Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Oof, that hurts.

Late Monday, when reporting its third-quarter earnings, Priceline Group Inc. surprised the market by writing down the value of OpenTable by $941 million. That's more than a third of the $2.6 billion it paid for the online restaurant-reservation service just two years ago.

The OpenTable deal has always looked pricey. Priceline offered a 53 percent premium to the booking business's average trading price in the 20 days leading up to the deal's announcement in June 2014. At the time, that was the richest premium paid for a large North American internet company since 2007. As one banker put it, the OpenTable deal "shows you that people are willing to pay dearly for the best." But in the tech world, or elsewhere, the "best" thing doesn't always pan out the way you think it might.

Priceline's interim CEO Jeffery Boyd, who was chairman at the time of the acquisition, said the writedown was the result of the company realizing that OpenTable might not grow as quickly -- especially internationally -- as originally targeted.

Cancel My Reservation
Analysts' estimates for Priceline's revenue have slid since the company announced its purchase of OpenTable in 2014
Source: Bloomberg

Priceline's plight shows what can happen when a company pays top dollar for potential growth, which obviously can't be guaranteed. And it hasn't been alone: As a result of the dealmaking boom of the few years, members of the S&P 500 Index have amassed a mountainous pile of $2.83 trillion in goodwill, according to data compiled by Bloomberg.

Like Priceline, other acquirers may have to face a reckoning at some point. And CEOs seeking deals now or in the future might want to renew their focus on price discipline and ensure they're setting out to achieve feasible synergies and growth at a reasonable pace. 

Notably, Priceline's shares actually bounced higher after hours despite the writedown. Investors seemed to take at least some comfort from the fact that the bulk of the company's operations are doing well (OpenTable only accounts for about 2 percent of Priceline's overall revenue). Excluding the charge and other items, earnings per share amounted to $31.18 in the third quarter, outpacing analysts' projections. Revenue during the summer travel season was also higher than expected. 

Relief Rally?
Priceline shares spiked in after-hours trading as the company said it would take on a charge on OpenTable and reported earnings that beat analysts' estimates
Source: Bloomberg

Still, the company's willingness to take the hit will likely mean its hiatus from M&A will continue (it hasn't done a deal since OpenTable). That's a bad sign for its prospective takeover targets, which include TripAdvisor Inc. and Skyscanner Ltd., but leaves a window for its rivals like Expedia Inc. to pounce if Priceline stays sidelined in a self-imposed penalty box. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net