Acquisitions tend to light a fire under companies who want to enter certain industries, and Priceline Group's (NASDAQ: PCLN ) acquisition of OpenTable (UNKNOWN: OPEN.DL ) and TripAdvisor's (NASDAQ: TRIP ) of La Fourchette are perfect examples. Is it possible that Expedia (NASDAQ: EXPE ) will feel the pressure to buy Yelp (NYSE: YELP ) ?
Reservation technology becomes a centerpiece for online travel companies
Priceline's acquisition of OpenTable is seemingly wise, as it gives the company an entrance into a reservation space that its customers should find useful. The research firm Piper Jaffray thinks the acquisition could eventually lead to event booking, ride sharing, attractions, and other categories in the booking arena.
Historically, Priceline has been successful with its acquisitions, and at first glance, this one seems no different. OpenTable is expected to grow revenue 19% and 16% over the next two years, respectively, and has an operating margin of 23.5%.
While investors might think that Priceline is ahead of the curve with its OpenTable acquisition, and that its peers will now follow suit, TripAdvisor actually beat Priceline to the punch. Earlier this year, TripAdvisor acquired the European restaurant reservation service La Fourchette for $140 million, giving it access to 24,000 restaurant partners in Europe.
Up until now, OpenTable has created more than 85% of its revenue from North America with its 24,000 restaurant partners. It will be interesting to see how Priceline utilizes the technology in emerging markets, where its platforms are particularly successful.
OpenTable creates revenue from both software installations and reservations themselves. Its 7,700 installed restaurant bases in emerging markets are considered to be a growth opportunity, although OpenTable noticeably lags TripAdvisor's LaFourchette in Europe. Therefore we can conclude that TripAdvisor actually has an advantage in Europe over Priceline, but that Priceline is hoping OpenTable can help it remain the global leader in online travel.
How will Expedia respond?
With TripAdvisor and Priceline's acquisitions, both now have an edge over Expedia with a service that it lacks. In a very competitive online travel industry, this could become a nightmare for Expedia if it fails to answer, as Priceline will undoubtedly advertise very well that customers can make reservations from its site.
This fact consequently brings Yelp into the discussion, a company that recently acquired SeatMe, a restaurant and nightlife venue-reservation platform. Unlike OpenTable's fee structure, Yelp has already said that SeatMe services will be free to any business that claims their Yelp page, and with the company having reviews on more than just restaurants, Yelp might already have a service to book a wide array of events.
Will Expedia acquire Yelp, which is currently valued at $5.3 billion? The answer to this question might be yes, and the reason is that it then gives Expedia the competitive edge of not only reservations but reviews for its customers -- and the possibility of reservations outside of restaurants.
Albeit, a Yelp acquisition would be tricky, as Expedia's market capitalization is less than two times as great. Also, there is the question of valuation. Yelp trades at 18 times sales and lacks profits, with an operating margin of negative 3.3%. However, the one thing Yelp does have is growth, with revenue expected to rise 57% and 43% over the next two years, respectively.
As for the financials, Expedia has $2.1 billion of cash and cash equivalents, and debt of only $1.25 billion. Theoretically, Expedia could raise another $5 billion-$7 billion in debt to match its total assets or use stock to fund such a deal.
Sure, buying Yelp would be a big risk for Expedia, but doing nothing could be even worse if customers like the idea of reserving restaurants or events in visited cities. Priceline and TripAdvisor have already struck, but in this rare occasion, Expedia might have been left with the best option to purchase.
Don't be surprised to see Expedia make a run at Yelp. If not, expect another company to show interest while Expedia struggles to find an answer to Priceline and TripAdvisor's new edge.
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