Penguin And Random House Sign Merger Deal - Term Paper Example

? PENGUIN AND RANDOM HOUSE SIGN MERGER DEAL Table of Contents Table of Contents 2 Introduction 3 Analysis of Penguin and Random House 3 Business Model 3 Geographical Distribution 4 Competitor Analysis 5 Business Strategy 6 Organisational Structure 7 Analysis of Penguin and Random House merger 7 Decision to Merge 7 Business Strategy 8 Consequences for the Sector 9 Consequences for Bertelsmann and Pearson 9 Organisational Structure 10 Conclusions 10 References 11 Introduction Sir Allen Lane is attributed to be the founder of the publishing organisation named Penguin Books. Penguin had revolutionised the publishing industry during the 1930s when it introduced inexpensive and high quality paperbacks. They were sold through various street stores like Woolworths (Penguin Books, 2012). Pearson Plc., which is a global media organisation, is the owner of Penguin Group. Apart from Penguin, Financial Times and Pearson are also included as different business segments of Pearson Plc. It is headquartered at London and was founded in the year 1844 (Yahoo Finance, 2012a). On the other hand, Random House is a privately owned digital publishing house. Various imprints and publishing groups are run by the company worldwide. Random House is actually a subsidiary company of Bertelsmann AG. The company operates its business in various geographical regions of the world like Europe, America, South Africa, and Asia Pacific. The company is headquartered at New York, United States and its employee strength is around 5,343 (Bertelsmann AG, 2012a). The present study entails about the detailed analysis of the merger decision between the two global leaders in the books publishing industry, Penguin and Random House. The major consequences of this merger deal on the organisational structures, business strategies and the overall publishing industry have been analysed in this report. Analysis of Penguin and Random House Business Model As mentioned earlier Pearson Plc. is the parent company of Penguin Group. Pearson Plc. is a multinational education and publishing organisation. Various types of learning materials, assessments, technologies and other allied services are offered by the company. Non-fiction and fiction books are also published by the organisation. Apart from this, Pearson Plc. also provides financial and business news, analysis, comments and data. Pearson Plc. operates its business activities worldwide through five different business segments. Penguin is one of those five business segments operated by Pearson Plc. Penguin group is responsible for publishing around 4,000 non-fiction and fiction books every year. The books are offered to the consumers in different formats like on screens, paper, and even in audio formats and are meant for readers of all age groups. The range of front list and backlist titles of Penguin group is huge and includes classics, children, literary prize winners, and reference volumes titles. Its business operations are carried out worldwide with the help of many publishing houses located in different nations of the world. Penguin group publishes under some of the reputed imprints of the world like Putnam, Allen Lane, Viking, Berkley, Ladybird, Puffin, Dorling Kindersley, and Harmish Hamilton (Pearson plc, 2012). On the other hand, Random House is a US based multinational organisation which is engaged in the business of publishing general trade books in English language. On an average around 10,000 paperbacks, electronic and audio books are published by Random House annually and they come in 15 different local languages of various countries worldwide. It has been estimated that around 400 million books are sold by the company every year. It is one of the wholly owned subsidiary company of Bertelsmann AG. The imprints of the Random House Publishing Group of Bertelsmann AG includes Bantam, Dell, Delacorte, Ballantine books, Trade Paperbacks of Random House, One World, The Modern Library, Presidio Press, Triumph books, Spiegel, Spectra, Villard Books, and Grau. Ballantine Books is considered to be one of the largest publishers of mass market and trade paperback, and hardcover in the American continent. Around 3,000 titles are included in the backlist of Ballantine Books (Bertelsmann AG, 2012a, p. 34). Geographical Distribution Penguin is regarded to be one of the best brand names in the field of book publishing and has a strong presence all around the world. The three most prominent and largest markets for Penguin are UK, US and Australia. Apart from this, it also has its presence in other parts of the world like UK, Ireland, New Zealand, South Africa and China (Penguin Group, 2012). Recently in January 2012, the company acquired around 45% stake in Companhia das Letras which is one of the leading trade book publishers in the country of Brazil. This acquisition strategy followed by the company helped to expand its presence in Brazil as well (Pearson plc, 2012, p. 26). Next if we look at the geographical distribution of Random House it can be found that it has its presence in more than 15 nations of the world. The publishing houses of the company are located all around the world in US, UK, Spain, Argentina and Spain (Bertelsmann AG, 2012b). Random House is associated with some of the well known publishing houses located in these countries like Doubleday and Alfred A. Knopf in USA, Plaza & Janes in Spain, Ebury and Trasnworld in UK, Goldmann in Germany and Sudamericana in Argentina (Yahoo Finance, 20121b). Hence, both these publishing companies have their presence mostly in UK and USA. If we look at the overall geographical segmentation of the global publishing industry it can be observed that Europe accounts for around 38% of the total market