. The government has predicted a drop in bestselling author advances, by one conservative model, of 4.3% for Penguin to 11.6% for Simon & Schuster.

The publishers don’t allow that advances will necessarily decrease. But even if some harm results from the merger, they say, the benefits will outweigh it.

Senior Penguin executives found four distinct ways the merger will improve the combined publishers’ net income, according to the publishers’ pretrial brief.

The merger will increase the number of books sold at retail by improving authors’ access to the Penguin supply chain and will reduce expenses such as those incurred when unsold books are returned to the publisher. Operating costs will decrease overall, and the combined company will save on real estate by cutting redundancy and consolidating workspaces, the brief said.

Such efficiencies will help total author compensation jump by $75 million to $107 million by 2025, the publishers have said. Meanwhile, compensation for the sought-after authors DOJ seeks to define as their own market will drop by nearly $30 million—a decrease that may be covered by the comparative gains across the board, the defense said in filings.

The efficiencies defense may not prove the pivotal argument in most merger cases, but it’s often a useful buttress for other defenses, said George A. Hay, a professor of law and economics at Cornell Law School.

Hay compared the case to Anthem Inc.‘s attempted acquisition of Cigna Corp., where the companies unsuccessfully defended themselves against a 2016 DOJ suit by arguing the merger would reduce the size of payments to doctors and hospitals.

The US Supreme Court has rejected the use of the efficiencies argument, but appellate courts are occasionally willing to consider it in “extraordinary circumstances,” Hay said.

Defining Markets

The DOJ’s first hurdle is convincing Pan that the market for famous author manuscripts worth more than $250,000 is distinct from merely popular drafts worth $100,000 in advance, said Mark McCareins, a professor of business law at Northwestern University’s Kellogg School of Management.

But such a specific market definition is a difficult argument to make. The monetary cutoff may be seen as an arbitrary boundary designed to justify the DOJ’s argument on the merger’s alleged harms, McCareins said.

“There’s a question in whether that’s a cognizable market,” McCareins said.

The case will come down to how credibly the judge sees the government’s experts and economic analysis.

“Conceptually, the government has a good case, it just has to prove it empirically,” Hovenkamp said.

The case is US v. Bertelsmann SE & CO. KGAA et al, D.D.C., no 1:21-cv-02886.

To contact the reporter on this story: Dan Papscun in Washington at dpapscun@bloombergindustry.com

To contact the editors responsible for this story: Keith Perine at kperine@bloombergindustry.com; Melissa B. Robinson at mrobinson@bloomberglaw.com