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June 13, 2014 9:59 pm
A joint venture would have made sense. People who travel eat out. Offering access to a restaurant reservations network on the website of a big travel network is logical. More sense still if the travel network is large and the restaurant network is relatively small. The travellers provide demand for the reservation network as it expands to new cities. Pairing Priceline, which supplies customers to 425,000 hotels worldwide, and OpenTable, which serves 31,000 restaurants but only in 6 countries, is a good idea, then.
Did it have to cost $760m? That is the premium over the undisturbed market value that Priceline paid in its $2.5bn acquisition of OpenTable, announced on Friday. It is hard to imagine that cost synergies will cover the gap. While the demand side of the networks is similar, the suppliers – restaurants and hotels – are quite different, so technology and sales forces will have limited overlap. The deal is about revenue: more demand and faster expansion on the restaurant side.
Priceline can afford $2.5bn. It has $4.8bn in net cash, and generated $2.2bn in free cash flow last year. But why not just host OpenTable on Priceline’s sites, in return for a little cut of the business generated? Then Priceline could have invested that $760m in its own business – which grew faster than OpenTable’s last year, despite having 35 times the revenue, and earning a higher return on equity to boot. Or – what the heck – the cash could have been given to shareholders. Perhaps the joint venture suggestion was made, and OpenTable balked. Too bad if it did. It is also too bad that Priceline didn’t balk at the price OpenTable demanded.
Priceline’s shares traded down about 2 per cent after the deal was announced, taking well more than $760m off its $65bn market cap. Now that does make sense.
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