value (Marketline, 2012a). Next if we look at the geographical segmentation of the European publishing market it can be observed that Germany accounts for around 19% of the market value (Marketline, 2012b). Competitor Analysis If we look at the global publishing industry the market is mostly dominated by the large publishing companies. Some of the major players in the global market apart from Pearson Plc. and Bertelsmann AG include Time Warner Inc., Lagardere, and News Corporation. Time Warner Inc. is a well known US based multinational organisation engaged in the business of publishing, filmed entertainment and television networks. Time, which is a wholly owned subsidiary of Time Warner, mainly operates the publishing business operations. At the end of the fiscal year 2010, 22 magazines were published by Time in US and 70 other magazines outside US through various media like IPC in UK, GEX in Mexico. Apart from this, Time also operates 45 magazine websites like Time.com, People.com, and CNNMoney.com. Lagardere SCA is headquartered at Paris, France and is actually a holding company and operates its business in varied industrial sectors through its subsidiaries in around 40 countries all over the world. Its business areas are wide and diversified in the fields of education, news, sports, culture, and entertainment. The primary business activities of the company are managed through Lagardere Media which is sub-divided into four reporting business segments. The Lagardere Publishing business segment is engaged in the business of publication of illustrated books, textbooks, dictionaries, part books, and many others. All these activities are carried under the brand name of Hachette Livre. Various new publications of the company are also marketed in e-books format in France, UK, and USA. News Corporation is another major publishing company operating its business in the global publishing industry. It’s a US based company headquartered at New York and operates its business worldwide in US, Europe, Australia and the Asia Pacific region. The company has eight reporting business segments in total and book publishing is a major segment. Harper Collins is owned by this book publishing division of News Corporation and offers a wide range of printed materials in the US, the UK, Canada and Australia. During the fiscal year 2010, 164 titles of Harper Collins US were a part of the bestseller list provided by the New York Times. All these major players in the global publishing industry dominate the market. The product differentiation offered by these organisations helps to lessen the intensity of rivalry amongst the competitors to some extent. However, the low costs associated with capacity expansion suggest that the already established major market players would continue to dominate in the near future. There is a little scope for the competitors to differentiate their production process. All these factors suggest that the rivalry amongst the competitors in global publishing industry is quite high. Business Strategy A business level strategy can be defined as an action plan that is developed by a business organization which gives a description about the various means through which it would compete in a given industrial or market segment (Ireland, Hoskisson, and Hitt, 2008, p. 88). The primary objective of a business level strategy formulated by any organization is to create increased value for its customers in a consistent manner. There can be five different types of business level strategies that can be employed by an organization. They are: a) Cost leadership, b) Focused cost leadership, c) Differentiation, d) Focused differentiation, and e) Integrated differentiation or cost leadership (Ireland, Hoskisson, and Hitt, 2008, p. 88). These are part of the Porter’s generic strategy framework and are a means of gaining competitive advantage through proper strategic planning and implementation (Stonehouse, Campbell, Hamill, and Purdie, 2004, p. 177). Now if we look at the business strategies employed by the Penguin Group or its parent company Pearson Plc. it can be found that it follows a focussed differentiation strategy. It is so because the primary focus of the Penguin Group is on consumer publishing and it has a strong brand value in the market. Moreover it is found to employ differentiation strategy through the introduction of innovative products in the publishing industry. The Penguin Group is known for its quality products that are offered to its consumers worldwide. The extensive portfolio of well known brands helps the company to gain competitive advantage in the market. Hence, the company is found to gradually shifting its business portfolio towards education and aspires to become the leading learning company of the world. Random House and its holding company Bertelsmann AG on the other hand employ a differentiation business strategy. Wide range of services and products portfolio is considered to be the key strength of the company. It has already established top positions in most of the markets worldwide and enjoys a large share of the market which helps it to boost its profits in a significant manner. Moreover, the differentiation strategy employed by the Random House helps it to attract new customers thereby increasing the revenues and profitability of the company. The strategic focus of the company is on four main areas namely, consolidation, regional expansion, growth platforms, and transformation to digital platform. Organisational Structure If we talk of the present organisational structure of Penguin Group, it can be said that it no longer works independently and is a wholly owned subsidiary of Pearson Plc. At present the Chief Executive Officer (CEO) of Pearson Plc. is Marjorie Scardino. As mentioned earlier, Pearson