$1.6 billion can buy a great many things. In the case of Expedia (NASDAQ:EXPE), this sum is being used to grab a top position in the online travel agent market. Last week, the company announced it signed an agreement to purchase rival e-travel conglomerate Orbitz Worldwide (UNKNOWN:OWW.DL) in an all-cash transaction. That's one very expensive ticket. Let's look closer at the deal to see what Expedia's getting for its money.
The Orbitz deal will add several famous e-travel names to that collection. These include, naturally, the eponymous travel portal, in addition to specialty sites like airline ticket discounter CheapTickets.com, Europe-focused portal ebookers, and Asia-Hotels.com.
A crowded lobby
Online travel isn't an easy segment to succeed in these days. The hotels and airlines that supply rooms and tickets to the portals have done a fine job of drawing customers directly to their web pages. They've effected this through good marketing and enticements like discounts available only through their sites. It's a 21st-century way of trying to cut out the middle man.
Meanwhile, at another end of the segment, another threat looms -- hungry newcomers eager for even a few crumbs of the huge online travel pie (which has surpassed the $100 billion mark, according to comScore). These brash young players -- Airbnb, for instance, or Hipmunk -- have already made dents in the segment.
On top of all that, the bulked-up Expedia isn't the only gorilla romping around. Priceline Group (NASDAQ:BKNG) has also been buying well-known e-travel assets. These days, its portfolio includes not only its self-titled portal, but also Booking.com and Kayak.com.
Last summer, Priceline Group added restaurant reservation site OpenTable to that list, collecting an asset that isn't strictly in the travel realm but can nicely compliment and broaden the company's portfolio.
Ready for takeoff
So, looked at a certain way, Expedia really didn't have much choice in terms of strategy but to make a big-ticket buy. It's a company that's clearly trying to appeal to the broadest range of travelers possible, and as such, needs volume. Specialty assets also help. Given the competition, big and small, this was likely not going to grow organically in a hurry.
Investors liked the Orbitz deal, judging by Expedia's nearly 15% leap in share price the day the deal was announced. But I'm not so sure; $1.6 billion is over 16 times 2014 free cash flow for a company that has been only sporadically profitable. Orbitz has a good set of assets that should compliment Expedia's portfolio, but it'll need to leverage them cleverly to make this deal worthwhile.
Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.