For those of us who are frequent fliers and hotel stayers, or at least travel enough, we may be all too familiar with the variety of online booking websites available, such as Orbitz, Expedia, Travelocity or Priceline with those commercials featuring William Shatner. However, soon enough there will be one less competitor and one bigger online travel company because Expedia has made an offer to buy Orbitz Worldwide and merge the two companies. The deal would be for $1.6 billion, through a combination of cash and debt. As often happens on public news of a possible merger, Orbitz (the target company) shares jumped up 22% to $11.72 per share. While not always the case for the buyer, excitement over the expansion for Expedia led its shares to increase about 14% to $89.57, according to the New York Times Dealbook.
As reported, this deal comes on the heels of other smaller acquisitions by Orbitz, which bought out competitor Travelocity and Wotif (from Australia) for $280 million and $660 million, respectively. Thus, if the Orbitz-Expedia deal goes through, Expedia will be making an even bigger coup than some might realize. Within the online travel industry, Expedia’s larger size and customer base will allow it to compete stronger with other competitors like Priceline. Of course, buying up competitors or merging with competitors is nothing new, but this one adds to the merger boom that 2014 saw, and there may not necessarily be a big slowdown as 2015 moves along. In a more practical sense, Expedia will take advantage of Orbitz’s already solid flight and hotel search systems and hope to build them up into even better technology that will secure more business through travel bookings.
Premium for the Sellers
As with any deal, the target company’s shareholders will receive a premium on their stock, thus Orbitz stakeholders will earn $12 cash per share which is a 24% markup on its value at the time of the proposed deal. In spite of the premium, the deal will still reportedly lead to a cost savings for Expedia of about $75 million.
Regulatory Approval Needed
The deal will, of course, have to cross the obstacle course of regulatory approval. As with deals of this size, the government must review and approve once it is confident there will be no antitrust and anti-competitive effects on the industry. Typically, the Justice Department and Federal Trade Commission will conduct such a review to make sure the resulting entity does not take over too much market share. This is a particularly interesting study because in other industries, such as telecommunications, a company may only be restricted to a certain geographic location or locations, which factors into antitrust concerns. With online travel, however, the Internet is basically everywhere, so the geographic scope of this deal is not limited. Antitrust or anti-competitive mergers can harm consumers if a company dominates or monopolizes and industry, whereas more fair competition encourages innovation and ultimately keeps prices in check for consumers. So long as Expedia can prove that consumers still have a wide enough array of choice for online travel bookings, and the government finds this deal not to be a problem, it should likely sail through.