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Summary:

In a surprise move, two vertical search sites, Kayak and SideStep decide to merge. The deal gives Kayak the heft, making it the fifth largest online travel destination. But that doesn’t mean it is immune from challenges posed by a slowing economy and its impact on the travel industry at large.

It was only two days ago when I first heard about vertical travel search engine, Kayak, trying to raise over $100 million from private equity investors at a valuation of around $700 million. That didn’t quite make sense, especially since Orbitz, a publicly traded company, commands a market capitalization of mere $753 million, lower than its estimated 2007 sales of $858 million.

Today it became clear what that money was intended for: acquiring rival SideStep for about $200 million. SideStep and Kayak’s current investors, along with some new investors, are ponying up about $196 million, TechCrunch reports. The Wall Street Journal says SideStep will become a subsidiary of Kayak, and the two sites will be maintained and developed separately. Kayak gets SideStep’s travel guides, hotel reviews and a downloadable tool bar.

The two companies, once combined, will be profitable and will have $3.5 billion in transaction volumes. The combined entity will be the fifth -argest online travel operator. The combined company revenues are rumored to be over $85 million. At the rumored $700 million valuation I had heard, the combined company is valued at about eight time sales. What makes them more valuable than say, Expedia and Priceline, which have market caps of $9.2 billion and $4.5 billion respectively, and are valued at 4 times trailing 12-month sales.

Interestingly, the pre-merger Kayak’s traffic seemed to be in a bit of a swoon, according to Hitwise and comScore data. Leaving traffic trends aside, the new Kayak will face the same challenges as its bigger rivals.

Stifel Nicolaus & Co. analyst George Askew today cut his ratings on online travel sites, saying economic weakness and increasing competition will take its toll on the business. If it impacts the big three, then Kayak isn’t going to be immune from the bad news. He cited data that showed U.S. airline passenger counts were down for the first time in a year. Hotel bookings are down as well, and Askew believes that this points to “potentially lower discretionary income for consumers into 2008.”

You buy Askew’s prognosis? Are you planning to curb your enthusiasm for travel?

  1. The travel industry is highly competitive and operates on razor thin margins. I think these companies are smart to recognize things are going to get harder, the recent unannounced entry by Google into the space (baby steps) no doubt is sending shivers. They are smart to consolidate and lock in a niche a secure a market position before it is too late.

    http://www.webguild.org/2007/12/google-flight-status.php
    http://internetcommunications.tmcnet.com/topics/broadband-mobile/articles/17038-google-chooses-holidayiq-hotel-reviews.htm

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  2. Hi Om,

    Vertical search engine growth is measured by growth of searches and resulting revenue, not by number of visitors. (It is very inexpensive for any site to pump up the number of visitors by buying low cost and low value “visitors” who do not end up doing or search or generating revenue.)

    If you speak with any of the agencies or travel providers on Kayak, you will see that we are indeed growing rapidly, and with strong profits for us and for the travel sites shown on Kayaks.

    And as for economic weakness, online travel sites actually grow through any recessions, as the need for consumers to find the best deal actually increases during times of economic slowness.

    Kind regards,
    Paul

    ps, you seem to write about your friend Beatrice’s company quite a bit, you might want to ask her about search volumes and sell through vs just getting visitors.

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  3. [...] 1:38 PM PT Comments (0) There’s more than one way to find the best airfare online, as the Kayak-SideStep merger shows. But what’s the best way? Is there one site that you can rely on to find the best fare [...]

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  4. Hey Om. The macro-economic backdrop is always worth taking into account. But I think that what happens at the firm level is highly dependent on how distinct segments will start to compete and complement each other. It used to just be about the OTAs (the Expedia’s of the world). Then price comparison engines (Kayak) entered the picture. Now a myriad of sharing (travel communities/social networks/blogs), organizing (TripIt), and planning (Kango, TripHub) sites are evolving. Heck I think we are entering the Cambrian period of evolution here in the travel space, fueled by growing consumer demand for ease, convenience, selection, and experience. Anyway, we blogged about our POV so drop by and see if you agree with our take. Thanks for tying in the traffic and macro factors, not something we had focused on.

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  5. oops…I mistakenly just linked back to GigaOM. Let me try again.

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  6. [...] GigaOM highlights pessimistic forecasts about the online travel market in [...]

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  7. [...] 24, 2007 Om Malik provides a strong take on the Kayak/SideStep merger. Most notable is that Om is drawing comments from Kayak co-founder Paul English. Without taking [...]

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  8. [...] my Forbes column, highlights the ambitions of newer players to build independent large companies. Kayak acquired SideStep, bringing together over 12 million unique visitors and $85 million in [...]

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  9. [...] a travel industry search engine announced that it is going to launch its own advertising network. I have been skeptical of this company, more so after their merger with SideStep. (How are those revenues growing fellas? They [...]

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  10. [...] GigaOM highlights pessimistic forecasts about the online travel market in 2008 [...]

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