Priceline is acquiring Kayak for $1.8 billion in cash and stock. Yes, read it again. While unexpected, interestingly the news does not fundamentally tell us anything about the industry.
Unless, that is, aside from Priceline’s willingness to use its strong stock performance to continue its aggressive growth.
KayakIPOed just a few months ago, on July 20, with a debut price of $26 per share. It closed on that first day of trading at $33 per share. Over the last 3.5 months, the price has fluctuated between $27 and $36.
The Priceline offer of $40 per share represents a 29% premium to its closing price, but only a 13% premium off of its close just four days ago when these negotiations were likely nearly complete (and an 8% premium off of its all-time high in early October).
Priceline’s high market capitalization makes the premium very manageable. While the stock dropped 2% after the announcement, it has a market cap of $31 billion, 4x that of its biggest competitor, Expedia, in part because of a price-sales ratio 3x that of the rival OTA.
That stock price certainly makes it easier to make acquisitions such as this, where $1.3 billion of the cost was in equity.
What can we learn from this deal?
If there is one big "a-ha" from this transaction, it is a sign of Priceline’s continued aggressiveness in building out the most robust travel portfolio on the planet.
Previous acquisitions for Priceline, including Booking.com and ActiveHotels, have focused on hospitality and have been in the $100 million range. Kayak is a meaningful departure from that for sure.
Less than a year after Expedia shed its media presence of TripAdvisor, Priceline is doubling down on media in the form of Kayak. This is a huge step in looking for value in travel search and advertising platforms, not just through the transaction channel.
This move represents an interesting departure for a major OTA and is obviously one worth watching.
What will we NOT learn from this deal, despite what pundits might say?
This deal tells us nothing new about the value of metasearch. Kayak’s IPO was the event that shed light into that and did much to confirm Kayak’s value. Priceline’s bullish price represents primarily fluctuations in Kayak’s price, fluctuations in Priceline’s valuation, and a natural acquisition premium.
The thesis for that premium likely rests partially in Priceline’s marketing expertise and global footprint, two things that can supercharge Kayak’s growth over the next several years.
Kayak is relatively new to mass marketing, starting campaigns only in 2009. Expect Priceline’s expertise there to open new growth opportunities for Kayak. Similarly, Priceline can help Kayak grow internationally.
Kayak has stumbled at times in its international growth, succeeding only modestly in some markets and struggling in others. Priceline’s more global footprint will help Kayak in some of those more challenging markets.
Existing players
We also have no reason to believe that this will have an impact on Expedia, Travelocity, and Orbitz, as far as traffic sent from Kayak. In all likelihood, Priceline was buying Kayak’s revenue stream as much as its search traffic.
As such, I would not expect the mothership to put too much pressure on Kayak to send more of its traffic to Priceline, relative to its competitors. Over time, this could be a threat, but if Priceline is just looking for traffic, there are many cheaper ways to boost feed into Priceline aside from throwing down $1.8 billion.
This deal also tells us little about Kayak’s long-term risk factors in the way of search capability and relationship with ITA/Google. It’s not surprising that Priceline isn’t intimidated by ITA/Google, and perhaps having Priceline’s support encouraged Kayak management to sell.
But given Kayak’s recent growing relationship with Amadeus for search, it’s hard to imagine this being a make or break for the deal.
Priceline remains, more than ever, the one to beat
Value in new models
The deal tells us that Priceline understands the fundamental value of metasearch with loyal users. It’s finally an admission from a traditionally transaction-oriented brand that search-alone is a powerful part of the value chain and is not going anywhere.
But even more so, it’s a reminder of the challenge of building a consumer brand in travel. Priceline could have built a meta-search tool (or bought a less established one), but they were willing to pay big money for one with an established brand, user-base, and revenue stream.
Once again, it’s a sign that technology and loyal users each alone is insufficient to drive value, you need both. Even Priceline, one of the best marketing organizations in travel, was willing to pay for it.
Or maybe it was none of this, maybe it was just the fact that Kayak and Priceline’s corporate headquarters are just down the road from each other in Norwalk, Connecticut. Regardless, don’t read too much into this.
As a public company, Kayak had few secrets, and as of closing, they’ll simply have a new corporate owner to report to. Lucky Steve Hafner, CEO of Kayak, won’t have to go far to talk to his new boss.
NB: Disclosure - Konwiser worked for Kayak in 2007.