“I don’t throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought” – Gordon Gekko, Wall Street.
Oliver Stone’s film Wall Street has a lot to answer for. Most everyday folk had probably never heard of a hedge-fund or private equity before 1987, even with the Margaret Thatcher and Ronald Reagan years in full swing.
Thatcher and Reagan had never quite said word for word that “greed is good,” as Gekko did in the film, but in many ways the film Wall Street captured the worst elements of the era of Thatcherism and Reaganomics and defined the me-first, take-take-take era that was the eighties.
Thirty-five years on, private equity still lives in the shadow of that Oliver Stone film, and that shadow was cast long and hard over the prospective sale of a major US publishing house to private equity firm KKR earlier this year.
Over the course of three TNPS reports in July and August, I took a deep dive into what a KKR buy-out of Simon & Schuster might mean for the industry.
The first, in July, ran with the headline “KKR sale of RB Media paves the way for its Simon & Schuster bid. The industry should be concerned.”
That post took the KKR news about RBMedia as a starting point to raise wider concerns about the way the publishing industry was being acquired by private equity firms with no clear interest in publishing, while also acknowledging that Gordon Gekko style worst-case scenarios were so far not materialising.
“Hedge funds have a reputation for buying, dismantling and throwing away the pieces of their acquisitions with callous disregard for the human cost.
“To be fair, we’ve not seen that happening with the recent trend for hedge funds to buy into the publishing industry. In fact Waterstones, Barnes & Noble, RBMedia, OverDrive and countless other examples suggest maybe the reputation is undeserved.
“And yet one cannot help but be nervous about KKR’s interest in buying Simon & Schuster. Not specifically because its KKR, but because of this shift in control of the industry into the hands of a small number of investment firms that, when the going is good, unquestionably bring enormous benefits.”
I singled out Waterstones, Barnes & Noble, OverDrive and RBMedia, the latter two owned at the time by KKR, the first two by Elliott.
RBMedia had just been sold by KKR for a billion bucks, twice what it paid for it. OverDrive is still with KKR, having been acquired from Rakuten. Every sign suggests it is doing immensely well. We should see the new digital library numbers in January, and likely as not it will be more records broken.
Elliott-owned Waterstones and Barnes & Noble continue to go from strength to strength. Just this past week the CEO James Daunt has been talking of a Waterstones IPO. Barnes & Noble has emerged strong again after after decades of decline.
Sure, stores were closed and jobs were cut when private equity firm Elliott took over the two bookstore chains, and yes, of course, there were human costs. But business is business. Stores were closing and jobs were going long before Elliott arrived on the scene, and on numerous occasions both Waterstones and Barnes & Noble were on life-support.
Today, both stores are stronger than ever. Per the FT report, Barnes & Noble has added sixty new stores since Elliott took over the company, and another fifty will be opened in 2024.
If “greed is good,” as Gordon Gekko famously said, then greed has been good for Waterstones and Barnes & Noble.
Or perhaps we need to take step back from the Wall Street rhetoric and remember that the film was entertainment, not a documentary.
Which is not say all hedge fund operators are saints, or that every business acquired by private equity emerges stronger. There are of course predatory hedge funds out there to live by the Gekko principles. “Lunch is for wimps.” “If you need a friend, get a dog.“
I tackled that topic in the next TNPS op-ed a few days later, as KKR became the clear front-runner to acquire Simon & Schuster.
“KKR CEO Pete Stavros has long had a reputation as part of a more-enlightened and pro-employee breed of private equity investors determined to leave behind the Gordon Gekko image.
“But at the end of the day investment firms like these are all about bucks. What we don’t have is any meaningful commitment to the industry beyond how much ROI the industry can deliver. And that should be a concern.
“Because what happens when the going gets tough?“
Talking more broadly than just KKR, I said:
“The bottom line: these are not publishing people, and have no long-term commitment to the industry.
“In the US, 50% of the news publishing industry is now controlled by hedge-funds.
“Per The Guardian, hedge funds ‘are widely feared by the industry for cutting staff and selling off real estate assets to boost profits.’“
I concluded that post saying:
“We can all hope KKR’s bid for S&S, if successful, will see that company expand and thrive, and employees, authors and the industry expand and thrive with it.
