Publishing is a Business

The Acquisition of Simon & Schuster: An Explainer

Earlier this week, it was announced that private equity firm KKR (Kohlberg Kravis Roberts & Co.) would purchase Simon & Schuster from Paramount Global for $1.62 billion—25% less than the price Penguin Random House had agreed to pay before a disastrous DOJ trial essentially killed the deal. Let’s break down what led to the sale of S&S and what things might look like going forward. Full disclosure: I worked at S&S as a publicist for Pocket Books from 1997-1998, then as VP, of Publicity, for Atria Books from 2006-2010.

I. The Paramount Problem:

Early in 2020, Paramount Global announced its plans to sell S&S because it didn’t deem the publisher a “core asset” to the company. This means Paramount entered the streaming wars at full throttle and offloaded business units to invest more money into Paramount+. In corporate speak, it means “looking for ways to increase shareholder value.”

If you’re an optimist, perhaps you’ll think Paramount’s $424 million streaming loss in Q2 (2nd quarter of the fiscal year) of this year is not that bad. You could even make an argument for some magical thinking that is on display in this Fast Company piece. The fact remains that Netflix and Amazon Prime own 23% and 20% of the streaming market share, respectively, while Paramount+ tops out at around 12%. The company expects an increase of 20% in subscriptions in 2024. I don’t see it happening, but I digress.

When PRH (Penguin Random House) agreed to purchase S&S for $2.2 billion in November 2020, there was an audible collective gasp from the publishing industry: no one wanted to see the Big Five turn into the Big Four. What executives from both Paramount and PRH should have done is not make the deal in the first place. Donald Trump’s DOJ probably would’ve allowed it, but it wasn’t (and isn’t) a secret that President Biden’s DOJ would be tough on mergers and acquisitions. Paramount wanted the money, and PRH seemed more than happy to pay the asking price, which would end up costing them $200 million in kill fees and the resignations of its top executives after the DOJ ruled against the merger. More than that, it caused reputational harm to PRH, which is restructuring its business.

While Paramount has benefitted from S&S’s cash flow, it is still selling the publisher below its initial asking price, losing the additional $555 million it would’ve made had the PRH deal gone through. You might think, “Pfft, millions are millions to those guys,” but you’d be mistaken. Paramount needs the cash. They are also exploring a sale of BET to Tyler Perry (he currently owns 25% of it) and seem to want to offload MTV, Comedy Central, and Nickelodeon. Considering how much cash it is bleeding, it wouldn’t be surprising if Paramount itself went up for sale. Do you know who likes a good deal? Jeff Bezos, that’s who. If you can’t envision Bezos, quite a few other media groups could come into play, though not with the big pockets and bigger ego of a guy who spends a lot of time on yachts! Bill Cohan has an excellent breakdown of Paramount’s predicament in this week’s edition of Dry Powder in Puck (which you should subscribe to if you are a media/entertainment industry obsessive like me).

I bring this up because when we look at where S&S ended up, it is important to understand the path of its soon-to-be former parent company. Things aren’t rosy at Paramount Global, nor will they be until it uses the cash from the S&S sale to pay down its debt.

II. The S&S Situation:

Like most publishers, S&S has had good and bad years—more good than bad- recently. With a profitable backlist and a hefty roster of bestselling authors—it is easy to see why a potential buyer found the publisher attractive.

The book industry isn’t easy for conglomerates to digest. There is a lot of uncertainty about what will work outside of “big” books, it is not an ad-supported business, and there is no agreement on P&Ls or author advances. There is, however, a backlist. As I’ve previously written, a publisher’s backlist dictates its value and funds the frontlist. No one knows how well a publisher’s frontlist will sell until it starts selling. The backlist provides publishers with steady revenue from known quantities (aka authors who perenially sell well). When book sales are trending down across the industry, it signifies that backlist titles aren’t selling well (or as well as expected). S&S has a deep bench of backlist authors, so even if a fraction of their backlist is underperforming, there are plenty of other titles to make up for the loss.

An issue S&S will have to contend with, and one I suspect CEO Jonathan Karp has already begun to tackle, is what the balance sheet looks like when there is not a Colleen Hoover-type cash flow. It is like looking at a used car whose body and interior are perfect, but things get hairy once you get under the hood. S&S’s revenue during the 12 months ending March 31 was $1.2 billion, and operating income was $255 million (operating income=profit - wages, depreciation, COSG, or cost of goods sold). That means business is very good, but whether it will remain that way is yet to be seen.

III. Private Equity & Book Publishing:

I will never understand anyone who treats book publishing as anything other than a for-profit business. Further, treating the industry as a singular entity with one business model isn’t the correct way to view it. Independent publishers conduct business differently than business units of conglomerates. That isn’t speculation; it is a fact. You have much more freedom when you don’t have to appease shareholders. If you whittle it down even further, academic publishing is a different beast than traditional indie publishing. Still, publishing is a business. Every publisher requires capital and revenue to keep the lights on.

