U.S. District Court Judge Florence Y. Pan’s decision blocking the $2.2 billion merger between Penguin Random House (PRH) and Simon & Schuster (S&S) has apparently quashed the deal.

Pan’s full decision, which was released November 8, backed the Department of Justice’s (DOJ) argument that the merger would have “reduced competition, decreased author compensation, and diminished the breadth, depth, and diversity of our stories and ideas,” as the DOJ put it in a statement after the initial decision.

“The government has presented a compelling case that predicts substantial harm to competition as a result of the proposed merger of PRH and S&S,” she wrote.

The result was a mild surprise to some observers, given that for the last two decades, the DOJ has done little to stand in the way of numerous media industry mergers—including the Penguin–Random House amalgamation nine years ago that reduced the Big Six to the Big Five.

Vanderbilt law professor Rebecca Allensworth, a specialist in antitrust law, observed that Pan’s decision appears “reasonable,” based on the potential impact to the publishing market—it would go from a Big Five to a Big Four if the merger were completed—and business history.

“There’s a lot of precedent that kind of level of merger is anti-competitive, especially since the merged company would be Number One [in its marketplace],” she told LJ. “I think it’s perfectly reasonable to infer that advances and author compensation would be potentially less competitive because of a merger like this.”

PRH disagreed with the court’s decision, noting that the department’s arguments did not emphasize consumer benefits, but instead rested on a belief that the merger would restrict competition for authors.

“As we demonstrated throughout the trial, the Department of Justice’s focus on advances to the world’s best-paid authors instead of consumers or the intense competitiveness in the publishing sector runs contrary to its mission to ensure fair competition,” the company said in a statement. “We believe this merger will be pro-competitive, and we will continue to work closely with Paramount and Simon & Schuster on next steps.”

Initially, PRH and its owner, Bertelsmann, said it planned to appeal. However, on November 21, Reuters reported—based on an anonymous source—that Paramount would let the deal expire without participating in an appeal, collecting a $200 million breakup fee from Bertelsmann. In a statement released late that day, PRH acknowledged that Paramount had backed away and said it was dropping the appeal.

“Penguin Random House remains convinced that it is the best home for Simon & Schuster’s employees and authors, and together with Bertelsmann, we did everything possible to complete the acquisition. We believe the judge’s ruling is wrong and planned to appeal the decision,” the company said. “However, we have to accept Paramount’s decision not to move forward. We want to thank our Penguin Random House employees and the teams at Simon & Schuster for their support.”

LIMITING OPTIONS FOR S&S

The developments open S&S to potential other suitors, including fellow Big 5 publishers HarperCollins and Hachette, both of which had expressed interest in buying S&S. Both had testified against the merger.

It is not clear whether, in the event of such a deal being reached, DOJ and/or a court would hold that the objections which barred PRH’s acquisition would also apply to a smaller, but still very substantial, competitor.

S&S’s options could be limited. According to the New York Times, though overall industry revenues have been down slightly in 2022, S&S has had an excellent year and could be attractive to other suitors. But with a publisher other than PRH, the same issues could hold, said Herbert Hovenkamp, a professor at the University of Pennsylvania’s law and business schools.

A buyer from a different industry might face fewer problems with the DOJ, he added.

“If [S&S] decide to abandon the merger and another buyer is waiting, they can do that deal, but that deal could also be challenged given who that buyer is,” he told LJ. “But if they can find an alternative acquirer [that’s not in publishing], the merger could go through without being challenged.”

S&S has been in that situation before. Paramount’s forerunner was a conglomerate called Gulf & Western, which made a name for itself in the 1960s by buying a variety of unrelated firms, including Paramount Pictures, Consolidated Cigar, Stax Records, and New Jersey Zinc. It bought S&S in 1975.

Sean Sullivan, an antitrust law professor at the University of Iowa, believes that S&S could merge with another publisher without inviting the wrath of the DOJ.

“Agencies bring these cases when there’s a good case,” he said. In filing against the merger between PRH, the No. 1 publisher, and S&S, which is No. 3, the “arguments that the DOJ was making—and the court has accepted—are all arguments that have been traditional arguments for 30-plus years in merger analysis.” But the calculus could change if S&S is paired with another publisher, he added.

STILL AN APPEALING PROSPECT?

If there’s an appeal, the case would move to the U.S. Court of Appeals for the D.C. Circuit, currently made up of 17 judges. Pan, who was recently confirmed to that court, is expected to recuse herself if the case continues.

The court would assign a three-judge panel to hear the case, and the results could change, said Allensworth.

“I think the [DOJ] made some strong arguments, but that’s not the same thing as saying it’s a slam dunk,” she said. “As in all merger cases, the biggest issue is defining the market. By virtue of the fact that the judge decided in favor of the DOJ, it’s very likely she accepted their market definition [of affected authors]. That’s hardly uncontestable, and you can bet that at the appeals court, the merging parties will be challenging that, and…that those authors have options beyond the Big Four or Five. So I think it’s totally possible they could win on appeal.”