Travelzoo Slides on Placement

Online travel service Travelzoo (TZOO) dealt a blow to its public shareholders Thursday, selling a big block of stock at a steep discount.

In the deal, the company will raise $30 million by selling 750,000 newly minted shares to a group of unnamed investors. The catch is that shares of Travelzoo, one of the hottest stocks of the year, were priced at $40. That's a 31% haircut to Wednesday's closing price of $58.07.

The news is likely to spark a fierce selloff in Travelzoo shares, which had been up 567% for the year before the announcement. In early action Thursday, the volatile stock dropped 9%.

The transaction is commonly known on Wall Street as a PIPE -- short for private investment in public equity. These are privately negotiated deals in which blocks of shares are sold to hedge funds at a discount. The $14 billion-a-year PIPE market is a popular way for small companies to raise capital.

But PIPE deals also have come in for much criticism because they are often bad for shareholders, since they tend to lead to a decline in a stock's price in the short term. This year the Securities and Exchange Commission opened an investigation into allegations that some hedge funds are manipulating shares of companies doing PIPE deals by using insider information of a deal to short the share of the company's stock.

The PIPE, however, could be good news for the long-term prospects of the tiny company that makes almost all of its money from online advertising bought by travel companies. The deal comes as the online travel space -- already populated by giants like Sabre (TSG) and Orbitz (ORBZ), which agreed this week to be acquired by Cendant (CD) -- promises to grow even more cutthroat.

In a press release, Travelzoo -- which bills itself as "the Internet's largest publisher of outstanding travel offers available directly from hundreds of travel companies" -- said it intends to use the proceeds for general corporate purposes, "including new product development and marketing expenditures, and potential acquisitions or strategic investments."