Deals

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

Priceline Group Inc.'s investors may not be bothered that the $75 billion online travel company just wrote down its biggest acquisition ever. But not even a tech favorite like Priceline gets a free pass on a bad deal in this space. Gadfly reviewed the 2014 takeover of restaurant-booking service OpenTable Inc. and determined that the purchase is troubled, one of five ratings we assign past transactions.  

Back when Priceline offered to pay $2.6 billion for OpenTable -- a business that was generating less than $200 million in annual revenue -- it should have raised more eyebrows. Instead, as with most flashy tech deals, excitement took over and even lifted shares of other richly valued online services providers. It was exactly the kind of transaction that helped fuel the overheated M&A environment we still see to this day.

But facts are facts and sure enough, Priceline finally had to admit it overpaid. The company said last week that it recorded a $941 million impairment charge on OpenTable for the third quarter. It also said that its post-acquisition strategy to significantly grow OpenTable internationally has "resulted in limited progress to date." And for that reason, investments in OpenTable's growth initiatives will be done "in a more measured and deliberate manner."

Big Ticket Item
Priceline's biggest acquisition wasn't worth the price:
Source: Bloomberg

Contrast those recent statements with this one in 2014 from then-CEO Darren Huston, who oversaw the acquisition (and quit earlier this year after having an inappropriate relationship with an employee):

"We have plenty of room to grow this enough to justify the price we're paying for the asset."

Not so -- although the rationale was there. The thinking was that when people travel, they may also want to find restaurants to dine at nearby, creating a symbiotic relationship between Priceline's hotel bookings and OpenTable. But by the acquirer's own admission, OpenTable's international expansion, particularly in non-English-speaking countries, will be costly and has delivered little reward so far. 

OpenTable Scorecard
Priceline overestimated the value of OpenTable, which hasn't grown as quickly as expected:
Source: Bloomberg, company filings and earnings calls
*Priceline last year acquired Australia's AS Digital, which it's rolling into OpenTable. **These are estimates based on trailing 12-month revenue back then and now. The company no longer breaks out results for OpenTable, but it had typically accounted for 40 to 45 percent of "advertising and other revenue," which implies this estimated range.

It's a stark difference from Booking.com. That tiny deal Priceline did in 2005 turned out to be its best decision yet because Booking.com now drives the majority of the company's revenue and cash flow. Jeffery Boyd, who was CEO from 2002 to 2013 and chairman since then, oversaw that transaction. He's also interim CEO while the board searches for Huston's permanent replacement.

The Booking.com acquisition perhaps hints at an underlying flaw in the OpenTable deal. The overrated growth potential (at least for now) stemmed from the idea that Priceline would buy OpenTable, build it out and make it better, as opposed to how OpenTable would contribute to a huge, successful travel company like Priceline. Even Huston insinuated this back when the deal was announced: "Most of the synergy will come from the customer base at the other brands to OpenTable, rather than the other way around." For example, an American booking a trip to Germany could then be directed to make a reservation at a German restaurant on OpenTable. 

Buying OpenTable certainly hasn't destroyed value, though. That's simply because it's just a drop in the bucket for Priceline, whose shares reached a record high last week. Priceline's main travel-booking business is strong, and OpenTable provides about 2 percent to 3 percent of revenue -- so small that its results are grouped together with that of Kayak Software, a site Priceline acquired in 2013 where travelers can compare prices for flights, hotels, etc. 

That doesn't mean OpenTable won't continue to give Priceline management headaches. I'm not just talking about its international ambitions.

If you've been reading up on the U.S. restaurant industry, you know that Americans are dining out less. Intense competition among food stores lately has driven down the cost of eating at home, while restaurant menu prices are going up to offset rising labor costs. This could present challenges for OpenTable, too.

The Case for Cooking
The spread between the cost of dining out versus eating at home is at a record:
Source: Bloomberg, Bureau of Labor Statistics

In the end, Priceline's financials may not be impacted much by this disappointing deal. However, it is a cautionary tale for other acquirers.

And as for Priceline's next purchase, Gadfly's Gillian Tan and I both have ideas that would probably add more value than OpenTable can. Hints: Take a TRIP, or scan the skies.

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

  1. In assessing the performance of the OpenTable takeover, we took into account the expensive valuation; the so far disappointing progress made in international growth and management's decision to be more restrained in such investments; and the near-term outlook for the restaurant industry.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

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