As Expedia Inc. closes on its $3.9 billion acquisition of vacation-rental leader HomeAway today, it is worth noting that Expedia is buying a company that is likely to be considerably less profitable over the next few years than what Expedia was initially led to believe in talks with HomeAway officials.

Specifically, an estimated $86 million less profitable in 2018, for example.

In documents Expedia filed with the U.S. Securities and Exchange Commission December 11 and November 16, 2015, HomeAway revealed that its board of directors found fault with HomeAway management’s draft financial forecasts for 2016 to 2018 that were given on October 5 to Expedia and two other unidentified companies that were participating in HomeAway’s sales process.

The board determined that HomeAway’s October 5 draft financial projections, which the board reviewed but did not formally approve, underestimated the business-model risks that HomeAway and an acquirer would have to deal with as HomeAway transitions to making virtually all of the properties it displays online bookable and introduces a traveler booking fee.

Underestimated the Business Model Risks

HomeAway management came up with a new set of tamped-down financial projections October 30 that the board approved and gave to Expedia six days before the agreement was signed November 4.

At the board’s instructions, the October 30 financial estimates for 2016 to 2018 gave more weight to the potential for supplier disruptions tied to the new business model and platform migrations; “price elasticity for travelers” renting vacation homes; search engine optimization risks; marketing inefficiencies, and HomeAway’s relative inexperience in platform migrations.

The following charts show HomeAway management’s rosier October 5 financial projections and the reduced adjusted EBITDA (earnings before interest, tax, depreciation and amortization) numbers in its October 30 forecasts.

HomeAway Management’s Draft October 5 Financial Projections

201620172018
Adjusted EBITDA$165M$275M$336M

HomeAway’s Board-Approved October 30 Financial Projections

201620172018
Adjusted EBITDA$154M$211M$250M

Source: Expedia and HomeAway

Consider the reduced October 30 adjusted EBITDA projections for 2016 ($154 million versus $165 million), 2017 ($211 million versus $275 million), and 2018 ($250 million versus $336 million).

In revising HomeAway’s financial projections on October 30 versus the ones made October 5, HomeAway management reduced its projected renewal rate for property owners and managers paying subscription fees in 2016 and increased the adverse impact it expects in 2016 when it implements a booking fee for vacation rental guests.

The October 30 forecasts also factored in further deceleration in site visitations because of expected search engine optimization challenges 2016 to 2018, and higher marketing spend as a percentage of revenue.

Google Isn’t Making Things Any Easier

The Expedia Securities and Exchange Commission filings reflect how tweaks to Google’s search algorithms would lead to HomeAway having to increase its marketing spend more than expected and how previous business model changes hurt the user experience.

HomeAway chairman and CEO Brian Sharples on October 1 “also reported on a recent change in the search algorithms of a leading search engine and the potential for such a change to impact HomeAway’s business,” the December 11 SEC filing says. “The HomeAway board of directors discussed that this change would require an adjustment in anticipated marketing expense in management’s preliminary analysis of the subscription and transaction-based revenue model.

“The HomeAway board of directors also discussed that although HomeAway management had provided additional information on the assumptions underlying management’s preliminary analysis of the new business model, the model still did not reflect a number of risks that the board of directors had identified with respect to HomeAway’s future business prospects, including, among other things, that prior adjustments to HomeAway’s business model had resulted in unexpected negative impacts on user experience and HomeAway’s business, that implementing a traveler fee posed technical challenges and would complicate tax reporting in foreign jurisdictions, that prior technological changes had often taken longer and been more difficult to implement than management had anticipated, and that HomeAway might have difficulty hiring and retaining the kind of technical talent that would be needed to make this transition.”

A Hard Day’s Night

Consider the big changes ahead for HomeAway, including making its listings online bookable, supplementing subscription fees with commission payments, introducing a booking fee for travelers and getting integrated with Expedia. When you further take into account competition from Airbnb, Booking.com, TripAdvisor and a bevy of local rivals, there is a helluva lot of risk ahead.

The bottom line is that in acquiring HomeAway, Expedia is getting an asset that can help Expedia obtain a leadership position in one of the fastest growing sectors in travel, namely vacation rentals and apartments, but the next few years could be rocky ones as Expedia-HomeAway attempt to make the big leap.

Photo Credit: Brian Sharples, HomeAway CEO (left), at a Fortune event, and Dara Khosrowshahi, Expedia CEO, at the 2014 Phocuswright Conference. Phocuswright and Fortune Brainstorm / Flickr.com