Plc. operates its business operations worldwide through its five separate business segments. They are: a) North American Education, b) International Education, c) The Financial Times Group, d) The Professional Education, and Education, and e) The Penguin Group. Hence, there is a separate management structure for Penguin Group and John Makinson leads the group who is the Chief Executive and Chairman of the Penguin Group. Penguin is thus the consumer publishing division of Pearson Plc. Next, speaking of the organisational structure of Random House, it is again a wholly owned subsidiary of the German company, Bertelsmann AG. Thomas Rabe is presently the Chief Executive Officer and Chairman of the Board of Directors of the company. Similar to Penguin, Random House is the publishing division of Bertelsmann AG. Bertelsmann AG has five reporting business segments namely the RTL Group, Gruner + Jahr, Arvato, the Corporate division and the Random House. The management structure of Random House includes Markus Dohle as the Chief Executive Officer and Chairman of the Board members of the company. Besides Jon Meacham is also a member of the Executive Board of Random House and is positioned as Executive Editor and Executive Vice President of the company. Analysis of Penguin and Random House merger Decision to Merge It has been decided by the two major companies in the publishing and education sector, Pearson Plc. and Bertelsmann AG to merge their publishing business segments, Penguin and Random House and establish a joint venture between them (Neate, and Sweney, 2012). The Chief Executive Officer (CEO) of Pearson Plc. suggests that this merger agreement between the publishing arms of the two companies would result in the availability greater resources that could be invested in the field of digital publishing. The merged company is planning to develop a web platform through which digital books would be offered to the consumers. The merger between these two publishing companies are taking place mainly due to the fact that the competition is intense in the market and especially in the field of online publishing. Internet giants like Google, Apple and more importantly Amazon are creating significant worries for the publishers like Penguin and Random House, who are used to sell most of their publications in physical format (Holton, 2012). Moreover, given the resources capacity that these inter giants has it is very difficult for Penguin and Random House to compete with them independently. Hence, the merger between Penguin and Random House has been decided upon to increase their resources capacity, become more cost effective while carrying out their business operations in a combined manner and thereby increasing their ability to compete effectively in the marketplace. Business Strategy The merger decision of Penguin and Random House has been confirmed by the Board Executives of the parent organisations of both the companies, Pearson Plc. and Bertelsmann AG respectively. This merger would lead to the creation of a new company and it would be named as Penguin Random House. The merger between Random House and Penguin has been reported to be a ? 2.4 billion deal and is expected to lead to the creation of one of the largest book publishers in the world (The Telegraph, 2012). If we speak of the business strategies to be followed in this newly formed merged company, it is quite obvious that it is expected to be different from that followed by two companies independently. As discussed earlier, the merger decision has been taken keeping in mind the objective of increasing the resource capacity of both the companies and making their business operations cost effective in nature. Hence, it can be assumed that the new business strategy of Penguin Random House would be integrated differentiation and cost leadership strategy. The merger between the two companies would mean that the central operational functions and costs like accounting costs, legal costs, and operational management costs would be minimised (Greenfield, 2012a). The merger is also expected to result in the creation of one of the largest publishing company in the world and the global market share of the company would be greatly enhanced. Moreover, it is also expected that the technology systems of both the merged companies would be combined together, thereby reducing the technology maintenance costs in a significant manner. Thus, the new company would be able to compete with the other internet giants like Amazon, Google and Apple more effectively and efficiently and they would be able to negotiate in terms of costs associated with their offered products. All these factors suggest that the merger decision would help the newly formed company, Penguin Random House in gaining cost leadership and further differentiate their product offerings and help in their geographical expansion in a big way. Consequences for the Sector The merger decision between the two major publishers of the world Penguin and Random House is expected to bring about significant changes in the global publishing industrial sector. The merger would result in the creation of the largest consumer book publishing company in the world. A shift in consumer preferences related to increasing use of e-books and digital media is already prevalent in the industry. This merger decision would mean that it has the capability of revolutionising the publishing sector because both the companies combined together would have access to larger volume of resources and it is expected that large volume of investment would be made in the digital media (Greenfield, 2012b). Hence the total outlook of the industry would change, more books would be available to the readers in the digital platform and more and more innovative