Paramount’s announcement in early August of its deal to sell Simon & Schuster to private equity firm Kohlberg Kravis Roberts (KKR) for $1.62 billion includes a significant detail for the library world. KKR already owns OverDrive, the platform used by about 90 percent of public libraries in North America for ebook lending. Simon & Schuster is the second largest publisher after Penguin Random House, with a 12 percent share of the U.S. book market (according to BookScan as of September 20). KKR's potential acquisition of Simon & Schuster will undergo scrutiny from the Department of Justice before proceeding and could raise questions about how Simon & Schuster will do business with OverDrive in the future.

During a presentation at OverDrive’s biennial Digipalooza conference in Cleveland on August 10, the company’s founder and CEO Steve Potash said the deal would “have no impact on any of the business we enjoy with any publisher and/or Simon & Schuster—it’s business as usual.” He added, “OverDrive has had a proud relationship with KKR now going on three years, and it’s because they appreciated us and invested in us as a mission-based company.” According to OverDrive’s website, the company’s mission is “To educate and entertain by providing the world’s favorite way to access the best collection of premium digital content.”

In a comment, an OverDrive spokesperson added: “OverDrive has continued to operate independently since KKR’s acquisition in 2020. Our mission and goals remain the same and KKR offers OverDrive access to a broad array of resources and experts.” 

Michael Blackwell, director for St. Mary’s County Library, MD, and a founder of the library ebook advocacy group ReadersFirst, said he didn’t expect to see much change. He expressed relief that it was KKR purchasing Simon & Schuster rather than Penguin Random House, whose bid to merge with the book publisher was ultimately blocked as a result of the Department of Justice civil antitrust lawsuit this year.

“The emphasis on blockbusters at the expense of all other titles will continue, but it would have been worse if some other publisher had gotten hold of Simon & Schuster,” Blackwell said. “This is all the more reason why we need to develop the mid- and small-publisher digital market in libraries. I doubt Simon & Schuster will change their digital license terms other than perhaps a price increase.” (Simon & Schuster declined to comment for this piece.)

But Sandeep Vaheesan, legal director at the Open Markets Institute, an antimonopoly research and advocacy group based in Washington, DC, believes there is more cause for concern. He cautions that even though this is no longer a case of horizontal competition between two book publishers, the vertical structure in this new potential sale could introduce a concentration of market power in the industry. If the acquisition goes through, KKR funds will own two parts of the publishing ecosystem, with significant market share, that do business with each other—a book publisher and a library ebook lending platform. As a result, Vaheesan expects a careful analysis of the acquisition by federal regulators.

“Traditionally the Department of Justice and the Federal Trade Commission have said that horizontal mergers are the biggest concern for anti-merger enforcement, because with fewer players in a market there is loss of head-to-head competition, and it is easier for competitors to collude,” Vaheesan said. “But vertical mergers are still a concern—especially under this administration,”

Vaheesan explained that a vertical merger in this case could allow OverDrive and Simon & Schuster to engage in favoritism, whereby certain titles were given special placement or top billings at the expense of other publishers. Vaheesan said this would not likely impact larger players like Penguin Random House, but that small or independent presses might be targeted. Publishers set license terms and prices, but OverDrive makes decisions about what it highlights and promotes to collection development librarians on their platform.

A spokesperson for KKR countered any notion of special treatment: “Simon & Schuster and OverDrive are separate and independently managed businesses and they will remain that way. They have different business models and different management teams. We do not foresee KKR’s funds’ ownership of these businesses to have any impact on their ability to serve the library and education industries and the broader literary community.”

A notable precedent is that when KKR acquired OverDrive in 2020, it already had RB Media in its portfolio. KKR acquired RB Media, the largest audiobook publisher in the world, from private equity firm Shamrock Capital in 2018. KKR completed its acquisition of OverDrive on June 9, 2020, and only two weeks later rolled RB Media’s digital offerings onto its platform. “Combining the RBdigital library business with OverDrive’s industry-leading technologies will greatly benefit libraries and their readers worldwide,” Potash said at the time.

