Why Priceline’s Price to Buy Kayak, $1.8 Billion, Could Be a Pittance

Priceline’s (PCLN) agreement to buy Kayak (KYAK) for $1.8 billion in cash-and-stock might at first blush seem awfully pricey. Kayak, after all, generated just $228.9 million in revenue for the nine months ended September 30, and less than $10 million in profit for that period.

But during the third quarter, Kayak handled 302 million queries – searches by people looking for travel deals and the like, up 31% from the year-ago quarter. And those queries are potential sales leads for the likes of Priceline and other travel sites. And getting sales leads is expensive.

Through three quarters of 2012, Priceline has spent $966.8 million on Internet advertising, essentially its bill from Google for ads and results when people enter search terms such as “Hong Kong hotel.” That nearly $1 billion buys leads, but there is no lasting value, which is what Priceline is hoping to get by buying Kayak. And as competition has increased in the travel business – variously targeted as a business by Google (GOOG), Microsoft (MSFT), Yahoo (YHOO) and other giants -- search terms have grown more expensive to buy, upping online advertising as a percentage of gross profit at Priceline.

PCLN Chart

PCLN data by YCharts

Priceline, growing rapidly, has found ways to improve its margins in recent years. But reliance on Google and other search engines for sales leads is a risky business model. Diversifying that risk by buying Kayak (and others?) makes sense.

None of this should suggest we know how well Priceline will integrate Kayak into its business, or if Kayak will ultimately be a cheaper way to source sales leads. But the overall strategy seems sound.

Jeff Bailey is the editor of YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

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