Europeans devour American book publishers.

Commentary about business and finance.
Feb. 8 2006 6:17 PM

Das Book

Why German, French, and British companies are devouring American publishers.

Time Warner earlier this week agreed to sell its publishing arm—with imprints such as Little, Brown and Warner Books—to Lagardère, a French media company, for about $537 million.

In some ways, it's a natural fit. Like the French, book editors enjoy languorous lunches and batting ideas around. Like the French, some U.S. publishers and editors (viz. l'affaire Frey) seem to have adopted Derrida-esque attitudes toward the nature of truth. The French work 35-hour weeks. Ditto for publishers. France is a one-time giant that, having lost its status in the world, is fighting a rear-guard action against 21st-century capitalism. Check.

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But there's something else going on. Random House, the largest U.S. publisher, is a division of Germany's Bertelsmann. Germany's Holtzbrinck owns the venerable Farrar, Straus & Giroux and Henry Holt, along with the not-so-venerable St. Martin's. Britain's Pearson owns the sprawling Penguin Group, which includes American imprints Viking, Riverhead, and Putnam. And Rupert Murdoch's News Corp. (OK, he's an American citizen and the company is based in New York, but both are of Australian extraction) owns a lot of American publishers, too, including HarperCollins and William Morrow & Co.

Why do foreign media firms find American publishers attractive even as U.S. media conglomerates look to dump them?

Publishing, alas for all the authors among us, is a small business in the scheme of things. Time Warner may be the fifth-largest book publisher in the United States, but the unit accounts for only a tiny sliver of the company's revenues and profits. Time Warner has a market capitalization of about $85 billion. At $537 million, the publishing arm accounts for only six-tenths of 1 percent of the company's total value.

For all the obvious reasons, sales of books aren't growing much in the United States. According to Simba Information, consumer book sales in the U.S. were $6.46 billion in 2005, up minutely from $6.44 billion in 2004. "Stagnant to low growth is the rule rather than the exception, across the board for the U.S. consumer book market," says Michael Norris, a senior analyst at Simba.

Now, $6.46 billion is nothing to sneeze at. But it's a rounding error compared with the sums generated by magazines, television, and movies. If you're a publicly held U.S. company, like Time Warner, you simply can't afford to keep carrying units—no matter how small—that don't offer the prospects of rapid growth. (Especially when you're fending off an assault from investor Carl Icahn, who yesterday released a voluminous report directing Time Warner CEO Richard Parsons to divide his empire into four parts.)

For American companies, book publishing is a slow-growth niche business. For the Europeans, it's something quite different. These foreign companies that now own U.S. publishers generally lack the scale of U.S. media conglomerates. Pearson and Lagardère have market capitalizations of about $10 billion and $11 billion, respectively. And French and German companies operate in home markets that lack much in the way of organic growth. To them, a near-stagnant U.S. market represents a rich, comparatively rapidly growing market. For a French or German manager, a business that grows by 2.5 percent a year is handily beating the pace of domestic economic growth.

The European buyers also operate under a different set of constraints. Bertelsmann is privately held, and so is Holtzbrinck. News Corp. is essentially family controlled. So, these companies are impervious to the nagging hedge funds that presume to know how to manage the companies. And in Europe, where shareholder activism is still in its infancy, executives at publicly held companies like Lagardère, whose assets incongruously include Elle and a 15 percent stake in aerospace company EADS, are less likely to be bullied by aggressive shareholders.

Book publishing may turn out to be another one of those industries that diversified, hypercompetitive, publicly held American companies can't afford to be in. (Independents like John Wiley & Sons or Scholastic can probably stick it out.) We've seen this process happen before. In manufacturing businesses, when margins plummet and the prospects for profitable growth decrease, Americans tend to abandon them and move on to the next thing. For IBM, the personal-computer business had evolved into low-margin manufacturing competing in a saturated, mature market. Its shareholders were happy for Big Blue to get rid of it and focus on higher-margin software and services businesses. But for the buyer—China's Lenovo—it represented an opportunity to acquire a brand name and an entree to a potentially lucrative market. Where you stand on the merits of a business depends on where you sit.

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