While the Department of Justice (DOJ) will likely handle the approval of the KKR purchase of Simon & Schuster, Vaheesan noted that the Federal Trade Commission (FTC) has made enforcement against vertical mergers a priority, citing the lawsuit against the acquisition of Activision Blizzard by Microsoft. (FTC chair Lina Khan previously worked with Vaheesan at Open Markets Institute.) The FTC filed a complaint in 2022 to block the Activision Blizzard acquisition on the basis that it would hinder competition in the gaming world, but the regulator failed to an obtain injunction against the merger in July 2023.

In the case of KKR and Simon & Schuster, the two parties will file paperwork with the Department of Justice and the Federal Trade Commission to give regulators basic information about the merger. After a 30-day waiting period, it will be determined if there is an antitrust issue.

“In the vast majority of cases the DOJ and FTC don’t see a problem and allow the merger to be completed, but in a small fraction of cases—and I think the KKR and Simon & Schuster merger fits into that minority—they’ll say they see competitive concerns, and they’ll ask for a lot more information,” Vaheesan said. “They’ll ask for internal communications about the merger, they might do interviews, they’ll build out an evidentiary record. That second review process can take anywhere from six to 12 months.”

There could be three potential outcomes if that additional review process happens. First, the DOJ could grant approval after careful examination and the deal could close. Second, regulators could engage in a negotiation process with the companies—perhaps asking them to sell off a certain line of business or calling for binding commitments about treatment of competitors. The third outcome could be for regulators to try blocking the merger in court, which is what happened in the Penguin Random House attempted sale.

Richard Sarnoff, chair of media at KKR and a former Bertelsmann and Activision Blizzard executive, told the Associated Press that “no layoffs were planned” at Simon & Schuster. Initial press reports of the Simon & Schuster deal with KKR have highlighted plans to offer Simon & Schuster employees equity ownership if the merger goes through. It’s not an unfamiliar model for KKR—they supported OverDrive’s implementation of a broad-based employee ownership program that is available to all OverDrive employees. “This has been well-received internally and has supported our ability to recruit and retain talent,” an OverDrive spokesperson said in a statement.

Marjorie Kelly, distinguished senior fellow at the Democracy Collaborative, said that decisions about profit maximization will reside with KKR, whose ultimate mission is to deliver returns to its institutional investors. Kelly has been studying KKR’s involvement with employee ownership and is the author of Wealth Supremacy (September 2023), published by Berrett-Koehler, a company that includes employees, authors, and customers in its ownership model.

“While offering workers ownership in the form employee equity is a step in the right direction, the private equity model is still one of capital extraction,” Kelly said. “There is a difference between profit and extraction. And I would argue that book publishing is a cultural sector of our economy that should not be subject to profit maximization. Book publishing and libraries should be protected knowledge zones.”

Kelly also noted that private equity firms tend to own companies for relatively short periods, often five to seven years. They tend to saddle companies with debt before they sell, using most of that debt to issue a payment to the private equity fund. The company must pay off the loan, for which it received little value. This maneuver is called “dividend recapitalization.”

This is what happened in the case of RB Media. This month, KKR completed the sale of RB Media to H.I.G. Capital, another private equity firm, and RB Media employees as equity holders received about one or two times their annual pay. But according to PitchBook data, RB Media took on $1.18 billion in debt between 2020 and 2021, including a $250 million loan to pay a dividend to KKR’s fund as owner. According to ratings agency Moody’s, even though RB Media became highly leveraged under KKR’s aggressive financial strategy, their credit rating was stable under KKR due to RB Media’s “cross-sell opportunities via OverDrive platform and contractually agreed increases in revenue.”

“Let’s say Simon & Schuster employees do get equity shares—they would receive the value of those when the firm is sold. But what happens next?” Kelly wonders. “With real employee ownership, workers have long-term influence and control. With short-term shares under private equity ownership, employees are able to enjoy some of the extraction, but financial shareholders are getting much more of it. And in the long run, employees have no control over their fate—layoffs could loom and the changing of the mission of the company is likely.”

After decades of consolidation of publishing houses, the idea that Simon & Schuster could be owned by a private equity firm introduces in a new phase of the financialization of the book industry, adding to what has already come to other media companies and the library ebook marketplace.