Expedia IPO and Spin-Off History Sets Up Uber for a Deal-Making Era

New Uber CEO Dara Khosrowshahi’s career has been defined by deal-making.

His stints at Allen & Co., InterActiveCorp, and heading up Expedia Inc. show his approach towards building a public company through acquisitions, and later spinning off the brands that have outperformed their peers and can create additional shareholder value.

This strategy hasn’t always been wildly successful, as we’ve seen with the recent IPO of Expedia-controlled Trivago, although that’s still a work in progress. Yet Khosrowshahi hasn’t been afraid to take risks throughout his career.

“If you’re always going to go with the flow you’re going to be a perfectly average company and that’s certainly not necessarily something that I want to say after my career, that I was perfectly average,”  Khosrowshahi told Skift of his time before heading up Expedia. “There’s a comfort in that. There’s a comfort in knowing, you know what, I’m not making the typical decision, I’m making a different decision. I know there’s a risk. But I’m going to take that risk and I’m going to go for it.”

Being different has been a problem for Uber, however; in an effort to gain market share, it’s run into trouble on all sides by violating user privacy, ostracizing drivers, and cultivating a toxic corporate culture.

Let’s look at Khosrowshahi’s track record when it comes to IPOs and spin-offs, with an eye on how his experience could be crucial to Uber’s turnaround attempt.

The Making of Expedia Inc.

So let’s look a bit at the history of Expedia as a company. It went through its first IPO in 1999, after being founded by Rich Barton in 1996 and owned by Microsoft. IAC, run by Barry Diller, acquired Expedia in 2003 after the company had developed a small corporate travel wing in the and become the leading online booking site for consumers.

This touched off a string of acquisitions, ostensibly with the goal of IAC assembling a new public version of Expedia through Khosrowshahi’s dealmaking prowess and Barry DIller’s deep checkbook. Expedia, at the time, had been in a bit of a lurch facing pressure from rivals like Travelocity, which was initially the king of the hill.

Expedia itself along with Expedia Corporate Travel (now Egencia), TripAdvisor, Hotels.com, Hotwire, eLong, and Classic Vacations were a part of the public Expedia Inc. that emerged in 2005 on the NASDAQ.

“The hardest thing for us is to build is lasting consumer loyalty,” Khosrowshahi told The New York Times shortly before the spin-off. “The average consumer shops at three sites; we want to be two of those three sites.”

This thinking has informed Expedia’s strategy since then; it’s not enough to just have one travel superbrand because travelers consult so many different sources of information before eventually booking. And even if the company overall had a smaller profit margin than Priceline Group, it still made a lot of money.

TripAdvisor

One of Expedia Inc.’s biggest success stories was TripAdvisor, which emerged in the mid-2000s as the preeminent travel reviews site on the Web.

As a marketing channel for Expedia-sold products and just about every other travel company’s too, TripAdvisor became a crucial part of consumer travel planning habits. In its heyday, it was an extremely profitable media company that touched a variety of travel verticals.

The TripAdvisor spin-off also represents one of the first moves undertaken with new Expedia president and CEO Mark Okerstrom as the company’s chief financial officer.

Before the one-for-two reverse stock split on December 1, 2011, Expedia’s market cap stood at $3.81 billion. Afterwards, the combined market cap of the two companies was $18.57 billion; TripAdvisor had overnight become a more valuable company than its previous owner, and Expedia Inc. shareholders reaped a windfall in the process.

“Dara Khosrowshahi was my boss for most of the time,” said TripAdvisor CEO Stephen Kaufer of his experience before the spin-off in Skift’s Definitive Oral History of Online Travel in 2016. “I just thought he did a wonderful job helping TripAdvisor by educating me and the rest of the team on what he could, by way of how the online travel industry operates, yet allowing us to lead a very separate life in terms of all of our clients or a lot of our clients, who were competitors of Expedia. And he never got in the way of that. He never dictated terms. He never said, ‘You can or can’t do this or that.’ That allowed us to flourish. When we spun off [in 2011], that was an easy transition for everyone.”

While the transition may have been easy, boosting the value of both companies, TripAdvisor has faltered in recent years in a move towards instant booking for hotels and tours.

