When Online travel service Expedia (EXPE) announced plans to buy smaller rival Orbitz Worldwide (OWW) for $1.3 billion, it became the latest consolidation in the $444 billion online travel industry. Shares of both companies surged on the news. In afternoon trading Expedia was up nearly 17 percent, and Orbitz had shot almost 22 percent higher.
On the takeover news, shares of other travel sites also took off. TripAdvisor (TRIP) rose nearly 24 percent, and Home Away (AWAY) was trading 7 percent higher, indicating that investors see more industry deals on the horizon. Even industry giant Priceline (PCLN) was up more than 3 percent. Companies outside the U.S. are especially attractive to the larger players, analysts say.
Bellevue, Washington-based Expedia will pay $12 per share in cash for Orbitz, which is headquartered in Chicago. That’s a 29 percent increase over Orbitz’ average trading price during the previous five days. The deal would add Orbitz to Expedia’s already-formidable lineup of online travel brands, which include Hotels.com, Trivago and Hotwire, and promises to ratchet up competition in an industry where it’s already intense.
Expedia shouldn’t face any significant regulatory hurdles because the online travel market remains fragmented. Moreover, Orbitz had struggled for a while, and rumors have circulated that it would be sold to a larger rival, according to analysts.
“It was just a matter of who would buy Orbitz and when,” said Henry H. Harteveldt, founder and travel industry analyst at Atmosphere Research Group, in an interview. “Orbitz just really didn’t have a clear marketing direction. They have just been kind of an aimless brand for the past three or four years. ”
Orbitz CEO Barney Harford, a former Expedia executive, could remain with the company after the sale is completed, according to Harteveldt. An Orbitz spokesperson told CBS MoneyWatch that no announcements about personnel have been made and declined to provide a timeline about when the deal might close.
“Barney came from Expedia, and I think he’d be comfortable returning to the fold,” Harteveldt said. “However, Expedia will have to give him a meaty-enough role, and he’ll want the opportunity for further advancement.”
A larger Expedia should be good news for consumers because it will keep the power of airlines in check, according to the Business Travel Coalition, which represents corporate travel departments.
“Strong, independent distributors are necessary to keep the airlines honest on their websites and in their offerings to consumers,” wrote Kevin Mitchell, the organization’s chair, in an email to CBS MoneyWatch. “These distributors provide consumers with the comparison-shopping tools that keep pricing discipline in the system. In the alternative, consumers would have to go to the Walled Gardens of each airline website and spend hours trying to determine the best deal. Of course, often, they would not.”
Expedia’s growing strength in the travel market, however, is bound to worry suppliers of travel services, according to Harteveldt. He added that the impact on consumers remains to be seen, though most won’t notice any changes, at least at first.
“The hotels and airlines in particular will be greatly concerned about the juggernaut that Expedia has become,” he said. “Right now, Orbitz and Expedia compete to offer access to inventory and prices. If the merger is approved, eventually Orbitz will be powered by the same back-end system as Expedia, with the same prices as a result. The only difference will be the web page’s design.”
Investors expecting more deals are probably on the right track, considering how active the industry has been consolidating recently. Priceline acquired rival Kayak Software in 2013 for $522.4 million. A year later, the Connecticut-based company branched out a bit and bought restaurant reservation service Open Table for $2.6 billion.
In July, Expedia said it was buying Australian booking site Wotif.com for $658 million. And barely a month ago, it announced plans to buy rival Travelocity for $280 million. In fact, just a week ago, Expedia Chief Financial Officer Mark Okerstrom shot down speculation that his company would be doing more acquisitions, telling The Wall Street Journal, “we’ve got our hands full right now.”
According to research firm Phocuswright, online travel agencies account for about 16 percent of the total U.S. travel market, or about $51.4 billion, a sign that the industry has plenty of room to grow.
“It has become a two-horse race between Expedia and Priceline globally.” Said Phocuswright Vice President Douglas Quinby