Today's Travelocity + Preview Travel deal represents the latest Internet equation using Old Math.
Media mogul Barry Diller used the term to summarize his belief that unprofitable (or barely profitable) Internet outfits are generally worth less than money-making traditional companies. His attempt to value Web portal Lycos at half the worth of the Home Shopping Network failed, but he was right about one thing: the day of reckoning will come for all Internet companies eventually.
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The terms negotiated by Travelocity's parent, Sabre Holdings, bear a strong resemblance to those proposed for USA Networks-Lycos. The traditional company (Sabre, itself mostly owned American Airlines parent AMR) gets about 70 percent of the new firm to be created by a merger; owners of the pure Internet play (Preview Travel) get 30 percent.
It's a new day though -- Preview shares are up 40 percent.
Diller's deal didn't happen because Lycos shareholders wanted a premium on top of the buyout premium they already assigned to the stock during its run-up prior to the USA Networks annoucement. But Preview Travel owners might accept any math at this point, given their stock's sluggishness over the last several months. Talk about a road to nowhere; a 9-month chart shows the top end of Preview Travel's trading range dropping gradually since January, with a prolonged slide throughout August and much of September.
Preview Travel shareholders can't expect anything better to come along. Thirty percent of the new company may not sound like much, but Preview Travel doesn't bring much to the gathering, other than gross travel sales that constitute about 55 percent of Travelocity's. On the other hand, Sabre contributes not only Travelocity, but also economies of scale both on a cost side with its established back office operations and on distribution, since the new company will use Sabre's electronic reservation system.
Oh, by the way, Sabre's also throwing $50 million cash into the pot.
In the long run it may not matter whether you use Old Math, New Math or No Math. The days are gone when Travelocity and Preview were the big names in online travel. Priceline.com now gets much of the media attention, not to mention ticket sales -- its airline business alone pulled in net revenue of $134.7 million, which translates into gross bookings several multiples above Preview Travel's. And that doesn't include hotel reservations, which Priceline only started recently. Even more gaping is the growth; Priceline in the latest quarter reported grew about 126 percent, or almost as much as Preview Travel expanded in an entire year.
The comparison isn't entirely accurate, since Preview is more of an full-fledged travel agency as opposed to a mere ticket seller. But airline ticket sales generate a sufficiently large amount of Preview's revenue to make the juxtaposition with Priceline worthwhile.
Preview doesn't hold up much better against another well-known travel site. Microsoft's Expedia.com saw net revenue of $13.5 million in the June quarter, or more than Preview generated in six months.
Much of Preview Travel's doldrums are its own fault. The company has been slow to respond to the threats of new business models such as Priceline, and management defections in the face of company stagnation earlier this year didn't help things. But despite with the success of Priceline, the whole notion of travel as a profitable online business remains unproven; even if Preview did everything right, it probably wouldn't be making money today. As it stands, no one expects Preview to come within hailing distance of a profit in the foreseeable future; First Call's consensus analyst view has the company losing money through 2001.
Yet real business principles have to take over at some point, and it could even be happening today, judging by the favorable reaction of Preview shareholders to a deal that gives them the smaller portion. But there's no escaping the sense that today's deal ultimately represents a merger of mediocrity.