Kayak and Priceline: A Force to Be Reckoned With?

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Kayak Software (KYAK) has agreed to be acquired by Priceline.com (NASDAQ:PCLN) for $1.8 billion in cash and stock just months after going public. The acquisition of its younger competitor is the largest in Priceline’s history, and could provide a new source of revenue for a travel company that has been showing its age.

Priceline was once a top Internet company, surviving the dot-com bubble in the late 1990s. It acts as an online travel agent, collecting fees and commissions on reservations. Kayak, which was started in 2004, instead allows users to search other sites to compare prices from a single platform. More than four-fifths of its business comes from making referrals to airlines, with the rest coming from advertising. Because Kayak aggregates information from airlines as well as other travel sites like Expedia (NASDAQ:EXPE) and ebookers.com, it usually offers the lowest prices available online, and has been slowly edging out competitors using Priceline’s more dated method.

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“I see Kayak serving as a global entree into the advertising market for Priceline,” said Daniel Kurnos, an analyst at the Benchmark Company. The deal could help Priceline “with their search rankings and give them some additional expertise in the technology department.”

Priceline also brings something to the table, though, and that is its already strong presence in overseas markets. Priceline, which also owns Asian travel site Agoda.com, is a global travel brand. International reservations accounted for 78 percent of its total last year.

In fact, Priceline handles around one in 20 of the world’s hotel bookings, according to estimates by Citigroup, with an even higher share in Europe. But after Google’s (NASDAQ:GOOG) acquisition of flight information service ITA Software, online travel agents are concerned that the search giant may direct more traffic through its own booking system. Priceline itself has faced increased competition this year, prompting its search for new ways to win online traffic.

Boeing 787 Dreamliner Airplane2Kayak is quickly growing its overseas presence as well, but it still draws the large majority of revenues from the domestic market. In the third quarter, Kayak’s revenue from outside the United States amounted to $17.3 million, a 40 percent increase from the period a year earlier. Overall third-quarter revenue rose 29 percent, to $78.6 million.

“We believe we can be helpful with Kayak’s plans to build a global online travel brand,” Priceline CEO Jeffery H. Boyd said in a statement.

Priceline will pay roughly $40 a share for Kayak, a 29 percent premium over Kayak’s closing price of $31.04 on Thursday. Priceline will meet two-thirds of the purchase price by issuing stock, with the rest in cash. With the purchase, Priceline takes advantage of its soaring share price that has seen its market value increase fourfold in the past three years, to $31 billion. The transaction is expected to close in the first quarter of next year.

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