Priceline’s Kayak Acquisition Will Strengthen Its U.S. Business

More than six months after announcing the deal, the leading largest Online Travel Agency (OTA) Priceline (NASDAQ:PCLN) finally completed its acquisition of travel search company Kayak last week. Priceline paid $522.4 million in cash and issued approximately 1.52 million shares of common stock in addition to assuming outstanding Kayak stock options, which in total valued the deal at $1.8 billion. 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 international growth over the years – Booking.com (2005), Agoda.com (2007) and TravelJigsaw (2010). With Kayak on board the company marks its entry in the meta-search space and continues to build a robust and well-rounded travel portfolio. A meta-search engine is a search tool which collates results from multiple search engines, providing a broader scope for user searches. Meta-search remains an integral part of the online travel booking supply chain.

We are yet to see whether or not the acquisition will provide Priceline a substantial edge over other OTA’s in the global market. However, we believe that Kayak can be of strategic importance for Priceline to close the gap with Expedia in the U.S. market. In this article we discuss how Priceline can leverage Kayak to accelerate its future growth rate.

See our complete analysis for Priceline

Kayak To Increase Priceline’s Competitiveness In The U.S. Market

Though Priceline overtook Expedia (NASDAQ:EXPE) as the world’s OTA by sales in 2010, Expedia remains the most popular OTA among American users. Expedia has a 43% share of U.S. gross booking as compared to Priceline’s 11% market share in 2012. ^[1]

The U.S. online travel market is growing at the slowest pace compared to other economies such as Europe, Latin America and Asia-Pacific. Nevertheless, with estimated revenues of $151 billion in 2012, the country remains the biggest market in terms of online travel sales and will continue to be so for years to come. ^[2] Having the highest Internet penetration in the world among major regions (78.6%), the U.S. has a higher proportion of travel booked online (51.5%) compared to other markets.

Growing at a CAGR of 47%, Kayak’s top line witnessed robust growth between 2007-2012. The company currently receives about 80% of its revenue from the U.S. and has over 50% share of the U.S. meta-search market. ^[3] We believe that by attracting more traffic to Priceline’s website, Kayak’s acquisition can increase the company’s booking transactions in the region.

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. ^[4] 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 Google 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.

Kayak To 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.

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, with a more than 50% contribution advertising is an important revenue stream for Kayak. 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. ^[3] Thus, we do not foresee any significant decline in its advertising revenue post the acquisition.

A Stronger Mobile Foundation

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 compared to the PC user base.

According to the 2012 Traveler study, 38% of leisure travelers and 57% of business travelers in the U.S. use mobile for getting travel information. ^[5] 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 their mobile user bases even faster.

We are yet to update our price estimate of $642 for Priceline to account for Kayak’s acquisition.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Priceline, Travelocity take steps to increase share, Travel Weekly, February 5, 2013 [↩]
2. Online Travel Sales Explode In Latin America, eMarketer, November 20, 2013 [↩]
3. Who is so far feeling the heat from Google Flight Search? No major surprises here, tnooz,  February 17, 2012 [↩] [↩]
4. What does the Priceline-Kayak deal (and Google lurking in the background) mean for hotel marketing?, tnooz, December 5, 2012 [↩]
5. Today’s Traveler: Google’s Annual Traveler’s Road to Decision Study, Google, August 2012 [↩]