– PCLN’s cash acquisition of OPEN for $2.6B should deliver clear synergies for expanding OPEN into international markets and bundling mobile services with other PCLN properties
– PCLN has the resources to stimulate growth and could also lever OPEN’s reservation management and payments solutions into other areas of the hospitality market
– However, other buyers (e.g. EBAY, GOOG, GRUB, YELP) may have been better placed to exploit further opportunities in the restaurant vertical (delivery, back office, supply chain, etc.)
– With PCLN’s track record of successfully growing acquired properties and OPEN’s sustainable competitive advantages, the deal is good for investors of both companies
Priceline’s announced acquisition of OPEN earlier today was somewhat of a surprise given PCLN has been focused on travel related commerce through its own site and others it has acquired, such as Europe’s booking.com, Asia’s Agoda.com, and more recently Kayak. OpenTable has a laser focus on the restaurant vertical, and a deal with another player in the segment, like GrubHub or Yelp, or even a broader etail-retail play, like eBay or Google, would have been more obvious. Still, travelers are a substantial source of restaurant industry traffic, and Priceline has definitely been looking for ways to diversify its business beyond the highly competitive world of airplane and hotel reservations. After its much smaller rival TripAdvisor bought OpenTable’s French analogue La Fourchette, perhaps Priceline was moved to follow suit.
Priceline has an outstanding track record for nurturing and scaling its acquisitions, and appears to have big plans for OpenTable. While the world restaurant reservations leader continues to deliver double digit sales growth, they have fumbled the ball on several growth initiatives. International markets, which have been a supposed priority since 2004, are largely limited to the UK, Germany and Japan, and its installed restaurant base abroad has been flat for the last 3 years at just under 8,000 locations in these three countries. Priceline clearly believes it can do much better – it has local offices scattered across the globe and a willingness to invest in feet on the street to sell the OpenTable solution much more broadly. Priceline’s network of hotel customers, which typically feature restaurants on or near premises are a natural place to start signing up new restaurants. Given extremely strong network effects (more restaurants attract more diners and vice versa), fragmented competition, and Priceline’s exceptional reach, restoring momentum to international sales efforts could have a huge payoff.
The acquisition is also a tech play. Based in Norwalk, CT far from Silicon Valley, Priceline isn’t exactly known to be the destination of choice for computer science talent and aside from managing its businesses really well, innovation is sparse. In contrast, San Francisco based OpenTable is a software company at heart, with its cloud-based table inventory management system for restaurants underlying the better appreciated consumer facing app. This cloud savvy could help Priceline improve its own mobile presence, with synergy in integrating the restaurant service into its trip planning service. Furthermore, OpenTable brings a mobile payments play as well – it has been testing a payments app in San Francisco that is expected to be rolled out in at least 20 markets by year end. Essentially, diners can view and pay for their check with the same smartphone app used to book the table rather than wait for a waiter to deliver the check, swipe the card, etc. This saves consumers one of the more frustrating parts of a restaurant meal and saves the merchant the table and employee time needed to deal with the process in the traditional way. Ultimately, this could be a backdoor into challenging POS terminals and back office financial systems for restaurants running OpenTable reservation software. This technology could also be adopted to other businesses in hospitality like hotels or tour operators.
I have long been intrigued by OpenTable’s possibilities – it has been in our small cap model portfolio from the start – and expected it to draw acquisition interest, most likely from e-tail players, like eBAY or Google, who could add the restaurant vertical to the list of merchants represented on their platforms. On reflection, today’s deal may make just as much sense, and could dramatically accelerate growth for the company under the Priceline banner. If so, the deal could prove to be a steal, and perhaps, it could be a good time to reconsider PCLN shares.
For our full research notes, please visit our published research site.