Did Priceline Spend Too Much Buying OpenTable?

NEW YORK (TheStreet) -- I was very intrigued by the news Friday that online travel pricing site Priceline.com (PCLN) is spending $2.6 billion to buy online restaurant reservation site OpenTable (OPEN).

When you have a deal like this there is always the issue of the impact on shares of the companies themselves and the impact on competitors, plus the question of whether Priceline spent too much buying OpenTable.

So I'm asking myself these two questions:

  • Why did Priceline buy OpenTable? 
  • What impact does the Priceline purchase of OpenTable have on their own stock prices, as well as the stock prices of their competitors?

Why Did Priceline buy OpenTable? With strong competitors such as TripAdvisor (TRIP), the trek to become the number one global online travel booking company can be made easier by automatically adding local dining to already established local lodging and transportation offerings.

OpenTable does local dining well and almost inconspicuously to the hungry diner. Last weekend, my party of four and I decided to dine at Katsuya on Vine in Los Angeles. (If you haven't been, go. You'll likely run into an actor, musician, or otherwise artistic notable person, and you'll see Rita Hayworth's star right out front.)

OpenTable popped up from the Katsuya Web site and with a few, quick keystrokes, we were set for an 8:30 p.m. reservation and happily on our way. In the meantime, OpenTable gathered my personal information for future use -- to upsell future restaurant events and more. 

This from the OpenTable Web site: OpenTable empowers your staff by collecting useful information on each guest: a favorite wine, a food allergy, a special table or occasion.

OpenTable has a no-show rate of 5%, which is much better than industry standard. OpenTable says that only four of nine callers/emailers complete their reservation if they are delayed or put on hold. And OpenTable notes that one-third of their reservations are booked between 10 pm and 10 am. That's huge because that is a time period when restaurants are not likely answering their phones. Imagine any restaurant not getting one-third of its intended reservations.

OpenTable is tight. The reservations are instantly visible to the restaurant's staff which helps staff the staff efficiently. There are over 31,000 OpenTable restaurants paying only for seated diners, plus over 600 partners, including Google (GOOGL) and Yelp (YELP).

These are all excellent reasons to answer the question, "Why did Priceline buy OpenTable?" but why would OpenTable want to be a member of the Priceline family?

OpenTable CEO Matt Roberts explained in a statement that Priceline is "a leader in e-commerce innovation" and has "an exceptional track record of customer service in dozens of languages around the world ..." 

Priceline gets to benefit from the mingling of dining and e-commerce, plus excellent mobile presence and OpenTable gets to benefit from Priceline's global exposure.

How has this potential deal, set to close in the third quarter of 2014, affected stock prices in the sector? 

The market seems to appreciate online local listing companies and their ability to grow, prosper and be purchased, like OpenTable, Yelp and Angie's List (ANGI). It looks like the market was happy with and for OpenTable, as evidenced by the OpenTable stock price surge from $70.55 on Monday, to the $104.48 (up 48.1%) price at close on Friday, after the announcement was made. Shares now trade around $104, 25, up over 31% for the year to date.

But Priceline's stock price went down Friday on the merger news. Was it because Priceline doesn't have the cash to complete the $2.6 billion cash offer? According to CNN/Money, "Priceline did not give immediate details about how it will finance the purchase. The company had only $1.3 billion in cash and cash equivalents on its balance sheet as of the end of the most recent quarter."

Priceline shares currently trade around $1,198, up 3% for the year to date.

Is Priceline paying too much? Whether it did or not, if you shorted Priceline, you came up with $40.62/share gain, though the exposure to get that gain is likely too much for most investors. How many individual shares can most people purchase at $1,229.92/share without betting the farm?

What's my conclusion? It seems the market reacts favorably when a company is tight in the e-commerce/app/global/mobile world, and unfavorably if a company pays more than market value.

As always, it's tough to make any blanket statements about anything in the stock market. There are no rules and we traders never say "always."  When you trade next time one company buys another, take note of these ideas over an excellent plate of sushi. I wish you

Many Happy Returns,

Rachel

 

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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