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Why Priceline's $2.6 Billion Buy of OpenTable May Be a Bargain

NEW YORK (TheStreet) -- Online travel services provider Priceline (PCLN) announced Friday it had agreed to buy restaurant-bookings Web site OpenTable (OPEN) for $2.6 billion in an all-cash deal. The deal is expected to be completed in the third quarter and values OpenTable at $103 a share, a 46% premium over Thursday's closing price.

OpenTable was surging 47% to $103.50 while shares of Priceline were slipping 0.7% to $1,216.95.

The acquisition comes at a time when shares of OpenTable, which books 15 million diners a month at more than 31,000 restaurants, were struggling to regain momentum. The stock suffered a steep setback from March and April's substantial tech selloff that was spurred by concerns about high valuations and another dotcom bubble.

While many momentum shares have recovered, OpenTable has yet to make a full rebound, owing to worries about its room for future growth in the face of a rising number of electronics reservations bookings services.

OPEN Chart

Holders of the stock have seen shares decline more than 11% this year, following a more than 15.5% drop between the sharply swooning March and April months. But even prior to Friday's announcement, the selloff appeared to have bottomed. Shares were trying to make their way back up and the stock was at $70 a share Thursday while the company appeared poised for a round of fresh new strategic initiatives.

The Outlook Before Priceline

During Bank of America's annual technology conference held on June 4 in San Francisco, OpenTable Chief Financial Officer Duncan Robertson looked optimistic as he highlighted OpenTable's recent decision for the first time to invest in consumer acquisition marketing to drive seated diner growth and the company's nascent mobile payments offering. The CFO said mobile payments has the potential to encourage higher user engagement on the OpenTable app and attract new users, according to a Bank of America note.

OpenTable indicated earlier this year that it plans to spend $9 million in consumer marketing in the U.S. and internationally in 2014, ramping up after spending just $1.7 million for each region in the first quarter. Up until 2013, the company invested a negligible amount of money on advertising, relying on growth through viral and word-of-mouth marketing.

The company also expects to roll out its mobile payments solution to 20 cities in 2014. Robertson said if the payment initiative achieves some scale, the company may be able to negotiate lower credit card fees to add incentive for restaurants to join the program.

Following Robertson's comments about the benefits of consumer marketing, Bank of America analysts said they now have increased confidence that OpenTable's seated diner growth will accelerate sequentially in the second quarter. They have an $87 price objective for the stock for next 12 months, up from the $70 level.

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