Buying Priceline's Buy
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Priceline.com (NASDAQ: PCLN) announced plans on Thursday to purchase traffic search engine Kayak (NASDAQ: KYAK) for $1.8 billion. The purchase is Priceline’s most expensive by far, and represents a 29% premium from where Kayak traded on Thursday.
After the announcement reviews and outlooks are mixed. I believe the acquisition will improve both companies, and investors should look to buy shares of Priceline. Let’s take a look at what the acquisition means to both companies.
What Did Priceline Just Buy?
Let’s be clear. Priceline did not just pay nearly $2 billion for a bump in traffic. In all likelihood the user experience on Kayak will be roughly the same. Users will still receive meta-results from all of the popular airfare services and be able to choose the website with the best price. Priceline isn’t going to funnel Kayak users to their website any more than usual.
What Priceline bought with Kayak is an advertiser. Essentially, Kayak operates like the Google (NASDAQ: GOOG) of travel. When users are planning a trip, they head to Kayak to find airfares and travel accommodations. This is evident in the website’s strong organic growth, now with over 75% of the users coming to the website through direct navigation (i.e. typing “www.kayak.com” into their web browsers).
Naturally, this type of targeted traffic attracts companies looking to get their product in front of an audience. This is what drives Kayak’s earnings, which most recently demolished analysts’ expectations, and what Priceline found so attractive.
In fact, the model is so successful that mainstream search companies Google and Microsoft (NASDAQ: MSFT) have attempted to copy it. Literally, both companies use nearly identical software models to Kayaks in their travel search engines. Nonetheless, Kayak has been able to retain its users and even improve its standing with travel providers, despite competition from these big names in search.
Furthermore, Kayak excels where Priceline simply gets by – mobile. Kayak’s mobile app is one of the most popular in the travel category of Apple’s app store. With mobile computing growing faster than any other computing sector, mobile apps will become increasingly more important for companies. Adding Kayak’s mobile expertise into its portfolio puts Priceline in good position to capitalize on the mobile revolution.
As a side note, Priceline will no longer have to pay advertising fees to Kayak. In the second quarter of this year that amount totaled approximately $7.7 million.
How Can Priceline Improve Kayak?
Kayak is particularly strong in the U.S., but it only registers a blip on the international radar. Currently, 80% of the websites traffic comes from the states. Priceline believes it can improve that number significantly.
Conversely, Priceline’s Booking.com brand is strong in Europe, but doesn’t have as much recognition in the United States. By combining the forces of both brands, the company can improve the weaknesses each of them currently present.
Moreover, Priceline is particularly great at marketing. Putting that marketing force behind Kayak’s superior product should continue to grow traffic.
There’s also the opportunity for Priceline to expand Kayak’s reach in the hotel booking space. Hotel’s offer a higher margin than airfare, and is an area Priceline has done well in recently. The addition of more hotel searches may also improve traffic to priceline.com, which has done particularly well with European hotels struggling to fill their rooms. In essence, hotel search expansion is a win-win and a natural extension for Kayak.
Priceline has a long history of making acquisitions that add to the company. Since purchasing Booking.com in 2005, the company has grown the brand to now generate more than half of its revenue and earnings. It has found similar success with Agoda in 2007 and TravelJigsaw in 2010. I believe Kayak is the company’s next great investment.
adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, Microsoft, and Priceline.com. Motley Fool newsletter services recommend Google, Microsoft, and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.