Talent, technology and more overseas growth.
That’s what analysts say are the main reasons why Priceline.com agreed to pay $1.8 billion for travel metasearch company Kayak, an acquisition expected to close by next March.
Priceline gains technical talent in Kayak’s employees as well as a number of search-capability patents, while Kayak will benefit overseas from Priceline’s content and financial resources, according to Henry Harteveldt, principal analyst at Atmosphere Research Group.
“A big component is intellectual property, and another big part of the deal is talent,” said Harteveldt. “There’s no question Priceline paid a very precious premium, but clearly they saw something in the mix that’s going to be able to repay it in a meaningful way.”
With the travel markets in Europe and Asia far more fragmented than they are in the U.S., Priceline will be able to use Kayak to drive further traffic to overseas sites such as Booking.com and Agoda, according to Carroll Rheem, director of research at PhoCusWright
“Kayak is in a position where it has all of the technical, behind-the-scenes elements, and Priceline has absolutely mastered cross-country marketing,” said Rheem. “There are a lot more airlines in Europe, and a ton of OTAs, so this market fragmentation creates a perfect opportunity.”
Because of such a partnership, the acquisition could increase the overseas revenue gap between Priceline and competitors Expedia, Travelocity and Orbitz. While Priceline’s approximately 10% share of OTA bookings from American travelers is about a quarter of Expedia’s share, Priceline’s annual revenue overtook Expedia’s in 2010 because of rapid growth in Europe and Asia.
The potential to accelerate that growth caused Priceline to agree to pay $40 a share for Kayak, 29% more than Kayak's share price at the close of market trading Thursday, just before the acquisition was announced.
Kayak, which was founded in 2004, went public at $26 a share last July, 20 months after first filing for its initial public offering.
As for the return on that investment, much of it depends on Kayak’s growth, which has been rapid.
Kayak said Thursday that its third-quarter net income rose 14% from a year earlier to $8 million, while revenue jumped 29% from a year earlier to $78.6 million.
Year-to-date, Kayak’s net income jumped fivefold from a year earlier to $19.4 million. Revenue was up 34% to $228.9 million.
Despite the prospect of Priceline’s realization of Kayak’s growth, Lazard Capital Markets analyst Jake Fuller called the agreement “a surprise” and said the acquisition would have little effect on the OTA competitive landscape within the U.S.
However, Fuller did call it “a potential negative” for travel-review site TripAdvisor.
Meanwhile, investors appeared to take a neutral approach to the agreement, as Priceline’s share price was little changed from Thursday’s closing price as of about 2 p.m. Eastern on Friday.
Follow Danny King on Twitter @dktravelweekly.