Priceline’s Acquisition of Kayak: What Does It Mean For Other Players in the Online Travel Space?
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Priceline's (NASDAQ: PCLN) $1.8 billion acquisition of Kayak (NASDAQ: KYAK) is probably the biggest event to happen in the Online Travel Agents (OTA) industry since the invention of the ITA software. With this acquisition, Priceline, the largest OTA, has tried to create a net of redundancy around its market share in the industry. To understand how this affects the whole industry, we will first take a look at the OTA industry in general, and then discuss PCLN's competition.
State of the OTA Industry
The Internet created a $300 billion online travel industry. Business is booming for Expedia (NASDAQ: EXPE), Pricline.com, Orbitz Worldwide (NYSE: OWW) and others, because, according to a Google study, 46% of leisure travelers and 52% of business travelers interviewed searched for online travel agents (OTAs). Even TripAdvisor (NASDAQ: TRIP), an online travel review company that does not directly offer travel booking, has seen a lot of growth because 37% of leisure travelers and 39% of business travelers search for travel review sites. (The 2012 Traveler: Google and IpsosMediaCT: August 2012).
The smartphone revolution has created another significant change in this cutting edge industry. According to a report, travel managers are having a hard time with travel budgets because mobile devices have made it easier for business travelers to adjust schedules even when they are in a hurry and still stay in touch, at times leading to unsanctioned traveling.
According to the Google commissioned travel study by IpsosMediaCT, the percentage of business and leisure travelers using mobile devices to access the Internet is increasing every year.
The bottom line of the study is that the desktop and laptop is fast giving way to mobile devices, which are becoming “pocket travel agents, offering instant access to airfare prices, contact information, flight schedules and bookings.” In July, 37% of smartphone users equaling 40 million users in the US visited travel websites and/or travel apps from their mobile phones.
The online business model not only requires less capital outlay, it is also less expensive to maintain. It initially started as a competition between brick and mortar travel agencies and OTAs and ended in near extinction of the former. The race is now between online search platforms – the winner is the one that provides the best environment for search. In the end it is a race for getting more vendors and traffic. PCLN’s acquisition of Kayak only months after the latter went public in July 2012 should be viewed exactly in this context.
Kayak is an operator of websites and mobile apps for comparison shopping, focused on online research for travelers. Priceline has offered $40 for one Kayak Software share; part of which is to be paid in cash ($500 million) and the balance in stock and assumed stock options ($1.3 billion). The transaction, the biggest ever for Priceline, puts the value of Kayak at $1.8 billion as against a market cap of $1.17 billion on the day the acquisition was announced.
This amounts to a premium of 54% on Kayak’s initial public offering price. For Priceline, the acquisition is tantamount to acquiring a large base of traffic of a new website and introduces the company to a new source of advertising revenue.
Below is a simple, color-coded Alexa rank study for the top 5 OTAs. This chart only reflects traffic to the websites, and does not actually reflect conversion to business. As you can see, Expedia, with a market cap much less than Priceline, still has almost double its reach. If you combine Kayak and Priceline, however, that is much closer to Expedia's reach. This is one of the aims of the merger.
KYAK shares gained 26.61% in post-market trading on Thursday, November 8, the day the news came out. A similar jump was seen in pre-market trading on November 9 and Kayak’s stock ended up close to the acquisition price at $39.67.
What the Acquisition means to Expedia and other Online Travel Agents
With a market cap of $31.21 billion, Priceline is the most valuable online travel agency. Kayak, on the other hand, is a billion dollar company that allows price comparison and books flights, hotels, cars and vacations.
KYAK made an initial public offer (IPO) in July 2012 to raise $91 million (3.5 million shares at $26 per share). In the third quarter, the company handled 31 percent more queries (302 million) than a year earlier across its web and mobile products. According to an analyst at RBC Capital Markets, both companies were doing well by themselves and this move is not what the market was “looking for them to do.”
While Priceline would be upbeat about the acquisition as it means a new source of customers, investors in Expedia (EXPE) have every reason to worry as the deal amounts to the coming together of listings and bidding of Priceline and search engine of Kayak on the same platform. Priceline beats Expedia by about $20 billion in market cap; however, the difference in revenue is marginal by comparison (in the third quarter, PCLN made $1.7 billion while EXPE made $1.19 billion in revenue), which tells me that compared to Priceline, Expedia may be somewhat undervalued. So it was important for Priceline to create more distance from Expedia in terms of revenue and product offerings; the acquisition of Kayak is a step in that direction.
In this quarter, Priceline's car rentals business has done very well. Its global hotel business is one of the principle revenue earners; however, recently there were worries that Expedia was having a greater reach than Priceline, especially in the European hotel market. Kayak's market comparison expertise will come in handy for Priceline, which already spends over $700 million per year in advertising, compared to Expedia's roughly $400 million. So Priceline's acquisition of Kayak is a major worry for Expedia.
TripAdvisor (TRIP), on the other hand, had a fruitful partnership with Kayak for travel reviews, an association that it might have to review now.
In the last fifteen months, there have been quite a few mergers and acquisitions in this space. Google acquired Zagat Surveys for $220 million and TripAdvisor snapped Private Holiday Watchdog for an undisclosed amount.
Shares of some of the companies in the online travel business including Orbitz, IAC Interactive, which controls Expedia and Hotwire (not listed), Yelp and Expedia rose on the day after Kayak’s acquisition by Priceline. Maybe that has to do with investor sentiment that some of the smaller OTA’s may be the next target for acquisition by a bigger player.
Shas Dey has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com and TripAdvisor. Motley Fool newsletter services recommend Priceline.com and TripAdvisor. 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.