“Expedia lost a high-margin, fast-growing media business in TripAdvisor, which makes Expedia now reliant to a great extent on a single, transactional revenue stream,” Skift executive editor Dennis Schaal wrote in 2013. “Expedia also now finds itself somewhat dependent on TripAdvisor as one of Expedia’s largest marketing channels, and Expedia disappointed Wall Street with its second quarter financial results because TripAdvisor’s new hotel metasearch product has not taken off as fast as both companies expected.”

Today, TripAdvisor’s stock price is down close to where it was when it first went public in 2011. But it’s likely no one at Expedia is really upset about that; Expedia, TripAdvisor, and shareholders made a lot of money from the stock split.

Trivago

Expedia’s spin-off of Trivago follows a similar pattern as TripAdvisor.

In early 2012, Expedia acquired a majority stake in German hotel metasearch site Trivago for $632 million. As Trivago grew, spending upwards of 80 percent of revenue on marketing, the time became ripe for it to go public.

In the wider context of the industry, the deal was a move for Expedia to stay competitive in metasearch. Its investment in Trivago ended up being a much more affordable move than Priceline Group’s acquisition of KAYAK for $1.8 billion.

“The Trivago team built one of the largest, fastest-growing and most well-known travel sites in Europe conducting more than 100 million hotel searches annually through a culture focused on developing great products, building a strong brand and promoting partners’ businesses,” said Khosrowshahi at the time.

As majority shareholder, Expedia was also one of Trivago’s biggest customers, accounting for a third of the company’s revenue in the 2016.

Trivago’s IPO, however, turned out to be nowhere near as successful as TripAdvisor’s. It was likely a combination of factors including a soft market for IPOs overall and concerns about the effect of Trivago’s inflated marketing spending going forward.

The big question for Trivago has been whether it is truly sustainable in the long-term to spend so much on marketing to the disadvantage of investing on other aspects of its business, and that concern has remained since its IPO.

Despegar

Expedia owns 16.4 percent of Spanish online booking site Despegar, which recently announced its intention to go public soon. It’s a little premature to say what this means for Expedia itself, but you can take a look at our deep dive into Despegar’s growth and potential future plans.

Takeaways for Uber’s Future

So what could Khosrowshahi have planned for Uber? In a conversation with Uber employees on Wednesday, he said Uber’s IPO could take place as soon as 18 months from now.

He has a track record of acquiring companies, overseeing their growth, and then spinning them off for a big payday. In this way, he helps subsidize the weaknesses in the less profitable companies under his corporate umbrella. Expedia proper, for instance, can grow steadily, so long as other companies in the group have more explosive growth.

Uber, however, is a different kind of intermediary than a booking site like Expedia or Trivago; Uber networks drivers to a single rider for a trip instead of giving consumers access to rates/bookings from numerous travel providers. The company also needs to inflate fares so it no longer has to subsidize rides, at the risk of driving users to cheaper competing services.

A company like Trivago, which has expanded its market share through marketing spend, has certain parallels to Uber itself: a focus on growth instead of profitability that helped skyrocket the company to top of mind for consumers, while remaining somewhat shaky on a financial basis.

At Expedia Inc., Khosrowshahi has invested often outside of North America, recently acquiring European rail booking site SilverRail. Uber has had trouble expanding outside North America, getting ousted from China after a huge investment and facing regulatory trouble across Europe. Expedia, too, has had troubles in the highly competitive China market, and sold its money-losing eLong unit to Ctrip in 2015.

Uber is estimated to currently have around $7 billion in the bank, so a series of strategic acquisitions or investments could be in the cards to further cement its international presence. Uber itself does have several complementary products, like a business travel platform, so perhaps a new focus on more profitable products than traditional consumer ridesharing could happen too.

There’s also one outcome that few seem to be discussing: Uber continues to chug along without major strategic changes, although negotiations with SoftBank are said to be under way. While Uber solves its internal problems, tweaks its business model, and quietly shores up its balance sheet, it will eventually go public or perhaps sell to a travel giant or another player at a reduced valuation.

We’ll find out soon enough how Khosrowshahi will work to solve Uber’s numerous problems as it gears up to go public, and the entire world is now watching.