Following a period in which the stock market's upward trajectory appeared unstoppable, investors are rediscovering that stocks do, on occasion, fall in price, with Iraq's descent into civil war just one catalyst for that process this week. After three consecutive days of losses, U.S. stocks are slightly lower on Friday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) both just under breakeven at 10:15 a.m. EDT. Still, that won't derail a booming mergers and acquisitions market; this morning, it's Priceline's (NASDAQ:BKNG) turn to make a meal of restaurant booking platform OpenTable (UNKNOWN:OPEN.DL).
Priceline has agreed to acquire OpenTable for $103 per share, valuing the restaurant reservation service at $2.6 billion. That price represents a 46% premium to yesterday's closing price; the stock is actually trading through the offer price this morning, which suggests the market sees the possibility of a third party coming forward with a higher offer.
Both observations square with what appears to be rising interest in this category. Today's announcement comes roughly one month after a similar transaction in which TripAdvisor acquired online restaurant booking platform La Fourchette, which hosts 12,000 restaurants across Europe.
Furthermore, news of today's deal has jolted the shares of Yelp, GrubHub, and Groupon (NASDAQ:GRPN), which were up between 4% and 14% at 9:51 a.m. EDT. In the case of Groupon, this looks like a reflexive (or poorly reasoned) bid. Yes, it and OpenTable have names that are the aggregation of two words. Yes, both companies do something with the Internet. However, unlike Groupon, OpenTable has a mature business model around which it has built a moat; as a result, it has been nicely profitable for the past five years (and in seven of the past nine years). OpenTable's net profit margin was a ruddy 18% last year, while Groupon remained unprofitable.
Priceline CEO Darren Huston said in a statement that "OpenTable is a great match for The Priceline Group. They provide us with a natural extension into restaurant marketing services." I can't disagree with that -- although the business models are slightly different, both companies provide a convenient platform (in the case of Priceline, it's technically a marketplace) to match consumers with service providers. OpenTable's system seats 15 million diners per month at 31,000 restaurants.
OpenTable is an excellent fit with Priceline and will provide a new growth channel. My only concern on the deal is the price: As of yesterday's close (i.e., before any acquisition premium), OpenTable was already valued at 45 times next year's earnings-per-share estimate. Tack on the premium and you get a valuation that looks very hard to digest, even for a company as well run as Priceline.