“But for every enlightened KKR RBMedia deal there will be an Alden Global Capital deal happening that will remind us the shadow of Gordon Gecko lurk nearby.“
That just to be clear I was not dewy-eyed and overly-trusting about private equity. In my next TNPS op-ed, where I argued that the KKR deal now finally approved, was good for the industry, I first listed a troublesome story of hedge-fund buyouts that had decimated companies and jobs. The ghost of Gordon Gekko is still with us!
But exactly what happened with those decimated companies is up for debate. These were companies already on the brink of bankruptcy before the hedge-funds acquired them. Were they bought with noble intentions, thwarted by economic realties, or was it always the plan to dismember them? An asset-stripping game putting profit before people?
Per Gordon Gekko: “A fool and his money are lucky enough to get together in the first place.”
These companies, like Waterstones and Barnes & Noble, had already been mismanaged to the point of imminent bankruptcy. Yet in the case of the two bookstore chains, Elliott turned them around, and much credit to their CEO, James Daunt.
Another CEO might have failed to deliver and Elliott might have pulled the plug, cut its losses, and gone the asset-stripping route to recoup some of its investment. That’s just common-sense business practice. Businesses are not charities.
But Elliott bought Waterstones because it saw potential. Otherwise why appoint Daunt? And when it paid off, Elliott moved on Barnes & Noble, and crucially kept the same CEO for both companies.
To be clear, I’m not Daunt’s biggest fan.
But no question that, for all the job cuts and warehouse mess-ups, etc, Daunt has overall done more good than harm.
And safe to say Elliott did not rush in and buy a bookstore chain and then look around for someone to manage it and happen by chance upon James Daunt. They went in with eyes wide open..
As Gordon Gekko explained to Bud Fox, “I don’t throw darts at a board. I bet on sure things. Read Sun-tzu, The Art of War. Every battle is won before it is ever fought.“
We can be certain that Pete Stavros was not throwing darts at a board when he bought Simon & Schuster.
Gekko again: “The mother of all evil is speculation.”
It’s an important point, and one that the film gets across clearly. Wall Street (the reality, not the film) is about speculation. Speculate to accumulate. Return on investment. Reward to risk. We all know the spiel.
And that’s fine when we’re gambling $50 bucks, $500 bucks or even $5,000 bucks on a stock we hope will make us a profit down the road. We understand it’s a gamble. Better odds than a horse-race or a roulette wheel, perhaps, but still a gamble.
But when we start talking spending $1.62 billion… Pete Stavros did not by chance happen to hear Simon & Schuster was up for grabs and thought it would be fun to add a publishing house to the portfolio. He at that time already owned OverDrive and RBMedia, and had long since brought on board Richard Sarnoff, who joined KKR in 2011 from then Random House (before the merger with Penguin).
Per Variety at the time:
“Longtime Random House exec Richard Sarnoff has been recruited by private equity firm Kohlberg Kravis Roberts as a senior adviser to help pursue, in part, new investments in media.“
The OverDrive and RBMedia acquisitions will have no doubt been a large part part of Sarnoff’s remit, and we can safely say the same about the KKR bid for Simon & Schuster. This was no gamble. This was a sure-fire bet where, per Sun-tzu in The Art of War, this battle “was won before it was ever fought.”
This past week Simon & Schuster CEO Jonathan Karp announced the new Board, as the KKR-deal was finalised and ownership officially transferred, and as the publishing house prepares to mark its 100th anniversary..
In Karp’s own words, Simon & Schuster is embarking on “its journey as an independent, standalone publishing company.”
The official press release is the usual predictable waffle about how wonderful the new team is, how experienced and committed they are, and what miracles they will work. “An exciting new chapter, thrilled to have such a dynamic and highly qualified team guiding us forward,” blah, blah, blah. Like Karp is gonna turn around and say, “This new team is crap, but it’s all we could get, and the company is f***d.”
All the trade media is carrying the spiel – it’s what press releases are for – and we’ll all have already read it or skipped it, depending on how just how bored we were that morning, so let’s move on to what actually matters here.
Because hidden away in the insert-names-and-publish template are a few words and names that do carry meaning.
Words first. Karp, referencing the new Board: “Their collective experience in digital innovation, global business strategy, and deep understanding of the publishing ecosystem will be instrumental in our growth and success as an independent publisher.”
