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Investors flying high on Preview Travel merger

The company that started out as producer of television travel shows is now a Wall Street darling in the wake of yesterday's announced merger with Travelocity.

What a long, strange trip it's been for Preview Travel.

As a result of yesterday's merger with Travelocity, the company that started out as a producer of television travel shows has become a leading online travel agency. And that has made it a Wall Street darling.

Preview Travel shares today gained 13 percent to close at 27.19. The shares surged 38 percent yesterday, a welcome spike for investors who have watched the stock suffer from jetlag for a year.

Investors apparently share the company's belief that the merger makes it the one to beat in the competitive online travel market.

"There has been a horse race where [Preview, Travelocity, and Expedia] have run neck-and-neck--the market values leaders," said Preview founder James Hornthal. "Some of the reasons for the merger is that it will provide better service for our customers and let the market find a leader."

He noted that Preview has been a leader in online travel for cruises and travel packages, whereas Travelocity has held the lead for airline and auto travel.

In 1995, Preview Vacations, a division of Preview Media, launched its first online area on America Online and later that year also created its own Web site. Going online was a turning point for the company, which was founded in 1985 as a producer of television shows about travel.

In 1996, Preview Media changed its name to Preview Travel and, two years later, spun off its television programming business to become a pure Internet player.

The company faced some turbulence when it launched its IPO in November 1997. Although it raised $27.5 million, during the first day of trading the stock gained just 6 percent from its IPO price of 11 a share. It proceeded to sink to as low as 6.875 the following month. It later rebounded, however, quadrupling in value last year.

Initial investors in the company were venture firm Kleiner Perkins Caufield & Byers and America Online.

Under yesterday's merger, Sabre Holdings will spin off Travelocity and seed the new company with $50 million in cash. Sabre will receive a 70 percent stake in the new company and Preview investors will hold the remaining 30 percent in this one-for-one stock transaction. The new company, which will be called Travelocity.com, will trade under the ticker TVLY.

Meanwhile, two analysts have increased their recommendations for the company. Lauren Cooks Levitan, an analyst with Robertson Stephens, today raised Preview to a "buy" from long-term "attractive." And Mark Rowen with Prudential Securities yesterday increased his target price to $32 a share from $18, and raised his recommendation to "strong buy" from "accumulate."

"The stock has languished because the market hadn't given it credit for some improvements it made in the past four or five quarters," Rowen said. Last February, CEO Ken Orton resigned to pursue other interests and Northwest Airlines' senior vice president Christopher Clouser was named as his successor.

During this time, Rowen noted the company moved to a better mix of higher margin products such as cruises and travel packages. It also increased advertising revenue.

He added that the ratio of travel lookers compared with those that actually booked trips, also has improved.

Meanwhile, Levitan noted Preview's stock had been hurt by disappointing revenue growth and a high ratio of "lookers to bookers."

"Preview didn't have the kind of revenue acceleration investors expected in an Internet stock," she said.

And like most Internet companies, Preview has yet to post a profit.

Despite the rocky road, investors appear be enthusiastic once again. "Investors will pay a premium for companies that are leaders," Levitan said.