Priceline.com Inc., the most valuable online-travel agency, is buying Kayak Software Corp. for $1.8 billion in cash and stock, adding profitable search tools to its services that help consumers book flights and hotels online.
Shareholders of Kayak, which held an initial public offering in July, will receive $40 a share, the companies said in a statement. That represents a 29 percent premium over Thursday’s closing price at $31.04 in New York, and includes about $500 million in cash as well as $1.3 billion in equity and assumed stock options.
The deal is the biggest to date for Priceline, which has been using acquisitions to add customers as it works to increase sales and fend off competition. Kayak lets travelers compare prices and make reservations for hotels, flights, cars and vacations. Online travel sales may reach $151.9 billion by 2016 from $107.4 billion in 2011, according to EMarketer Inc.
“It is obviously a great source of customers for Priceline,” said Andre Sequin, an analyst at RBC Capital Markets. “Priceline’s done very well in this space on their own, and as Kayak does serve competitors as well, it wasn’t necessarily a step we were looking for them to do.”
Kayak, which raised $91 million in the July IPO by selling 3.5 million shares at $26 apiece, processed 302 million queries across its Web and mobile products in the third quarter, up 31 percent from a year earlier.
Priceline shares slipped as much as 2.5 percent to $612.12 in extended trading yesterday after the deal was announced. Earlier, the stock fell 1.1 percent to $627.87 at the close in New York. Kayak surged as much as 32 percent to $41.01 in extended trading. Both are based in Norwalk, Connecticut.
“These are two of the largest online-travel companies, and both are consistently in the top five or top 10 of traffic in the United States,” said Dan Marcec, an analyst at EMarketer. “It makes sense that these two companies would want to work together, of course, because they do have different strengths and different objectives.”
The boards of each company have unanimously approved the transaction, which is expected to close in the first quarter of 2013. Kayak’s current management team will continue to run operations as an independent unit within Priceline.
“Our intention is for Kayak to be operated independently under the leadership of existing management, as with our other brands, with a primary focus on building value for its customers and advertising partners,” Priceline Chief Executive Officer Jeffery Boyd said on a conference call with analysts yesterday.
Kayak’s competitors in the online-travel market include Google Inc. and Microsoft Corp., which have both made acquisitions to expand their businesses. The company also vies with startups, including Hipmunk Inc.
The acquisition could put Kayak in competition with some of its biggest partners. When users search for flights or hotels, they’re given results from Priceline as well as Expedia Inc. and Hotwire, owned by IAC/InterActiveCorp. Priceline’s top U.S. competitor is Expedia and it goes head-to-head with Hotwire in airline and hotel bookings.
“We don’t believe that our ownership of Kayak should dissuade other advertisers from participating,” Boyd said.
Kayak has higher gross margins than Priceline because it’s largely a technology company. Kayak’s gross profit in the third quarter was 94 percent of revenue, compared with 82 percent for Priceline.
Kayak was founded in 2004 by Chief Executive Officer Daniel Stephen Hafner and Paul English, the chief technology officer. They held a combined 16 percent of the company’s voting power as of July. The biggest backers at the time of the IPO were General Catalyst Partners, Sequoia Capital, Accel Partners and Oak Investment Partners.
Law firm Levi & Korsinsky is investigating Kayak’s board of possible breaches of fiduciary duty “by failing to adequately shop the company before entering into this transaction,” according to a statement after yesterday’s announcement.
Newman Ferrara LLP, another law firm, said it is investigating whether the board took “all necessary steps to ensure that Kayak’s shareholders receive the maximum value readily available for their shares of Kayak common stock.”
© Copyright 2014 Bloomberg News. All rights reserved.