Now juxtapose the words with the names:
Among the Board are Richard Sarnoff and Ted Oberwager, both already at KKR and both covered in the previous TNPS post on the KKR buy-out. Oberwager, the New York Times reminds us, is “on the board of RBMedia, an audiobook company, and Skydance Media, which teamed up with Paramount Pictures on ‘Top Gun: Maverick,’ a Tom Cruise action drama that generated more than $1 billion.”
So we have two KKR insiders with deep experience of media and digital prospects, as well as KKR Director Chresten Knaff, all gently nudging Karp in the right direction if needed.
Of most interest to me is the arrival of Madeline McIntosh, one-time head of PRH US, who resigned shorty after Markus Dohle fell on his sword.
Dohle had previously brought the company into disrepute with his disastrous attempt at convincing a judge the PRH CEO knew what he was doing (if he did, he would never have tried to acquire Simon & Shuster in the first place), while blaming anyone under him for any and all problems, and making unsupported-by-facts and sometimes beyond-irrational claims abut the industry. Bricks & mortar stores will disappear in three years if subscription is allowed to prevail… The print-digital publishing divide is forever 80-20… The list is endless.
It’s not clear if McIntosh left because of the aftermath of the court case, or because of the new management replacing Dohle, or because it was the perfect moment to “build something new.”
Being on the board of Simon & Schuster probably doesn’t count for the latter, so I’m looking forward to seeing what else Madeline has lined up.
But four out of seven is a great start for the new Simon & Schuster Board. What about the others?
V Pappas is not a widely-known name on the publishing circuit, but as COO at TikTok, and before that at YouTube, we should be seeing a clear picture emerging of a new direction for Simon & Schuster where digital is a key driver, not an afterthought. In stark contrast to its bigger rival Penguin Random House, for now still largely locked into Markus Dohle’s “bet on print” roadmap.
Vanessa Pappas joins Kareem Daniel, former chairman at Disney Media and Entertainment Distribution.
Overseeing KKR’s involvement will be Peter Stavros himself. Stavros describes himself as an Employee Ownership Advocate, and that alone says a lot about how KKR differs from some other private equity operators.
After KKR sold RBMedia to HIG Capital, RBMedia’s 300 employees, as equity holders since KKR bought RBMedia five years ago, were lined up for pay-outs that would average $50,000 per person when the transfer to HIG Capital was finalised. Employees with ten years standing were expected to pocket $100,000 each.
The seventh member of the Board is of course Jonathan Karp himself. Karp’s position at Simon & Schuster looks good. More control, a committed parent company, and a fellow Board that will embrace digital opportunity.
But let’s not get too carried away with Karp’s performance so far. There’s a lot of work to do.
Over at the New York Times, Elizabeth Harris waxes lyrical about how the Britney Spears memoir is boosting Simon & Schuster’s bottom line, as if Karp personally write the book for the singer and charmed her into into letting Simon & Schuster publish it. The reality is, Simon & Schuster won the bid for this particular big-selling book. Another day, another book, another publisher. It has very little to do with business leadership. Give me a fistful of mega-bucks and I’ll outbid another publisher for the next celebrity twaddle that comes along. It’s not rocket science, and its certainly not business acumen
If only the publishing game were as simple as Harris seems to think. But publishing is not only about milking the public’s obsession with celebrity.
Karp of course got to be where he is by showing meaningful business skills across the trade and demonstrating a genuine understanding of how the industry works.
But the real test is yet to come. Karp heads a new Board with strong digital inclinations and strong multi-media backgrounds, and while he no longer has an open door to a movie studio, it does mean more doors are open to him to exploit Simon & Schuster content. But the market is facing unprecedented challenges, alongside unprecedented opportunities. The ride ahead won’t be smooth.
But, so far, things are looking good for the publisher, and personally I’m excited to see where this goes.
Karp aside, it’s a fresh start for Simon & Schuster. A relaunch and reinvent opportunity that could steal market share from rivals as well as expand the overall market.
Nihar Malaviya may be head of PRH now, but he’s still encumbered by the Dohle baggage. A chance for Simon & Schuster to move up the publishing food chain and even compete on PRH territory.
But let me end this op-ed with a final quote from the man himself, Gordon Gekko: “I look at a hundred deals a day. I pick one.“
Peter Stavros picked one.
And no-one, least of all Stavros, throws about $1.62 billion unless they have a game-plan and a vision.
The new Board shows us what that game-plan and vision might be.
