The Pitfalls and Perils of Online Travel Acquisitions

As China’s largest online travel agency, Ctrip, is poised to close on its pending $1.74 billion acquisition of flight-searcher Skyscanner and then to integrate its technologies, products, and workforce, it’s appropriate to point out in the excitement of the moment that these sorts of deals don’t always work out as intended.

Acquisitions, after all, are hard to do.

The most obvious and recent example of a tough acquisition is the Priceline Group’s $2.6 billion purchase of dining reservations platform OpenTable in 2014.

Citing OpenTable’s expansion issues, but not getting too specific about its precise problems, the Priceline Group recently took at $941 million non-cash impairment charge against OpenTable’s goodwill. The impairment charge was a drag on the Priceline Group’s third quarter net income although the parent company vowed to continue to invest in OpenTable, albeit in a more measured way.

Opentable Hype Versus Reality

In the heady days after the Priceline Group acquisition of OpenTable, Priceline officials waxed on about how the restaurant reservations platform would be a natural extension of its brands, especially in the mobile era where travelers are checking their phones to find something to do, or a place to eat, spontaneously and in the moment.

On the morning of the acquisition, then-CEO Darren Huston said: “Over the long term, we are excited with the prospect of OpenTable building a strong and profitable global business in online restaurant reservations. We believe this will enhance our consumers’ experiences with our brands, drive increased traffic, and deepen relationships with our local partners across both travel and dining, and create a meaningful financial opportunity for the Group.”

Financial analysts, too, may have been caught up in the merger fervor. In August 2014, a couple of months after Priceline’s OpenTable announcement, Evercore sent a note to investors about Priceline, stating “we remain optimistic on the outlook given the attention being given to areas of growth as evidenced by the recently launched Pay with OpenTable product as well as PCLN’s investment in China’s largest OTA, Ctrip.”

The Pay with OpenTable feature, which enables diners to settle their checks through the app, isn’t especially noteworthy as a growth driver for OpenTable — let alone the much- larger Priceline Group.

Restaurant reservations, whether by TripAdvisor’s The Fork, which seems to be making strides, or eventually OpenTable may ultimately prove to be an advantageous, complementary business for online travel companies. But, for now, at least, it is clear that the Priceline Group, which paid a 48 percent premium for OpenTable over its share price on June 12, 2014, overpaid for the platform and over-estimated its future revenue.

That’s quite a comedown for the Priceline Group, which made one of the best acquisitions in Internet history in Booking.com a dozen years ago, and also successfully acquired other brands including Kayak, Agoda, and Rentalcars.com.

Expedia’s Orbitz Worldwide Woes

Expedia Inc.’s 2014-2015 acquisitions of Wotif, Travelocity, Orbitz Worldwide, and HomeAway initially drove a lot of growth for the online travel agency — although the Priceline Group and others cautioned at the time that there could be a day of reckoning because mergers are tough.

In the fourth quarter of 2015 it seemed like Expedia Inc. was cruising along on all cylinders as it grew its hotel room nights a whopping 39 percent — compared with 26.6 percent for the Priceline Group –and with 15 percentage points of Expedia’s jump attributed to its acquisition tear.

By the second quarter of 2016, however, Expedia’s room night growth decelerated and CFO Mark Okerstrom conceded that Expedia’s network infrastructure “wobbled a little bit” because of the strain of integrating Orbitz Worldwide. In the second quarter of 2016, Expedia Inc.’s room night growth slowed to 20 percent, down from 35 percent a year earlier.

Expedia, officials said, had reassigned so many engineers and other staff to integrating Orbitz Worldwide’s multiple brands that the core Expedia and Hotwire brands were neglected.

During Expedia’s second quarter earnings call on July 28, Expedia CEO Dara Khosrowshahi assured analysts and investors that the strain on Expedia’s infrastructure, which impacted network quality and uptime, had taken a toll but had in the interim been largely corrected.

“We have addressed the vast majority of these issues and believe that they are now largely behind us,” he said at the time.

The Expedia ship, though, had not been righted by the third quarter of 2016 as room night growth fell to 17 percent, compared with 36 percent a year earlier, and earnings per share missed analysts’ expectations.

As in the second quarter call, during the third quarter session with analysts, Khosrowshahi stated that the worst was behind Expedia. “Q3 was definitely a step in the right direction for the company,” Khosrowshahi told analysts, adding, that the Orbitz migration is largely complete and room-booking trends improved in September.

We’ll only find out next year whether indeed Expedia’s integration of Orbitz will prove to be a two-quarter stumble or something to be concerned about in the future, too.

Cendant and Sabre Learned Integrations are Difficult

Other travel companies — and firms in other industries, too — have tripped up over acquisitions.

In 2006, Cendant, which owned online travel companies such as Orbitz and Galileo, hotel brands such as Wyndham, and real estate businesses, indicated that it had taken a $425 million impairment charge related to its online and offline travel businesses, which included Orbitz, eBookers and Gullivers Travel Associates.

And in the fourth quarter of 2008, Sabre Holdings, which owned Travelocity, took a $382 million impairment charge related to its 2005 acquisition of UK-based lastminute.com, which it bought for $1.2 billion. Lastminute.com became “Travelocity Europe” and in many ways served as an albatross for Travelocity and parent company Sabre because of internal control problems and widely disparate tech platforms.

In 2014, Switzerland-based Bravofly Rumbo announced a deal to acquire Lastminute.com for a mere $120 million — or roughly one-tenth of what Sabre acquired it for 10 years earlier.

Distracting and Debilitating

Headlines about acquisitions tend to emphasize the upside although in reality they can turn into nightmares and be distracting and debilitating for the acquiring company.

By all accounts, Expedia had become vey skilled at rolling up companies to acquire, with Travelocity North America turning out to be a lucrative buy and a case in point.

Now Expedia faces its challenges integrating Orbitz Worldwide and vacation-rental phenom HomeAway.

Ctrip will have to be on its game when it closes on acquiring Skyscanner, which is slated to happen before the end of 2016. Ctrip will be adding some 800 Skyscanner employees, new technologies and dozens of new points of sale to its portfolio as it attempts to turn Skyscanner from primarily a metasearch site into one that handles airline bookings, too.

There’s vast potential there and plenty of potential pitfalls too.