digital platforms are also expected to emerge in the forthcoming years. Moreover, with the consolidation in the industry, the supplier power in the form of handful of major publishers in the world would increase significantly. Consequences for Bertelsmann and Pearson Bertelsmann and Pearson who are the two parent companies of the two merged companies discussed in this study would be greatly benefited from this merger deal. It would help both the organisations to extend their market share significantly in Europe and other parts of the world. It is expected that the global market share for Penguin Random House would be around 25% and the market share in UK would be around 27% (Rahim, 2012). This would result in boosting the profitability of both the companies because the merged company is expected to generate revenues of around ?2.5 billion and profit of around ?175 million (Sweney, 2012). Moreover, both these organisations would be able to compete with the internet giants Google, Apple and Amazon in an effective and efficient manner. The sustainability of the publishing business of both the organisations is also expected to enhance as a result of this merger. However, it can bring about uncertainties amongst the company employees regarding their hob security in the merged firm (Curtis, 2012). Organisational Structure As discussed earlier, the merger between Random House and Penguin would result in the formation of a new company named Penguin Random House. It is a ? 2.4 billion merger deal between the two companies wherein 53% of the company’s stake would be in the hands of the parent company of Random House, i.e. Bertelsmann AG and the rest 43% stake would be enjoyed by the parent company of Penguin, i.e. Pearson Plc. This merger would lead to a significant change in the existing organisational and management structure of both the merged companies. It has been decided that the new Penguin Random House Company would be led by the two Chief Executives of both the companies. John Makinson, who is presently the CEO and Chairman of Penguin House would become the full-time chairman of Penguin Random House and Markus Dohle, who is presently the CEO and Chairman of Random House would become the CEO of the newly formed company. Conclusions The merger between Penguin and Random House is expected to revolutionise the global publishing industry in the forthcoming years. The two companies have joined hands to become one of the largest publishing companies in the world. The analysis and findings of this study suggests that this merger decision was quite inevitable given the current shift in consumer preferences in the industry and the recent rise of internet giants like Google, Apple and Amazon who are taking away the market shares of these two publication companies (Pfanner, and Chozick, 2012). This merger deal would result in the creation of different innovative product offerings for the consumers in the industry and the increased use of digital media to deliver the products offered by both the merged companies. Moreover, it would be highly beneficial for the two parent companies Pearson Plc. and Bertelsmann AG leading to their increased profitability and making their business sustainable in future. References Bertelsmann AG, 2012a. Annual Report 2011. [pdf] Available at: [Accessed 1 December 2012]. Bertelsmann AG, 2012b. Corporate Divisions: Random House. [online] Available at: [Accessed 1 December 2012]. Curtis, R., 2012. Who Shall Live and Who Shall Die: What the Random/Penguin Merger Means to You. [online] Available at: [Accessed 3 December 2012]. Greenfield, J., 2012a. Five Thoughts on a Penguin-Random House Merger: Rapid Reaction. Forbes. [online] Available at: [Accessed 3 December 2012]. Greenfield, J., 2012b. Penguin and Random House Combine to Form World’s Largest Book Publisher. [online] Available at: [Accessed 3 December 2012]. Holton, K., 2012. Random House and Penguin merge to take on Amazon, Apple. Reuters. [online] Available at: [Accessed 3 December 2012]. Ireland, R. D., Hoskisson, R. E., and Hitt, M. A., 2008. Understanding Business Strategy: Concepts and Cases. 2nd ed. Connecticut: Cengage Learning. Marketline, 2012a. Global Publishing. MarketLine Industry Profile, March 2012. Marketline, 2012b. Publishing in Europe. MarketLine Industry Profile, March 2012. Neate, R., and Sweney, M., 2012. Penguin and Random House in merger talks. The Guardian. [online] Available at: http://www.guardian.co.uk/books/2012/oct/25/penguin-random-house-merger-talks> [Accessed 3 December 2012]. Pearson plc, 2012. Annual Report and Accounts 2011. [pdf] Available at: [Accessed 1 December 2012]. Penguin Books, 2012. About Penguin: Company History. [online] Available at: [Accessed 30 November 2012]. Penguin Group, 2012. Penguin Group. [online] Available at: [Accessed 30 November 2012]. Pfanner, E., and Chozick, A., 2012. Random House and Penguin Merger Creates Global Giant. The New York Times. [online] Available at: [Accessed 3 December 2012]. Rahim, S., 2012. Random Penguin? What the merger of two great publishers might mean. The Telegraph. [online] Available at: [Accessed 3 December 2012]. Stonehouse, Campbell, Hamill, and Purdie, 2004. Global and Transnational Business: Strategy and Management. 2nd ed. New Jersey: John Wiley & Sons. Sweney, M., 2012. Penguin and Random House merger to create biggest book publisher ever seen. The Guardian. [online] Available at: [Accessed 3 December 2012]. The Telegraph, 2012. Penguin and Random House to merge in ?2.4bn deal. [online] Available at: [Accessed 3 December 2012]. Yahoo Finance, 2012a. Pearson plc (PSO): Profile. [online] Available at: [Accessed 30 November 2012]. Yahoo Finance, 2012b. Random House, Inc. Company Profile. [online] Available at: [Accessed 3 December 2012]. Read More