Why Priceline Plucked Kayak

NEW YORK ( TheStreet) -- Priceline.com's ( PCLN) $1.8 billion deal to purchase Kayak Software ( KYAK) came as a big surprise, but on closer inspection looks like a smart move for the online travel giant.

The deal, which coincided with Kayak's third-quarter-earnings, was certainly a bolt out of the blue. TheStreet, for example, had scheduled a post-earnings interview with Kayak CEO Steve Hafner on Thursday, but that was abruptly cancelled by the company when news of the acquisition hit.

In typical M&A fashion, Priceline shares slipped down 1.26% to $619.99 shortly after market open on Friday, while Kayak's stock climbed 26.61% to $39.39. Analyst reaction to the deal, though, is overwhelmingly positive.

"Priceline has history of successful, forward-thinking acquisitions," wrote Stifel Nicolaus analyst Michael Purcell, in a note released on Friday, pointing to the fruitful purchases of Booking.com in 2005 and Agoda in 2007. "We see very little to be negative about from the acquisition of Kayak."

Purcell pointed, in particular, to Kayak's strong organic growth, with 75% of the company's traffic coming from direct navigation that's not reliant on Google ( GOOG).

The analyst also sees plenty of potential for international expansion, noting that Kayak receives about 80% of its revenue from the U.S.

"This leaves ample room for international growth," he wrote. "Priceline's brands, such as Booking.com can continue to populate Kayak's results and bring Kayak's offerings to the individual hotel level to further penetrate advertising budgets."

Stifel Nicolaus has a buy rating and $760 price target on Priceline.

Credit Suisse analyst Stephen Ju also believes that Kayak's technology story appealed to Priceline, adding that the company's mobile app is one of the most popular travel sector apps for Apple's ( AAPL) iOS operating system. The analyst rated Priceline outperform with an $838 price target.

One of the world's largest online travel agents, Priceline is well positioned for the mobile boom, something which can only be helped by the acquisition of Kayak.

Priceline does not break out its mobile revenue, but has acknowledged that it's a growing part of its business. In a note earlier this year, Deutsche Bank said that in 2011 6% to 7% of bookings for Priceline's Booking.com division came from the mobile space.

"Kayak enhances Priceline's technology prowess, and provides another brand to acquire customers," wrote Deutsche Bank analyst Ross Sandler, in a note released on Friday. "The multiple is expensive, and we are somewhat confused on the timing, but we are generally optimistic on the combination possibilities."

Deutsche Bank has a buy rating and $800 price target on Priceline.

Kayak went public in July after earning a reputation as a valuable resource for travelers.

Underlining Kayak's success, the Norwalk, Conn.-based firm reported strong third-quarter results after market close on Thursday. Kayak posted revenue of $78.6 million, comfortably above analysts' forecast of $77.36 million. Excluding items, Kayak earned 26 cents a share. Analysts surveyed by Thomson Reuters were looking for earnings of 19 cents a share.

Cantor Fitzgerald analyst Naved Khan agreed that Priceline has made a shrewd move by grabbing Kayak, describing the company as a "valuable meta search asset" that can be built out globally. Meta search refers to search engines that search other search engines, an increasingly popular technology in the online travel space as consumers trawl multiple Web sites for the best deals.

As for the broader implications of the deal, Khan sees the acquisition as a "headline negative" for Kayak's partner Expedia ( EXPE), but adds that this is unlikely to have a material impact.

The analyst has a buy rating and $750 price target on Priceline.

Priceline's purchase of Kayak is expected to close in the first quarter of 2013.

--Written by James Rogers in New York.

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