It is true that KKR, the private equity firm that bought S&S, also acquired Nabisco in 1985 and was the subject of the 1989 book Barbarians at the Gate. The 1980s birthed something called a leveraged buyout. A leveraged buyout means one company acquires another (usually underperforming) company using a significant amount of borrowed money, therefore taking on tremendous debt. Elon Musk acquired Twitter by way of a leveraged buyout. Twitter and S&S are two very different companies. Further, KKR hasn’t made public how the all-cash deal was financed, but they could have done it in several ways. What’s important to note is that S&S wasn’t underperforming in any way. Paramount didn’t want to remain in the book business (I don’t think they ever wanted to be in it). Linear television (non-streaming) is dying, and streaming is theoretically where the business is headed. In other words, KKR didn’t make an unsolicited offer for S&S, which I think gets lost in the story.

The other bidder in the S&S sale was News Corp. Imagine if the Murdochs bought S&S and merged it with HarperCollins—the industry would become more condensed, and many jobs would be lost. Yet, mention a private equity firm as the buyer, and people will scream bloody murder. What applies to one private equity firm in a particular industry doesn’t apply to them all. Your friend’s brother’s cousin, who read a book about private equity firms, is not the expert here. Remember, S&S was for sale and needed a buyer. If not KKR, then who?

IV. Foward Thinking:

There are some scenarios worth exploring in light of KKR’s acquisition of S&S:

1. S&S will now be a private standalone company. This isn’t a bad thing. KKR is known to give employees equity ownership and will extend a broad-based equity ownership program to all S&S employees when the transaction closes. While it’s hard to say what that will mean for employees on the lower end of the salary range, I think it is a step in the right direction.

2. The inefficiencies of S&S were on the table before the company was sold. KKR is not going into a mystery deal. The books have long been open at S&S (remember, it went on the market in 2020). If specific imprints chronically underperform, they will be shut down—as they should be. The theme of today’s newsletter is “Publishing is a business.” Running an imprint isn’t a hobby; it is a job, and if your imprint consistently misses its targets, it isn’t going to stay in business. Jonathan Karp already knows what, if anything, has to go.

3. S&S has a distribution business that can be sold. If a part of S&S can go on the chopping block, it is their distribution business. KKR could use the money from that sale to reinvest in parts of the publishing arm or pay down any debt it incurred to finance the all-cash deal for S&S.

4. P&Ls will be heavily scrutinized. There is no world in which this doesn’t happen. In fact, it should happen. As we saw in the DOJ v PRH trial, publishing has a complicated relationship with numbers. People in the industry talk about money in three ways: when they are making a lot of it, don’t have enough, or want more of it. P&Ls are not indicative of a book’s true potential success or failure.

5. Don’t expect mass layoffs. As I wrote above, Karp already knows what needs to happen. If there are inefficiencies, they’ve already come to light. Knowing what I do about how S&S is structured, I think there is a better way to run some centralized departments there. I will leave it at that. Do I believe the company will be gutted? No.

6. Lists might get cut. If you know me, you know I am a fan of “less is more” in publishing. This tips to underperforming imprints, imprints where too many of the same kind of book are being published, or imprints without clear direction. Instead of an imprint publishing books w, x, y, and z, it may only publish books y and z. If books y and z sell well, it is good for everyone, especially the authors.

7. Maybe things will get interesting. Would it be so terrible if S&S got to be more innovative and creative because they are privately owned? Nope. Not one bit.

V. Final Thought:

It took me a long time to figure out that I preferred the business of book publishing to the creative side of it. I realize that the lens through which I view the industry differs from that of others. What frustrates me is when there is a lot of complaining without presenting solutions. Maybe it’s because I am solution-oriented and look at issues facing the industry with an eye toward actionable items to improve it. Sometimes those items are not aligned with what people would like to see—and that’s okay. However, I have been in budget meetings, I have slashed budgets, I have had to fire people, figured out where money is coming from for marketing and publicity campaigns, forecasted how many copies of a book to print, sorted out which sales channels are best suited for a title and much more. I have been in the thick of it, good and bad. Through all of it, I knew, and still know, that publishing is a business.

End Notes:

What I’m watching: I haven’t had much downtime lately, but I will probably rewatch Mad Men. It’s one of my go-to comfort shows. As Don Draper said, “Happiness is the moment before you need more happiness.” So good. Pay the writers!

What I’m reading: Lots of newsletters. On substack, check out Platformer if you haven’t already. Casey Newton is a must-read on all things tech industry. Puck is my go-to for media/entertainment industry news (they are not on substack). The Information (also not on substack) is essential for tech/social media/influencer news.

What I’m listening to: The “rainy night in Paris” sound from the Calm app. (It’s been busy)