Will a merger between Penguin and Random House better place the firm to tackle Amazon?

YES

Lizzie Carr

The merger of Penguin and Random House is ultimately about the survival of the fittest. Publishing is going through revolutionary changes, and this merger shows just how much some brands will need to adapt to survive in today’s marketplace. Given the size of the two companies, there are some obvious cost-savings the businesses will be able to make. But more interesting is the potential for these traditional publishers to take power back from a number of new market entrants, like Amazon. Penguin-Random House now has the potential to explore new publishing platforms and create a brand that maintains relevance. The wider proliferation of the e-reader is our current benchmark, but there is a broader opportunity for the merged company to renew its position in the market. Let’s just hope the Penguin-Random House maintains Penguin’s original values of publishing pioneering new authors.

Lizzie Carr is strategy director at The Gild.

NO

Ian Whittaker

This deal is not a game changer for the publishing market. But it does make strategic sense for Pearson to go down the joint venture route rather than directly selling Penguin. Pearson will gain exposure to cost savings from the joint venture, and will maintain savings within its education business. It’s a neat way of reducing the company’s consolidated expenses. Selling Penguin outright would also have had a large capital gains tax impact in the US. Importantly, what would Pearson have done with the cash if it had sold Penguin outright? Any other alternative deal would have been dilutive – even if Pearson had returned all the cash back to shareholders. Further, this deal implies that the case for a breakup of Pearson is now unlikely, as the company cannot sell its stake in the newly-merged firm for three years.

Ian Whittaker is a media equity research analyst at Liberum Capital.