Priceline Hits a Homerun with Kayak

Last night it was announced that Kayak (KYAK) agreed to be acquired by Priceline.com (PCLN) for for $40 a share, a $9 premium over yesterday’s $31 closing price.

Good for Kayak

Yes, this deal is good for KYAK shareholders, and I urge them to hold their shares of PCLN they will be given. Here’s why: Priceline is known for its Priceline.com site. But what really made PCLN stock soar the last decade was the purchase of Booking.com.

Around 2003 Priceline acquired two European travel sites, Booking being one of them. Booking had little competition in Europe, as many Europeans preferred using travel agents over online sites.

Over the years, Internationsl sales took flight and Booking propeled PCLN stock to staggering heights. Here’s a table of PCLN bookings from my 2008 Q1 PCLN research report:

Now Booking is the profit generator for Priceline. Whether Booking helped Priceline or Priceline helped Booking doesn’t matter — they joined forces and became the dominant player in online travel. Hats of to PCLN management who had to vision to expand overseas during tough economic times. This kind of management will surely help Kayak take their business to the next level too.

Great for Priceline

This deal is great for Priceline because Kayak is the top travel comparison site out there (in my opinion). Kayak is the site you go to to compare prices from online travel sites like Expedia, Traveloxity, Hotels.com and Priceline. No need to search each site in a seperate window — Kayak does the work for you.

Secretaries depend on Kayak to book their bosses travel arrangements, and business travel is where the money is. Kayak  also has built a “leading position in mobile”. To me this seems like another Booking acquisition that will continue PCLN’s stellar run of increasing profits.

Here’s KYAK’s estimated profits:

2012 $0.83
2013 $1.08
2014 $1.51

So the final sale price for KYAK was 37 times 2013 earnings, very reasonable for PCLN. My only complaint is I would have preferred PCLN pay only cash so the sale would have been better for EPS.

Sharek’s Take

The KYAK/PCLN “merger” is a good deal for Kayak shareholders, but can turn into a great deal if they continue to hold onto PCLN stock and not sell it. Priceline gets a jolt of juice to its profitable business, which now becomes more profitable as Kayak has stronger profit margins than Priceline. This is an awesome deal for both parties.