In a surprising move, Priceline (
PCLN
), a leading online travel agency (OTA) announced its acquisition
of Kayak, a leading travel search company, in November 2012. The
two companies signed a definitive agreement for a stock and cash
agreement of $1.8 billion. Priceline will pay $500 million in cash
and the remaining $1.3 billion in equity for the deal, which is
expected to close by mid 2013. The $40 per share price tag offered
by Priceline marks a 54% premium over Kayak's initial listing price
of $26.
Priceline has been able to successfully leverage its past
acquisitions, which have substantially contributed to its growth
over the years - Booking.com (2005), Agoda.com (2007) and
TravelJigsaw (2010). The Kayak deal seems to be in line with the
company's strategy of growing through acquisitions to build a
robust and well-rounded travel portfolio. The Kayak
acquisition is the biggest deal for Priceline so far as its
previous acquisitions have been approximately $100 million
each.
Though we do not believe that the acquisition will provide
Priceline a substantial edge over other OTA's in the global
market, we feel that getting Kayak on board will help it close the
gap with Expedia in the U.S. market.
Here we list the potential benefits and inherent risks for
Priceline from the Kayak acquisition.
See our complete analysis for Priceline
Kayak Can Add Value to Priceline's Travel Search &
Advertising Platform
Priceline is the second largest online travel company in the
world in terms of gross bookings. So far, Priceline has been
focusing only on the transaction channel of online travel,
i.e. selling travel products such as airline tickets, hotel
rooms, cruise packages and car rental services. However, with
the acquisition of Kayak, it marks its entry in the meta-search
space. A meta-search engine is a search tool which collates results
from multiple search engines giving a broader scope to user
searches. Meta-search remains an integral part of the online travel
booking supply chain.
We feel that the acquisition could serve as a way for Priceline
to expand its paid search or advertising offerings, an area where
it does not have much exposure currently. While revenues from
advertising contribute very little to Priceline's overall earnings,
for Kayak, with a contribution of 58% in 2011, advertising is an
important revenue stream. We believe that the expansion of its
advertising platform can broaden and diversify Priceline's revenue
base.
Potential Risk
- There is a possibility that the acquisition will discourage
Priceline's competitors from advertising on Kayak. However, with a
53% share of the U.S. meta-search market, Kayak remains
a great resource for customers and delivers attractive return
on investment for its advertisers. Thus, we do not foresee any
significant decline in its advertising revenue post the
acquisition.
Priceline Can Reduce Its Dependence on Google
According to Travel Trends, Priceline is one of Google's biggest
customers, having spent close to $375 million in online
advertisement in Q3 2012 alone. However, with Kayak on board,
Priceline might reduce its dependence on Google to get traffic for
its website. With the launch of Google Flight Search and
Google Hotel Finder, many online travel companies have accused the
online search engine of placing its results upfront, which
negatively impacts the visibility of other travel
products. Reducing its dependence on Google, Priceline
can incur significant annual savings in its advertising budget
going forward.
Kayak has a recognized brand name, and a substantial majority of
its users visit the website directly rather than being routed
through a search engine. Around 75% of the user queries received on
Kayak in the first three months of 2012 was generated by direct
visits to its websites, and only 10% were generated from general
search engines.
Potential Risk -
ITA Software which was acquired by Google, contributes
close to 40% to Kayak's total airfare query results, which accounts
for 85% of total searches performed on its website. Kayak agrees
that the alternate faring engines solutions do not currently
provide the level of comprehensiveness and accuracy that ITA's
software offers. In the future, Google might not renew ITA's
current agreement with Kayak for any improvement or replacement
software, or do so at unfavorable terms, which could negatively
impact airline query results from Kayak. (Read Our Full Analysis:
Downside Risks To Priceline's Kayak Acquisition Due
To Google-ITA
)
The Combined Expertise of the Two Companies Can Help
Build a Strong Mobile Foundation
With an increasing number of people using mobile devices to go
online, we believe the mobile platform offers immense growth
opportunity for travel services. Presently, queries
received via Kayak's mobile application account for around 14% of
the total search queries received by the company.
In Q3 2012, Kayak registered an 87% y-o-y increase by processing
56 million queries via its mobile applications. Kayak's mobile
applications were downloaded 3.1 million times in Q3, a 95%
increase over last year, and the company believes that it has a
more loyal mobile user base as compared to the PC user base.
Though Priceline does not disclose its mobile revenue in its SEC
filings, the company declared in its recent earnings call that it
is witnessing rapid growth in its mobile platform. Deutsche Bank
estimates that in 2011 around 6-7% of the bookings from
Booking.com, which accounts for a substantial portion of
Priceline's revenue, came from the mobile platform.
Developing a mobile platform requires significant costs in terms
of design and development. We feel that by leveraging each other's
expertise in mobile, Priceline and Kayak can grow its mobile user
base even faster.
Priceline Can Add Value to Kayak in International
Markets
Kayak receives about 80% of its revenue from the U.S., and has
somewhat struggled to retain its foothold in the international
markets. ((
Why Priceline Plucked Kayak
, The Street, November 9, 2012)) Google's meta-search
initiative is considered to be a growing threat, and Kayak does not
have enough of an international presence to take on Google's global
presence.
On the other hand, with the acquisition of Booking.com, Agoda
and TravelJigsaw, Priceline has managed to successfully expand its
international gross bookings from 55% of total gross bookings in
2007 to around 78% in 2011. We feel that leveraging
Priceline's marketing expertise and rapidly expanding global
footprint can fuel Kayak's growth rate in international
markets.
Kayak Can Increase Priceline's Competitiveness in the
U.S. Market
Though Priceline has been successful in narrowing the gap with
its competitors, Expedia continues to account for the highest
market share of the agency model in U.S. Under the agency
model, OTA acts as an agent in the transaction, passing
reservations booked by travelers to the relevant airline, hotel,
car rental company or cruise lines. While Expedia accounts
for 14.23% of the market, Priceline has an 11.6% market
share.
The acquisition of Kayak could increase traffic to Priceline's
website, in turn increasing booking transactions. Thus, we
believe that the acquisition better equips Priceline to close the
market share gap with Expedia in the U.S. market.
Conclusion
In our view, getting Kayak on board increases Priceline's
competitiveness in the market. Kayak has developed a world class
technology to facilitate travel searches, and boasts of innovation
in building great user interfaces across multiple platforms and
devices. With Kayak on board, Priceline has a better
chance of reducing Expedia's lead in the U.S. market and also
benefit from other revenue and cost synergies.
Our price estimate of $584 for Priceline is at a slight discount
to the current market price.
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