Orbitz, a controversial online travel site founded by the nation's largest airlines, filed paperwork Monday for an initial public offering to raise $125 million from the sale of stock.
The Chicago-based company did not say how many shares would be offered or at what price they would be offered. The money-losing company hopes to trade under the ticker symbol "ORBZ."
Orbitz said it would use the money raised in the IPO to acquire other businesses or develop new products and technologies, though it stated that it had no immediate plans for acquisitions. Goldman Sachs, Credit Suisse First Boston, Legg Mason Wood Walker, and Thomas Weisel Partners will underwrite the IPO.
The filing comes as the inspector general of the Transportation Department reviews Orbitz's business practices--the second time the company has come under government scrutiny since its founding in 2000. The U.S. Department of Transportation, Inspector General Ken Meade and the Senate Commerce Committee determined last year that Orbitz did not violate antitrust regulations at the time, allowing the company to proceed with business plans.
The inspector opened a second review April 1, and has 90 days to issue his own findings on whether Orbitz is exploiting any unfair advantages.
Orbitz would not comment on the filing or whether it will affect the current investigation. An Orbitz spokeswoman said she could not comment because of the "quiet period" imposed by the Securities and Exchange Commission.
Orbitz, which has a lock on some of the cheapest fares sold online, began selling tickets in June, and by February it topped $1 billion in revenue. By contrast, it took Seattle-based Expedia, which debuted in October 1996, about four years to reach $1 billion in annual revenue. It took Fort Worth, Texas-based Travelocity, which debuted in March 1996, about three years.
According to the filing, Orbitz took in $43.4 million in 2001, including transaction fees of about $13.5 million from its founding airlines. Orbitz has conducted more than 6 million transactions since its launch. In the quarter that ended on March 31, it had reservations for $542 million in gross bookings.
Abuse of "most-favored nation" status?
But politicians and rivals are concerned about Orbitz's "most-favored nation" status, a designation that guarantees that the company gets the airlines' lowest prices on many fares. Opponents want the government to make Orbitz remove the clause.
Orbitz executives have steadfastly rejected that request, though they have never downplayed their aggressive business strategy. United Airlines, American Airlines, Delta Air Lines, Northwest Airlines and Continental Airlines invested $145 million to found Orbitz in 2000--at the time a venture known as "T2" and rumored to stand for "Travelocity Terminator."
It's unclear whether an IPO would hinder the company's effort to clear the federal investigation and mounting pressure from influential politicians. Late last month, 24 Congress members from both parties, including eight who serve on the Judiciary Committee, sent an open letter to the Transportation Department blasting Orbitz as harmful to competitors in the $31 billion online travel niche.
Orbitz rivals expressed shock Monday that the company would proceed with an IPO during the investigation. It's unclear from the filing how much stock would be held by private investors and how much control Orbitz's founding partners would retain. The filing noted that founding airlines would maintain control of the composition of the board of directors, including the right to select six of the nine members of our board. Founders would also nominate the remaining three directors and vote their shares to elect them.
That smacks of a cartel to Antonella Pianalto, executive director of Interactive Travel Services Association, a Washington-based trade group whose primary members are Expedia and Travelocity.
"This shouldn't reduce anyone's regulatory concerns," Pianalto said Monday. "I'm quite frankly surprised Orbitz is going forward with an IPO during an investigation like this...It's an attempt by Orbitz to cash in on its cartel clauses before the government takes them away. The value of Orbitz is in the access to fares that no one else has, and they need to cash in while they still have them."
Suzi Levine, director of product marketing for Seattle-based Expedia, said Monday that Expedia will push the government investigation regardless of Orbitz's IPO filing.
"It's hard to see a cause and effect" between the filing and the investigation, she said. "But we do support the investigation and the government's questioning of the anti-competitive practices at play."
Not surprisingly, the IPO filing contained significant warnings about the government investigation and the potential for related problems.
"We will continue to be subject to antitrust scrutiny," Orbitz said. "Additionally, we believe our business and operations are currently being reviewed by attorneys general of various states. Although we believe that the creation and operation of Orbitz is permissible under applicable antitrust laws and enforcement guidelines, the continued involvement of our founding airlines or their affiliates on our board of directors and as our stockholders can be expected to result in ongoing antitrust attention to a degree that is not likely to be experienced by our competitors."
Orbitz also listed credit card fraud as a potential liability. It noted that it has had less than a year to calculate fraud rates and fraud notification lags and couldn't predict whether the current rate of fraudulent bookings would increase.
Salaries and other disclosures
Orbitz also detailed executive salaries--a sensitive disclosure required when companies file their IPOs.
CEO Jeffrey Katz made $500,000 in salary last year, $500,000 in an annual bonus and $19,301 for the payment of taxes on perquisites and other personal benefits. He also collected 250,000 shares of stock, of which 83,335 shares vested on July 12; roughly 6,945 shares will vest on each of the 23 monthly anniversaries of the date of the issuance.
In addition, Katz got options on 3.65 million shares of stock last year with a vesting price of $2.32, which he can buy and then sell anytime until 2011. His stock option grant accounted for 28.15 percent of all the stock options that Orbitz granted to employees last year.
Katz also signed a three-year employment agreement in July 2000, guaranteeing him a base salary of at least $500,000 and annual performance bonuses up to 200 percent of his base salary. He will get another 250,000 stock options at fair market value whenever the IPO closes.
Thirty days after the IPO, Katz could demand that Orbitz pay him $2.5 million if the average closing price of the stock is less than $10 per share during the 30-day period. Executives are increasingly inking deals that guarantee them a reward on their stock options--even if they are technically underwater and other employees and investors lose out.
If Katz gets fired or resigns, Orbitz will pay him severance equal to his base salary or his bonus for the remainder of the contract term, whichever is higher. He could also exercise at least two-thirds of his options upon termination.
Chief Financial Officer John J. Park and Chief Technology Officer Alex D. Zoghlin each made $300,000 in salary last year, as well as $150,000 each in annual bonuses. They each received 43,105 shares of stock that will vest later this year. (Zoghlin received an additional $87,000 in cash and $63,000 in the form of 27,156 shares of common stock.)
Orbitz also disclosed details Monday confirming that airline travel reservations were the company's biggest source of revenue, accounting for approximately 87 percent of revenue in 2001 and 83 percent for the three months ended March 31. Air revenue is primarily derived from supplier transaction fees, consumer service fees and reservation system booking incentives relating to airline travel reservation services.
The company, which spent $12.9 million in the first three months of the year on sales and marketing initiatives, also said it was developing two new services, supplier link technology and Booking Engine Services. The first aims to create a direct link with an airline's internal reservation system, allowing Orbitz to bypass global distribution services such as Sabre for some bookings.
Booking Engine Services will produce e-commerce technology that airlines can purchase. On April 15, Orbitz launched its first "powered by Orbitz" site for American Airlines, and now all airline tickets purchased on AA.com use Orbitz technology. Orbitz has already signed an agreement to provide similar services for Northwest Airlines, and it expects to get revenue from this service beginning this quarter.
A growing number of politicians, as well as executives from Orbitz rivals Expedia and Travelocity.com, have criticized Orbitz, which has emerged as the fastest-growing travel site on the Internet.
Orbitz would not comment on the filing or whether it will affect the current investigation. An Orbitz spokeswoman said she could not comment because of the "quiet period" imposed by the Securities and Exchange Commission in wake of filing for an IPO.