Expedia has announced its planned acquisition of Orbitz for $1.34bn. This is the company’s second acquisition in two months – after acquiring Travelocity for $280mm. New entrants, from Google to Airbnb to various startups, are posing a larger threat to the overall travel industry. As the online travel booking space faces increased competition, the largest players are pushing to consolidate the fragmented industry for a higher market share and competitive edge. The Expedia-Orbitz merger will increase the combined company’s market share to 6%, above Priceline’s 5% share – thus, making it the largest player in the travel retail industry. As a result, Expedia will have stronger negotiation power with airlines and hotels.
By comparing Expedia to Priceline, it is interesting to see their different acquisition strategies. Expedia’s strategy is to acquire similar companies for an increase in market share and scale. On the other hand, Priceline’s strategy is to acquire companies that give it an entrance into other areas of hospitality, such as restaurant reservations. Some of the companies Expedia has agreed to acquire include Orbitz, Travelocity, Wotif.com, Hotels.com, Hotwire, Trivago, Cheap Tickets, and Hotel Club.
Expedia agreed to pay a 24% premium to Orbitz’s closing price on Wednesday, February 11, 2015 or $12 a share – the deal will be paid for all in cash. There are expected cost synergies of $75 million as a result of the deal. Investor sentiment for the deal was bullish as Orbitz shares jumped by about 22% and Expedia rose over 14%.
Although investors are satisfied with the deal, traditional hotel and airline operators certainly are not. A larger online travel site poses the threat of increasing commission rates to airlines and hotel operators whom have long relied on using these distribution channels. However, there has also been a shift in hotel and airline customer acquisition strategies: these companies are attempting to lure more customers to their own websites, and are doing so with attractive incentives (i.e. free Wi-Fi, breakfast, and the ability to choose preferred airline seats). Up until this acquisition, the commission hotels pay online travel sites have been reduced from 21% to 16%, and Airlines have successfully lured many customers to their own websites.
From a regulatory standpoint, U.S. regulators are likely to focus on how the acquisition will affect consumers, while European regulators are likely to focus on how the acquisition will affect Expedia’s competitors.
By: Jacob Kalatizadeh